Form 10-K IXIA For: Dec 31

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 FORM 10-K

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 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)

 

 Registrant’s telephone number, including area code: (818) 871-1800 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, without par value	The NASDAQ Stock Market LLC

 

 Securities registered pursuant to Section 12(g) of the Act: None 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes [  ] No [X]

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

The aggregate market value of the shares of the Registrant’s Common Stock held by nonaffiliates of the Registrant as of June 30, 2014, computed by reference to the closing sales price on the Nasdaq Global Select Market on that date, was approximately $669,981,749.

 

As of March 26, 2015, the number of shares of the Registrant’s Common Stock outstanding was 78,862,215.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on June 1, 2015 are incorporated by reference into Part III of this Annual Report.

 

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IXIA

 

FORM 10-K

 

TABLE OF CONTENTS

 

Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	30
Item 3.	Legal Proceedings	30
Item 4.	Mine Safety Disclosures	30
PART II
Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 8.	Financial Statements and Supplementary Data	56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
Item 9A.	Controls and Procedures	56
Item 9B.	Other Information	60
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	63
Item 11.	Executive Compensation	63
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	63
Item 13.	Certain Relationships and Related Transactions, and Director Independence	63
Item 14.	Principal Accounting Fees and Services	63
PART IV
Item 15.	Exhibits, Financial Statement Schedules	64
SIGNATURES		70

 

 

PART I

 

Item 1. Business

 

Overview

 

Ixia was incorporated in 1997 as a California corporation. Ixia provides application performance and security resilience network test and network visibility solutions that validate, secure, and optimize businesses’ physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure, ongoing operation of their networks. Ixia's powerful and versatile solutions, expert global support, and professional services equip organizations to exceed customer expectations and achieve better business outcomes.

 

Application performance means successfully deploying applications across networks so that businesses’ customers enjoy a quality user experience. Security resilience means ensuring networks are durable against ever-growing IT security threats, so that businesses’ customers are confident their online experience is protected. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

  

When asked, Ixia’s customers agree that two things are true: applications are the network, and security is critical. Ixia is committed to helping our customer’s networks perform at their highest level, so that end users get the best performing and most secure application experience.

 

The Company is headquartered in Calabasas, California with operations across the U.S. and the rest of the world.  Our revenues are principally derived from shipments within the U.S. and to the Europe, Middle East and Africa (EMEA) and Asia Pacific regions. See Note 5 to the consolidated financial statements included in this Annual Report on Form 10-K (this “Form 10-K”) for entity-wide disclosures about products and services, geographic areas and major customers.

 

Ixia Solutions 

 

Ixia is a leading provider of physical and virtual network application performance and security resilience solutions. Application performance and security resilience allow network operators to ensure that their priority network functions are validated, secured, and optimized through the network life cycle.

 

Ixia solutions help customers address three network goals:

 

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Validate the network—test and confirm design in virtual and physical environments

 

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Secure the network—assess and monitor security threats in real-world scenarios

 

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Optimize the network—enhance application performance and visibility across the network

 

Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure, ongoing operation of their networks. Our product solutions consist of our high performance hardware platforms, software applications, and services, including warranty and maintenance offerings.

 

Ixia's powerful and versatile solutions, expert global support, and professional services equip organizations to exceed customer expectations and achieve better business outcomes. Our solutions provide organizations with a complete understanding of its user behavior, security vulnerabilities, network capacity, application performance, and information technology (“IT”) resiliency. From the research labs to the network cloud, Ixia solutions ensure application performance and security resilience across network and data center infrastructure. No matter what profession or position in the world, connecting to networked applications quickly and securely – from any location – is paramount to success. The convergence of new technologies is complicating the IT landscape – smartphone ubiquity, cloud proliferation, challenges of big data, demands of the social consumer, pervasive cyber threats – intensifying the challenge of constantly, securely, and quickly connecting users to their applications. The delivery of communications and entertainment applications and services is moving to an always-connected, always-on paradigm. Ixia solutions battle-test wired networks, wireless networks and data center infrastructures, provide seamless access to network & application performance and enable IT leaders to run highly resilient, high performing networks.

 

Our solutions are scalable, easy-to-use, and adaptable, automatically providing companies with comprehensive coverage of the latest applications and security attacks in order to optimize performance and protect against threats. Our goal is to enhance application performance and security resilience by providing comprehensive, easy-to-use, and automated solutions that empower our customers to drive their business forward by taking the guesswork out of network reliability and the application services.

 

Real-world test solutions must recreate the true behavior of wired and wireless users, at massive scale, with increasing fidelity. Network testing solutions must be highly scalable and capable of generating large amounts of data at high speeds over increasingly complex configurations, and be up to date with the very latest applications and security attacks. Comprehensive, integrated testing must occur throughout network design, development, production, deployment, and operation stages. Because this testing and verification must take place across multiple layers of the network infrastructure and for all network protocols, network testing solutions are also required to be highly flexible, extensible, and modular. This rapid evolution of complex network technologies and protocols – which includes leading-edge technologies such as higher speed Ethernet, LTE and the latest Wi-Fi standards – has resulted in the need for an integrated platform solution that is easy to use, with minimal training and set-up.

  

 

Our network visibility solutions intelligently connect data center and network infrastructure with monitoring solutions that ensure application performance and security resilience. Powered by an easy to use, drag-and-drop interface, our advanced packet processing technologies including filtering, load balancing, packet shaping, session correlation, application intelligence, and de-duplication improve the way our customers manage their data centers, prevent network application and service downtime, and maximize return on IT investment.

 

Our systems provide our customers with the following key benefits:

 

	●	Versatile High Performance. Our network test solutions generate and receive data traffic at full line rate – the maximum rate that data traffic can be transmitted over a network medium. Our systems provide accurate analysis across multiple layers of the overall network and of individual network components in real time. Our systems can be configured to either generate programmed packets of data or conduct complete sessions.
		Our test systems can analyze each discrete packet of information, thereby allowing our customers to precisely measure the performance of their networks and individual network components. This precision allows customers to accurately measure critical quality of service parameters such as throughput, latency, loss, and jitter. It also verifies data integrity, packet sequencing throughout the network, and quality of service (QoS).
		When used for realistic application sessions or conversations between network endpoints, our test systems emulate highly complex and specialized applications such as transferring electronic mail, browsing the Internet, conveying voice and video information, managing databases, and establishing wireless calls. This emulation allows our customers to accurately measure critical characteristics of their networks such as session setup rate, session tear down rate, and session capacity. By analyzing the content of these sessions, our customers can also accurately measure QoS and media quality.
		Our network visibility solutions allow customers to dynamically aggregate, regenerate, distribute, filter, and condition packets from all parts of the network at full line rate. These high performance systems enable broader network visibility and enhance the performance of customers’ monitoring solutions while reducing costs.

 

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Highly Scalable. Each of our network test interface cards provides one or more ports through which our systems generate and receive data traffic. Each physical port contains its own dedicated logic circuits, with substantial memory and compute resources. Our customers can easily scale the size of their test bed or the amount of data traffic generated by inserting additional interface cards. By connecting multiple chassis and synchronizing hundreds of ports to operate simultaneously, our customers can simulate extremely large networks. Our GPS-based components even allow our chassis to be distributed throughout the world, while maintaining the close time synchronization necessary for precision tests. We believe that our systems can offer our customers one of the highest port density and scalable space efficient systems available. In addition, our client-server architecture allows multiple users in the same or different geographic locations to simultaneously access and operate different ports contained in the same chassis to run independent tests. Customers using our high-density network visibility platform can easily scale their visibility needs through flexible port licensing and modular extensions that can grow with their expanding network monitoring needs.

 

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Highly Modular Hardware Platform. We offer network test hardware platforms with interchangeable interfaces, using a common set of applications and Application Programing Interfaces (APIs). Our architectures enable the emulation of millions of network users on scalable platforms, with a mixture of both network and application layer traffic. These architectures offer our customers an integrated test environment that might otherwise require multiple products to cover the same test scenarios. We believe that our network test hardware platform solutions decrease the overall cost while increasing productivity and scalability, and reducing training requirements for our customers. Our network test hardware products consist of stackable and portable chassis which, depending on the chassis model, can be configured with a mix of interface cards. This modular design allows our customers to quickly and easily create realistic, customized test configurations. Our open architecture accelerates the integration of additional network technologies into existing systems through the addition of new interface cards and distributed software. Our modular approach to network visibility allows customers to increase port density, add higher speed links, and/or advanced features – helping customers to future proof their network monitoring and visibility investments.

 

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Flexible. Our customers can easily expand our systems to address changing technologies, protocols, and applications without changing system hardware or replacing interface cards. This protects and optimizes customers’ investments by eliminating the need for “forklift upgrades” or the purchase of additional niche products. Additionally, customers under our Application and Threat Intelligence (ATI) service receive automatic bi-weekly updates of the latest applications and attacks for use in their real-world testing scenarios.

 

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Automation. Our systems make it easy to create automated tests and network monitoring rules that can run unattended. We offer our customers a growing library of automated tests and monitoring automation scripts that simplify and streamline the test and monitoring processes. The automated tests are repeatable and the results are presented in a structured format for easy analysis. Ixia offers “Click-Thru Automation” that records and repeats interactive operation, providing automation without programming. In addition, Ixia's Tool Command Language (Tcl) API is a comprehensive programming interface to our hardware, as well as to our software applications. The Tcl API enables libraries of automated scripts to be quickly built with specificity to a customer's environment. We also offer a utility that exports configurations created in our graphical user interface (GUI) as Tcl scripts. Our visibility solutions can be automated and integrated with monitoring tools using our RESTful API.

 

 

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Ease of Use. We have designed our systems so that users can install and operate them with minimal training and setup. Our network test systems are easy to use and offer our customers a wide range of readily accessible pre-designed test configurations. These tests include industry standard and use case-specific tests. Users can easily configure and operate our systems to generate and analyze data traffic over any combination of interface cards or ports through our graphical user interface that features a familiar Microsoft™ Windows™ point-and-click environment. Once tests are designed in our GUIs, they can be saved for reuse or in Tcl script form for customization and even greater levels of automation. Our network visibility systems also offer customers best in class ease-of-use, with a point-and-click GUI that enables customers to quickly develop complex filtering and packet distribution algorithms with simple, but powerful, drop-down menus. These configurations can be saved for reuse and automated using our RESTful API.

 

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Intelligent. Our products and solutions are designed with high processing capability and intelligence leveraging the deep technical prowess and engineering capabilities at Ixia. These intelligence capabilities manifest themselves in our products in the form of protocol awareness, application context and knowledge of security threat vectors. Ixia continues to be a leader in the market through innovation by making our products more application and security aware and intelligent through analytics so that our customers are presented with relevant and actionable information whether it be test results in a lab environment or resiliency reports for some network equipment or real-time application flow data being sent to a monitoring & security analysis tool.

 

Ixia Business Strategy

 

Our goal is to enable seamless performance, resilience and reliability in application and service delivery over networks by providing the most comprehensive, insightful and easy-to-use test, security and visibility solutions in the industry. Over the past few years, Ixia has taken a number of significant actions to acquire technology and talent that has positioned the Company as a preeminent provider of network test, security and visibility solutions. This has been accomplished by growing our portfolio of products and addressable markets through acquiring technologies, businesses, and assets; expanding our international presence, sales channels and customer base; continuing to deliver high quality products and support to our customers; and developing our employees. Key elements of our strategy to achieve our objective include the following:

  

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Continue to Expand our Addressable Markets. We plan to further expand our addressable markets into growth areas for network and application security, next-generation networking technologies, monitoring network applications and services, and more.

 

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Maintain Focus on Technology Leadership. We will continue to focus on research and development in order to maintain our technology leadership position, and to offer solutions that address new and evolving network technologies. We intend to maintain an active role in industry standards committees such as IEEE and the Internet Engineering Task Force (IETF), and to continue our active involvement in industry forums, associations and alliances such as the Ethernet Alliance, Metro Ethernet Forum, Open Networking Foundation (ONF), Wi-Fi Alliance, International Telecommunications Union (ITU), Small Cell Forum, Telecommunications Industry Association (TIA) and 3GPP. We also plan to continue to work closely with some of our established customers who are developing emerging network technologies, as well as leading edge start-up companies, to enhance the performance and functionality of our existing systems and to design future products that specifically address our customers’ needs as they evolve.

 

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Expand and Further Penetrate Customer Base. We plan to strengthen and further penetrate our existing customer relationships, and expand our reach into new enterprise, government, and service provider customers by:

 

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Continuing to develop and offer new and innovative solutions that meet our existing and potential customers’ needs,

 

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Expanding our sales and marketing efforts through direct channels and partner relationships to increase penetration in under-represented vertical and geographic market segments,

 

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Building upon and further strengthening our reputation and brand name recognition, and

 

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Continuing our focus on customer support by maintaining and expanding the capabilities of our highly qualified and specialized internal personnel.

 

 

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Expand International Market Presence. We will further pursue sales in key international markets, including EMEA, and the Asia Pacific region. In order to pursue sales in these markets, we intend to develop and expand our relationships with key customers, partners, resellers and distributors, as well as expand our direct sales and marketing presence within these markets.

 

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License and Acquire New Products. We will continue our strategy of acquiring products in key technologies that expand our product offerings, address customer needs, and enhance the breadth of our evolving product portfolio. To expand our product portfolio, we may partner with industry leaders, acquire or license technology assets, or acquire other companies.

 

We have made several acquisitions throughout our existence which has expanded our product portfolio and end customer base, and increased our overall total addressable market. Our recent acquisition history includes the following:

 

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In July 2011, we acquired VeriWave, Inc. (“VeriWave”), a performance testing company for wireless LAN (WLAN) and Wi-Fi enabled smart devices. This acquisition expands our portfolio of supported network media and addresses the need for an end-to-end solution that completely tests converged Wi-Fi, wired, 3G, and 4G/LTE ecosystems.

 

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In June 2012, we acquired Anue Systems, Inc. (“Anue”). Anue solutions provide visibility into live networks and the applications running within them in order to efficiently aggregate and filter traffic. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base.

 

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In August 2012, we acquired BreakingPoint Systems, Inc. (“BreakingPoint”). BreakingPoint is a leader in application and security assessment and testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s network infrastructure. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base.

 

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In December 2013, we acquired Net Optics, Inc. (“Net Optics”). 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 including network packet brokers, physical and virtual taps and application aware capabilities. The acquisition has expanded our product portfolio, strengthens our service provider and enterprise customer base and broadens our sales channel and partner programs.

 

Customers

 

Today’s networks and data centers are continuously improving their performance and scale in order to accommodate the plethora of applications and services we now rely upon to do business, communicate, capture memories, plan, travel, and more. Applications drive network capacity, influence quality of experience, introduce potential vulnerabilities, and lead to more innovations. Every organization from device manufacturers, to service providers, to enterprise and government organizations seeks to optimize networks and data centers in order to accelerate, secure, and scale the delivery of these applications.

 

Ixia’s solutions provide the insight needed for organizations to make real-time decisions that optimize performance, harden security and increase the scalability of networks facing constantly changing requirements. The Ixia line of hardware, software, and other services cater to the needs of Network Equipment Manufacturers (NEMs), Service Providers, and Enterprise and Government organizations. Ixia solutions provide an end-to-end approach for our customers to test devices and systems prior to deployment, validate the performance and security of networks and data centers after every change, and help them continuously monitor network application and security behavior to manage performance. 

 

We provide solutions and services to each of our customer segments, including those set forth below:

 

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NEMs. NEMs provide voice, video, and data and service infrastructure equipment to customer network operators, service providers, and network users. Such users require high standards of functionality, performance, security, and reliability. To meet these higher standards, NEMs must ensure the quality of their products during development and manufacturing (prior to deployment). Failure to ensure the consistent functionality and performance of their products may result in the loss of customers, increased research and development costs, increased support costs, and losses resulting from the return of products. NEMs, for example, use our network test systems to run large-scale subscriber and service emulations, generating extreme traffic loads to verify the performance and capacity of their wired and wireless devices prior to deployment in production networks. Our systems are also used by NEMs in the sales and acceptance process to demonstrate to their customers (e.g., service providers and enterprises) how the NEMs’ products will operate under real-world conditions. In addition, our conformance test suites are used by NEMs to ensure that their devices conform to published standards – ensuring that they will be interoperable with other equipment. These equipment manufacturers are also, in many cases, large enterprises and therefore have the same challenges that can be met using our assessment and monitoring solutions within their own internal network.

 

 

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Service Providers. Service providers seek to deliver a growing variety of high quality, advanced network services ranging from traditional telecommunications and Internet services, to social networking, cloud storage, and entertainment streaming. Failure to provide a quality experience to the end user can be costly through high subscriber churn rates and reduced revenues. To ensure quality of experience and service assurance, service provider R&D and network engineering groups must verify the performance and functionality of staged networks during equipment selection and network design, prior to deployment and after any change to the production network. Service providers also use our network test systems to emulate millions of mobile (3G/4G/LTE) subscribers to realistically predict end-user quality of experience delivered by providers’ infrastructure and services. Service providers must also ensure security for customers and their own networks, as the keepers of vast amounts of business and personal data. And finally, service providers depend on our monitoring solutions to filter application traffic in order to prioritize, de-duplicate, and optimize wired and wireless data streams.

 

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Enterprises and Government. Enterprise and government organizations depend on their networks and data centers to get business done, and they devote enormous resources to ensure applications and services run optimally and securely. These customers rely on our solutions to help evaluate equipment during selection, optimize and harden their network designs in labs prior to roll-out, and once rolled out, continuously monitor the production network to ensure optimal performance and security of the contents flowing through it. Notably, organizations must always be vigilant against the impact of security threats to its business critical network. Using our solutions, they consistently ensure their network and data center are optimized and resilient. Our security solutions are also used by major organizations to train their staff on the new generation of “cyber warfare and mitigation techniques” to recognize and defend against massive cyber-attacks.

 

During the year ended December 31, 2014, we received orders from approximately 2,400 new and existing end customers. Based on product shipments for the year ended December 31, 2014, our significant customers by category included:

 

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Leading NEMs such as Cisco Systems, Alcatel-Lucent, Juniper Networks and Dell;

 

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Voice, broadband and/or wireless service providers such as AT&T, NTT and Verizon;

 

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Enterprises such as Microsoft, Amazon, JP Morgan and Wells Fargo; and

 

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Government contractors, departments and agencies such as Boeing, the U.S. Air Force and the U.S. Army.

 

Since our incorporation in May 1997 through December 31, 2014, we have shipped our systems to over 6,000 end customers. No customer other than Cisco Systems and AT&T have accounted for more than 10% of our total revenues over the past three years. Cisco Systems accounted for 10.6% of our total revenues in 2013 and 13.5% of our total revenues in 2012. AT&T accounted for 14.3% of our total revenues in 2013. See Note 5 to the consolidated financial statements included in this Form 10-K for entity-wide disclosures about products and services, geographic areas and major customers.

 

We do not have long-term or volume purchase contracts that commit our customers to future product purchases, and as a result our customers may reduce or discontinue purchasing from us at any time.

 

Backlog

 

Backlog consists of purchase orders that we have received and accepted for products and services. Our backlog includes orders for products scheduled to be shipped and for services scheduled to be delivered to our resellers and customers within 90 days. Purchase orders for products are generally shipped within 90 days after acceptance, unless a later shipment date is requested by the reseller or customer. Services are performed in accordance with our contractual commitments to our customers. Our backlog at December 31, 2014 was approximately $38.9 million, compared with a backlog of approximately $13.6 million at December 31, 2013.

 

We typically ship our products within the quarter in which the related product orders are received. A substantial portion of our orders is received during the last month of the quarter, and a significant percentage of those orders is received during the last week of that month.

 

Because our product shipments in any quarter may be affected by our customers’ rescheduling of product delivery dates and changes in and cancellations of orders by our customers (which changes and cancellations can usually be effected prior to shipment without significant penalty), and because a significant portion of our revenue in a quarter is attributable to product orders shipped in the same quarter during which they are received, we do not believe that the amount of our backlog, as of any particular date, is necessarily a meaningful indicator of our future business prospects or financial performance.

 

Although it is generally our practice to ship and bill for products shortly following our acceptance of an order, we from time to time exercise discretion over the timing of certain product shipments, which can increase or decrease the amount of our backlog and affect the timing of revenue recognition for such shipments. In such cases, we may consider a number of factors, including the degree to which we have achieved our business objectives for the quarter, especially with respect to product orders received late in a quarter. We may also consider our manufacturing and operational capacity to fulfill product orders, delivery dates requested by our resellers and customers, our contractual obligations to our resellers and customers, and the creditworthiness of our resellers and customers. Our ability to ship products shortly following our acceptance of an order may also be adversely impacted by the time required to comply with applicable export laws and regulations.

 

Timing of revenue recognition for services may vary depending on the contractual service period or when the services are rendered. All or a portion of the revenue attributable to an order for the performance of services over multiple years is generally treated as deferred revenue providing it has been invoiced at the end of a quarter.

 

 

Product Technology

 

The design of all of our systems requires a combination of sophisticated technical competencies, including designs utilizing field programmable gate arrays (FPGAs) and network processors (NPs). FPGAs are integrated circuits that can be repeatedly reprogrammed to perform different sets of functions as required. NPs are special programmable integrated circuits optimized for networking applications. Many of our systems also require high-speed digital hardware design, software engineering and optical and mechanical engineering. We have built an organization of professional staff with skills in all of these areas. The integration of these technical competencies enables us to design and manufacture test systems which are highly scalable to meet the needs of our customers.

 

Complex Logic Design. Our systems use FPGAs that are programmed by the host computer and therefore can be reconfigured for different applications. Our newest products have high clock frequencies, which are the timing signals that synchronize all components within our system, and logic densities, which are the number of individual switching components, or gates, of more than four million gates per chip. Our customers may obtain updates and enhancements from our website, thereby allowing rapid updates of the system. Almost all of our logic chips are designed in the hardware description language known as VHDL, which is a unique programming language tailored to the development of logic chips. This language enables the easy migration of the hardware design to application specific integrated circuits as volumes warrant. We develop VHDL code in a modular fashion for reuse in logic design, which comprises a critical portion of our intellectual property. This reusable technology allows us to reduce the time-to-market for our new and enhanced products.

 

Network Processor Technology. Our patented NP technology enables our products to emulate complex networks and data centers at a very high scale. The programmability of the NPs allows our customers to remain current with new networking technologies, by allowing customers to obtain frequent updates and enhancements from our website.

  

Software Technology. We devote substantial engineering resources to the development of software technology for use in our product lines. We have developed software to control our systems, analyze data collected by our systems, and monitor, maintain and self-test our hardware and field programmable gate array subsystems. A majority of our software technology and expertise is focused on the use of object-oriented development techniques to design software subsystems that can be reused across multiple product lines. These objects are client and server independent allowing for distributed network applications. This software architecture allows all of the software tools developed for our existing products to be utilized in all of our new products with very little modification. Another important component of our software technology is our graphical user interface design. Customer experience with our test and visibility products has enabled us to design a simple yet effective method to display complex configurations in clear and concise graphical user interfaces for intuitive use by engineers.

 

Products and Services

 

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 highly scalable and flexible products enable our customers to configure solutions based on their specific networks and use cases. For example, if our customer wants to analyze the performance of an Ethernet router, the customer could purchase our network test hardware platform, including a chassis and one or more Ethernet interface cards, and our IxNetwork software application.

 

Products

 

Sales of our network test hardware products typically include a chassis and one or more Ethernet interface cards. Our software applications and APIs allow our customers to create and manage integrated, easy-to-use automated test environments. Our hardware platform consists largely of interchangeable interface cards which fit into multi-slot chassis. Our chassis are metal cases that incorporate a computer, a power supply, and a backplane which connects the interface cards to the chassis. The interface cards generate, receive and analyze a wide variety of traffic types at multiple network layers.

 

Our primary 12-slot network test chassis (e.g., XGS12 and XG12) provides a high-density, highly-flexible test platform. Operating in conjunction with our software applications, our chassis provide the foundation for a complete, high-performance test environment. A wide array of interface cards is available for our primary chassis. The 12-slot Ixia chassis supports up to 192 Gigabit ports, 384-10GE ports, 48-40GE ports and 24-100GE ports. These interface cards provide the network interfaces and distributed processing resources needed for executing a broad range of data, signaling, voice, video, and application testing for layers 1-7 of the network stack. Each chassis supports an integrated test controller that manages all system and testing resources. Resource ownership down to a per-port level, coupled with hot-swappable interface modules, ensures a highly-flexible, multi-user testing environment. Backward compatibility is maintained with key existing Ixia interface cards and test applications to provide seamless migration from and integration with existing Ixia test installations.

 

 

We offer a number of interface cards that operate at speeds of up to 400 gigabits per second. Each one of our interface cards contains multiple independent traffic generation and analysis ports that operate at line rate. Each port on most interface cards has a unique transmit stream engine that is used to generate packets of information and a real-time receive analysis engine capable of analyzing the packets as they are received. The transmit stream engine generates millions of data packets or continuous test sequences at line rate that are transmitted through the network and received by the analysis engine. When data packets have been generated, the analysis engine then measures throughput, latency, loss and jitter, and checks data integrity and packet sequence on a packet-by-packet basis. In addition, our systems measure the effectiveness of networks in prioritizing different types of traffic. Most of our current generation interface cards also include a microprocessor per port to generate and analyze sophisticated routing protocols, such as BGP and MPLS, as well as application traffic such as TCP/IP, HTTP and SSL. Certain of our application and security load modules can recreate more than 35,000 attacks, including exploits, malware, denial of service (DoS), and mobile malware. These load modules provide application and threat assessment solutions at Internet-scale, and create massive-scale, high fidelity simulation and testing conditions for battle-testing infrastructures, devices, applications, and people.

 

 We offer a comprehensive suite of software applications in conjunction with our network test hardware platforms to address specific technologies. These applications measure and analyze the performance, functionality, interoperability, service quality, and conformance of networks, network equipment and applications that run on these networks. These applications enable network equipment manufacturers, service providers, enterprises and governments to evaluate the performance of their equipment and networks during the design, manufacture and pre-deployment stages, as well as after the equipment is deployed in a network. Our technology-specific application test suites are targeted at a wide range of popular application and security performance and conformance requirements across various protocols, interfaces and types of devices. These include automated and targeted delivery, functionality and performance test for technologies and devices including storage, video, voice, intelligent networks, specific applications, routing, switching, WiFi, broadband, wireless, software defined networks and virtual networks and functions. All of these technologies are used in variety of situations including (but not limited to) R&D test environment, change management and scenario planning for production networks.

 

Ixia also develops virtual versions of its core network test designed to test virtual assets and environments using its trusted technologies that have been used for testing hardware-based network equipment for a decade. These products help accelerate the development of our customer’s virtual products and allow enterprises, service providers and governments to quantify its benefits by using Ixia’s trusted technologies.

 

Our network visibility products improve the way our enterprise, service provider, and government customers manage their data centers, save valuable IT time, and maximize return on IT investments. Ixia network visibility solutions revolutionize the way customers monitor their network - enabling complete network visibility into physical and virtual networks, and optimizes monitoring tool performance whether out-of-band or in-line.  Our network visibility platform ranges from network access (TAPs), to solution-specific appliances for smaller implementations to a 100GE, high-density NEBS3 compliant chassis designed for large and complex data centers.  These products help our customers monitor their rapidly growing number of 1GE, 10GE, 40GE and 100GE ports with existing monitoring tools.  Sales of our network visibility products typically consist of an integrated, purpose-built hardware appliance with proprietary software which includes patented filtering and content handling technology that ensures each monitoring tool gets exactly the right data needed for analysis, all powered by the easy to use, drag-and-drop management system.  We also offer advanced processing modules that easily slide into certain of our appliances for additional advanced intelligence and functionality including de-duplication, packet slicing and time-stamping. Our latest advanced feature module is the Application and Threat Intelligence Processor (ATIP) that delivers real-time application data to monitoring tools to allow customers to make better decisions with respect to identifying unknown network applications, and threats to network infrastructure from suspicious applications and locations.

 

In addition to our core network visibility functionality, we also have a number of available features that give customers greater flexibility and intelligence for their network visibility implementations. Customers can deploy our network visibility solutions not only out-of-band in physical networks, but in-line for security applications and in virtual environments with our in-line technologies and Phantom virtual TAP software application, respectively. Another example is the GTP Session Controller that intelligently manages high-scale, session-aware, mobility load balancing deployments. In addition, our ControlTower solution allows customers to deploy, manage and maintain distributed implementations with ease.

 

 

Services

 

Our service revenues primarily consist of our technical support, warranty and software maintenance services. We also offer training and professional services.

 

We offer technical support, warranty and software maintenance services with the sale of our hardware and software products. Many of our products include up to one year of these services with the initial product purchase. Our customers may choose to extend the services for annual or multi-year periods. Our technical support services are delivered by our global team of technically knowledgeable and responsive customer service and support staff, and include assistance with the set-up, configuration and operation of Ixia products. Our warranty and software maintenance services include the repair or replacement of defective product, bug fixes, and unspecified when and if available software upgrades.

 

Our technical support and software maintenance services also include our Application and Threat Intelligence (ATI) service for our application and security platforms, which provides a comprehensive suite of application protocols, software updates and responsive technical support. The ATI subscription service provides full access to the latest security attacks and application updates for use in real-world test and assessment scenarios. Our customers may choose to purchase the ATI service for annual or multi-year periods.

 

Products in Development

 

We continue to develop our IP testing capabilities, and we intend to remain focused on improving our position in performance, security, monitoring, functional, interoperability, service quality and conformance in several technology areas. Our product development teams have deep networking, applications and security expertise and understand the incredibly diverse set of problems our customers need to solve today as well as new challenges customers will face as network technologies evolve. Our teams constantly work to improve current solutions as well as push forward into new areas relevant to the markets in which we compete. These technologies include a host of networking, application and security technologies and protocols ranging from faster speeds like 400 GE and beyond to software defined networking and network functions virtualization, to old and new protocols that allow the data to traverse those environments.

 

We may delay or cancel the introduction of new products to the market as a result of a number of factors, some of which are beyond our control. For more information regarding these factors, see “Business – Research and Development” and “Risk Factors – If we are unable to successfully develop or introduce new products to keep pace with the rapid technological changes that characterize our market, our results of operations will be significantly harmed.”

 

Competition

 

The market for providing network test and monitoring systems is highly competitive, and we expect this competition to continue in the future. We currently compete with network test and monitoring solution vendors such as Spirent Communications, Gigamon, Danaher, Aeroflex, JDS Uniphase, and NetScout. We also compete either directly or indirectly with large Ethernet switch vendors and network management, analysis, compliance and test tool vendors that offer point solutions that address a subset of the issues that we solve. Additionally, some of our significant customers have developed, or may develop, in-house products for their own use or for sale to others.

 

We believe that the principal competitive factors in our market include:

  

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Breadth of product offerings and features on a single test or monitoring platform,

 

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Timeliness of new product introductions,

 

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Product quality, reliability and performance,

 

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Price and overall cost of product ownership,

 

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Ease of installation, integration and use,

 

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Customer service and technical support, and

 

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Company reputation and size.

 

 

We believe that we compete favorably in the key competitive factors that impact our markets. We intend to remain competitive through ongoing research and development efforts that enhance existing systems and to develop products and features. We will also seek to expand our market presence through marketing and sales efforts.

 

We expect to continue to experience significant competition from our existing competitors, and from companies that may enter our existing or future markets. And, as we move into new market segments within the broader network test and monitoring arena, we will be challenged by new competitors. These companies may develop similar or substitute solutions that may be more cost-effective or provide better performance or functionality than our systems. Also, as we broaden our product offerings, we may move into new markets in which we will have to compete against companies already established in those markets. Some of our existing and potential competitors have longer operating histories, substantially greater financial, product development, marketing, service, support, technical and other resources, significantly greater name recognition, and a larger installed base of customers than we do. In addition, many of our competitors have well established relationships with our current and potential customers and have extensive knowledge of our industry. It is possible that new competitors or alliances among competitors will emerge and rapidly acquire market share. Moreover, our competitors may consolidate with each other, or with other companies, giving them even greater capabilities with which to compete against us.

 

To be successful, we must continue to respond promptly and effectively to the challenges of changing customer requirements, technological advances and competitors’ innovations. Accordingly, we cannot predict what our relative competitive position will be as the market evolves for network test and monitoring solutions.

 

Sales, Marketing and Technical Support

 

Sales. We use our global direct sales force to market and sell our products and solutions. In addition, we use distributors, value added resellers, system integrators and other partners to complement our direct sales and marketing efforts for certain vertical and geographical markets. We depend on many of our distributors, resellers and other partners to generate sales opportunities and manage the sales process. Our direct sales force maintains close contact with our customers and supports our distributors, resellers and other partners. Another key component of our go-to-market strategy for certain products is strategic relationships with technical partners. These technical partners consist of network monitoring and management companies, including Computer Associates, IBM, Network Instruments, Riverbed, HP, ArcSight, and others to complement their monitoring solutions. We work with technical partners in two main ways: (i) through customer referrals and recommendations and (ii) through automation integration/interoperability that provides a differentiated solution for our customers.

 

Marketing. We have a number of ongoing programs to support the sale and distribution of our products and solutions and to inform existing and potential customers, partners and distributors about the capabilities and benefits of our systems. Our marketing efforts also include promoting our business by:

 

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Sponsoring technical seminars and webinars that highlight our solutions,

 

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Participating in industry trade shows and technical conferences,

 

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Writing and distribution of various forms of collateral, including brochures, white papers, solution briefs and application notes,

 

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Demonstrating the performance and scalability of our products at our iSimCity proof-of-concept labs,

 

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Communicating through our corporate website and various social media outlets, such as LinkedIn, Twitter and our corporate blog, and

 

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Writing articles for online and print trade journals.

 

Ixia Technical Support. Our global team of Technical Support and Field Engineers have a high level of networking and product expertise. We enable our customers to make the best use of Ixia products to accomplish their goals, help answer questions and resolve issues they encounter, and minimize downtime. Customers can reach the Ixia Technical Support Team by phone, email, or website. We have regional support offices in the United States, Europe, and multiple countries in Asia.

 

Support services our team provides for our customers include:

 

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Assist new customers with product installation and licensing,

 

 

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Provide configuration assistance and expert advice on best practices,

 

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Investigate user issues and work to quickly resolve them,

 

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Quickly respond to reported hardware failures and repair or replace as needed, and

 

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Provide access to our self-service portal where customers can report new cases and access our extensive knowledge base articles.

 

We also offer premium support options for customers who require even higher levels of service. This past year we have invested in new case management and support phone systems to increase our capability to respond quickly, route customers to the best person, and effectively manage their requests globally.

 

Manufacturing and Supply Operation

 

Our manufacturing and supply operations consist primarily of supply chain management, procurement, quality control, logistics, final assembly, configuration testing, fulfillment and logistics. We outsource the manufacture, assembly and testing of printed circuit board assemblies, certain interface cards and certain chassis to third party contract manufacturers and assembly companies, the most significant of which are located in Malaysia. This manufacturing process enables us to operate without substantial space and personnel dedicated to solely manufacturing operations. As a result, we can leverage a significant portion of the working capital and capital expenditures that may be required for other operating needs.

 

We are dependent upon sole or limited source suppliers for some key components and parts used in our systems, including among others, field programmable gate arrays, memory devices, processors, oscillators and optical modules. We and our contract manufacturers forecast consumption and purchase components through purchase orders. We have no guaranteed or long-term supply arrangements with our respective suppliers. In addition, the availability of many components is dependent in part on our ability and the ability of our contract manufacturers and assembly companies to provide suppliers with accurate forecasts of future requirements, as well as the global commodity market. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source or delay in transitioning to a replacement supplier’s product or replacement component into our systems could disrupt our operations and significantly harm our business in any given period.

 

Lead times for materials and components ordered by us and by our contract manufacturers vary and depend on factors such as the specific supplier, purchase terms, global allocations and demand for a component at a given time. We and our contract manufacturers acquire materials, complete standard subassemblies and assemble fully-configured systems based on sales forecasts and historical purchasing patterns. If orders do not match forecasts or substantially deviate from historical patterns, we and our contract manufacturers and assembly companies may have excess or inadequate supply of materials and components.

 

Research and Development

 

We believe that research and development is critical to our business. Our development efforts include anticipating and addressing the network performance analysis and monitoring needs of network equipment manufacturers, service providers, enterprises and government customers, and focusing on emerging high growth network technologies.

 

Our future success depends on our ability to continue to enhance our existing products and to develop new products that address the needs of our customers. We closely monitor changing customer needs by communicating and working directly with our customers, partners and distributors. We also receive input from our active participation in industry groups responsible for establishing technical standards.

 

Development schedules for technology products are inherently difficult to predict, and there can be no assurance that we will introduce any proposed new products in a timely fashion. Also, we cannot be certain that our product development efforts will result in commercially successful products or that our products will not contain software errors or other performance problems or be rendered obsolete by changing technology or new product announcements by other companies.

 

We plan to continue to make significant investments in research and development, including investments in certain product initiatives. Our research and development expenses were $115.2 million in 2014, $117.5 million in 2013, and $98.2 million in 2012. These expenses included stock-based compensation expense of $6.8 million in 2014, $8.1 million in 2013 and $6.2 million in 2012.

 

 

Intellectual Property and Proprietary Rights

 

Our success and ability to compete are dependent in part upon our ability to establish, protect and maintain our proprietary rights to our intellectual property. We currently rely on a combination of patent, trademark, trade secret and copyright laws, and restrictions on disclosure and use, to establish, protect, and maintain our intellectual property rights. We have patent applications and existing patents in the United States, the European Union and other jurisdictions. We cannot be certain that these applications will result in the issuance of any patents, or that any such patents, if they are issued, or our existing patents, will be upheld. We also cannot be certain that such patents, if issued, or our existing patents, will be effective in protecting our proprietary technology. We have registered the Ixia name, the Ixia logo and certain other trademarks in the United States, the European Union and other jurisdictions, and have filed for registration of additional trademarks.

  

We generally enter into confidentiality agreements with our officers, employees, consultants and vendors, and in many instances, our customers. We also generally limit access to and distribution of our source code and further limit the disclosure and use of other proprietary information. However, these measures provide only limited protection of our intellectual property rights. In addition, we may not have signed agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances.

 

Despite our efforts to protect our intellectual property rights, unauthorized parties may attempt to copy or otherwise obtain or use technology or information such as trade secrets that we regard as confidential and proprietary. We cannot be certain that the steps taken by us to protect our intellectual property rights will be adequate to prevent misappropriation of our proprietary technology or that our competitors will not independently develop technologies that are similar or superior to our proprietary technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Any infringement or misappropriation of our intellectual property rights could result in significant litigation costs, and any failure to adequately protect our intellectual property rights could result in our competitors’ offering similar products, potentially resulting in loss of competitive advantage, loss of market share and decreased revenues. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our business.

 

The telecommunication and data communications industries are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies or related standards that are important to our business. We generally have not conducted searches to determine whether the technologies that we use infringe upon or misappropriate intellectual property rights held by third parties. Any claims asserting that any of our products or services infringe or misappropriate proprietary rights of third parties, if determined adversely to us, could significantly harm our business. See Part I, Item 1A of this Form 10-K for additional information regarding the risks associated with patents and other intellectual property.

 

Employees

 

As of December 31, 2014, we had 1,755 full time employees, 909 of whom were located in the U.S. We also from time to time hire temporary and part-time employees and independent contractors. Our future performance depends, to a significant degree, on our continued ability to attract and retain highly skilled and qualified technical, sales and marketing, and senior management personnel. Our employees are not represented by any labor unions, and we consider our relations with our employees to be good.

 

Available Information

 

Our website address is www.ixiacom.com. Information on our website does not constitute part of this report. We make available free of charge through a link provided at such website our Forms 10-K, 10-Q and 8-K as well as any amendments thereto. Such reports are available as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.

 

The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding the Company that we file electronically with the SEC at www.sec.gov.

 

 

Item 1A. Risk Factors

 

The statements that are not historical facts contained in this Form 10-K are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect the current belief, expectations or intent of our management and are subject to and involve certain risks and uncertainties. Many of these risks and uncertainties are outside of our control and are difficult for us to forecast or mitigate. In addition to the risks described elsewhere in this Form 10-K and in certain of our other SEC filings, the following important factors, among others, could cause our actual results to differ materially from those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of us.

 

Our business may be adversely affected by unfavorable general economic and market conditions

 

Our business is subject to the effects of general economic conditions in the United States and globally and, in particular, market conditions in the communications and networking industries. In the past, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced or deferred capital spending in the United States, Europe, Asia and other parts of the world.

 

The global financial crisis began in 2008 and the subsequent recovery from the downturn has been challenging and inconsistent. Instability in the global credit markets, the impact of uncertainty regarding the U.S. federal budget including the effect of the recent sequestration, tapering of bond purchases by the U.S. Federal Reserve, the instability in the geopolitical environment in many parts of the world and other disruptions may continue to put pressure on global economic conditions. If global economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate further, we may experience material impacts on our business. Unfavorable and/or uncertain economic and market conditions such as these may result in lower capital spending by our customers on network test and monitoring solutions, and therefore demand for our products could decline, adversely impacting our revenue and our ability to accurately forecast the future demand and revenue trends for our products and services. Challenging economic and market conditions may also impair the ability of our customers to pay for the products and services they have purchased.

 

In addition, prolonged unfavorable economic conditions and market turbulence may also negatively impact our contract manufacturers’ and suppliers’ capability to timely supply and manufacture our products, thereby impairing our ability to meet our contractual obligations to our customers. These effects, as well as any other currently unforeseeable effects, are difficult to forecast and mitigate. As a result, we may experience material adverse impacts on our business, operating results, financial condition and stock price.

 

Acquisitions undertaken and any that we may undertake could be difficult to integrate, disrupt our business, dilute shareholder value and significantly harm our operating results

 

Acquisitions are inherently risky and no assurance can be given that our previous acquisitions, including our 2013 acquisition of Net Optics, our 2012 acquisitions of Anue and BreakingPoint, or our future acquisitions will be successful or will not materially and adversely affect our business, operating results or financial condition. We expect to continue to review opportunities to acquire other businesses or technologies that would add to our existing product line, complement and enhance our current products, expand the breadth of our markets, enhance our technical capabilities or otherwise offer growth opportunities. While we are not currently a party to any pending acquisition agreements, we may acquire additional businesses, products or technologies in the future. If we make any further acquisitions, we could issue stock that would dilute existing shareholders’ percentage ownership, and we could incur substantial debt or assume liabilities. Acquisitions involve numerous risks, including the following:

 

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problems or delays in assimilating or transitioning to Ixia the acquired operations, systems, processes, controls, technologies, products or personnel;

 

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loss of acquired customer accounts;

 

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unanticipated costs associated with the acquisition;

 

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our failure to identify in the due diligence process significant issues with product quality or development and liabilities related to operational issues, intellectual property infringement or tax or other regulatory matters;

 

 

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multiple and overlapping product lines as a result of our acquisitions that are offered, priced and supported differently, which could cause customer confusion and delays;

 

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higher than anticipated costs in continuing support and development of acquired products;

 

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diversion of management’s attention from our core business and the challenges of managing larger and more widespread operations resulting from acquisitions;

 

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adverse effects on existing business relationships of Ixia or the acquired business with its suppliers, licensors, contract manufacturers, customers, resellers and industry experts;

 

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significant impairment, exit and/or restructuring charges if the products or technologies acquired in an acquisition do not meet our sales expectations or are unsuccessful;

 

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insufficient revenues to offset increased expenses associated with acquisitions;

 

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risks associated with entering markets in which we have no or limited prior experience; and

 

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potential loss of the acquired organization’s or our own key employees.

 

Mergers and acquisitions are inherently risky and subject to many factors outside of our control, and we cannot be certain that we would be successful in overcoming problems in connection with our past or future acquisitions. Our inability to do so could significantly harm our business, revenues and results of operations. See Note 2 in the consolidated financial statements included in this Form 10-K.

 

Competition in our market could significantly harm our results of operations

 

The market for our products is highly competitive. We currently compete with network test and monitoring solution vendors such as Spirent Communications, Gigamon, Danaher, Aeroflex, JDS Uniphase, and NetScout. We also compete either directly or indirectly with large Ethernet switch vendors and network management, analysis, compliance and test tool vendors that offer point solutions that address a subset of the issues that we solve. Additionally, some of our significant customers have developed, or may develop, in-house products for their own use or for sale to others. For example, Cisco Systems, our largest customer, has used internally developed test products for a number of years. Although Cisco Systems has in the past accounted for a significant portion of our revenues, we cannot be certain that it will continue to do so.

 

As we broaden our product offerings, we may move into new markets and face additional competition. Moreover, our competitors may have more experience operating in these new markets and be better established with the customers in these new markets.

 

Some of our competitors and potential competitors have greater brand name recognition and greater financial, technical, marketing, sales and distribution capabilities than we do. Moreover, our competitors may consolidate with each other, or with other companies, giving them even greater capabilities with which to compete against us.

 

Increased competition in the network test and monitoring markets could result in increased pressure on us to reduce prices and could result in a reduction in our revenues and/or a decrease in our profit margins, each of which could significantly harm our results of operations. In addition, increased competition could prevent us from increasing our market share, or cause us to lose our existing market share, either of which would harm our revenues and profitability.

 

We cannot predict whether our current or future competitors will develop or market technologies and products that offer higher performance or more features, or that are more cost-effective than our current or future products. To remain competitive, we must continue to develop cost-effective products and product enhancements which offer higher performance and more functionality. Our failure to do so will harm our revenues and results of operations.

 

 

If we are unable to successfully develop or introduce new products to keep pace with the rapid technological changes that characterize our market, our revenues and results of operations will be significantly harmed

 

The market for our products is characterized by:

 

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rapid technological change such as the recent advancements of IP-based networks and wireless technologies (e.g., LTE);

 

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frequent new product introductions such as higher speed and more complex routers;

 

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evolving industry standards;

 

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changing customer needs such as the increase in advanced IP services agreed to between service providers and their customers;

 

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short product life cycles as a result of rapid changes in our customers’ products; and

 

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new paradigms like Virtualization and Software Defined Networks (SDN).

 

Our performance will depend on our successful development and introductions and on market acceptance, of new and enhanced products that address new technologies and changes in customer requirements. If we experience any delay in the development or introduction of new products or enhancements to our existing products, our revenues and operating results may suffer. For instance, undetected software or hardware errors, which frequently occur when new products are first introduced, could result in the delay or loss of market acceptance of our products and the loss of credibility with our customers. In addition, if we are not able to develop, or license, or acquire from third parties, the underlying core technologies necessary to create new products and enhancements, our existing products are likely to become technologically obsolete over time and our revenues and operating results will suffer. If the rate of development of new technologies and transmission protocols by our customers is delayed, the growth of the market for our products and therefore our revenues and operating results may be harmed.

 

Our ability to successfully introduce new products in a timely fashion will depend on multiple factors, including our ability to:

 

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anticipate technological changes and industry trends;

 

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properly identify customer needs;

 

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innovate and develop and license or acquire new technologies and applications;

 

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hire and retain necessary technical personnel;

 

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successfully commercialize new technologies in a timely manner;

 

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timely obtain key components for the manufacture of new products;

 

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manufacture and deliver our products in sufficient volumes and on time;

 

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price our products competitively;

 

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provide high quality, timely technical support; and

 

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differentiate our offerings from our competitors’ offerings.

 

 

The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technology and market trends. We cannot be certain that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely or cost-effective basis. Further, we cannot be certain that our new products will gain market acceptance or that we will be able to respond effectively to technological changes, emerging industry standards or product announcements by our competitors. If we fail to respond to technological change and the needs of our markets, our revenues, results of operations and competitive position will suffer.

 

We depend on sales of a narrow range of products and, if customers do not purchase our products, our revenues and results of operations would be significantly harmed

 

Our business and products are concentrated in the markets for systems that analyze and measure the performance of wired and wireless IP-based networks and for systems that provide network visibility into physical and virtual networks and optimize monitoring tool performance. These markets continue to evolve, and there is uncertainty regarding the size and scope of these markets. Our performance will depend on increased sales of our existing systems and the successful development, introduction and market acceptance of new and enhanced products. We cannot be certain that we will be successful in increasing these sales or in developing and introducing new products. Our failure to do so would significantly harm our revenues and results of operations.

 

Because we depend on a limited number of customers for a significant portion of our revenues, any cancellation, reduction or delay in purchases by one or more of these customers could significantly harm our revenues and results of operations

 

Historically, a small number of customers has accounted for a significant portion of our total revenues. Sales to our two largest customers, Cisco Systems and AT&T, accounted for 14.8% of our total revenues in 2014, 24.9% of our total revenues in 2013 and 20.9% of our total revenues in 2012. We expect that some customer concentration will continue for the foreseeable future and that our operating results will continue to depend to a significant extent upon revenues from a small number of customers. Our dependence on large orders from a limited number of customers makes our relationships with these customers critical to the success of our business. We cannot be certain that we will be able to retain our largest customers, that we will be able to increase our sales to our other existing customers or that we will be able to attract additional customers. From time to time, we have experienced delays and reductions in orders from some of our major customers. In addition, our customers have sought price reductions or other concessions from us and will likely continue to do so. We typically do not have long-term or volume purchase contracts with our customers, and our customers can stop purchasing our products at any time without penalty and are free to purchase products from our competitors. The loss of one or more of our largest customers, any reduction or delay in sales to one of these customers, our inability to successfully develop and maintain relationships with existing and new large customers, or requirements that we make price reductions or other concessions could significantly harm our revenues and results of operations.

 

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that may have an adverse effect on our business

 

Large network equipment manufacturers and service providers have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to develop additional features, reduce our prices or grant other concessions. As we seek to sell more products to these large customers, we may be required to agree to such terms and conditions. These terms may affect the amounts and timing of revenue recognition and our profit margins, which may adversely affect our profitability and financial condition in the affected periods.

  

If we do not diversify our customer base, we may not be able to grow our business or increase our profitability

 

To date, the majority of our total revenues have been generated from sales to network equipment manufacturers. Our growth depends, in part, on our ability to diversify our customer base by increasing sales to service provider, enterprise, and government customers. To effectively compete for the business of these customers, we must develop new products and enhancements to existing products and expand our direct and indirect sales, marketing and customer service capabilities, which will result in increases in operating costs. If we cannot offset these increases in costs with an increase in our revenues, our operating results may be adversely affected. Some of our existing and potential competitors have existing relationships with many service providers, enterprise, and government customers. We cannot be certain that we will be successful in increasing our sales presence in these customer markets. Any failure by us to diversify our customer base and to increase sales in these markets would adversely affect our growth.

 

 

Our restatements in 2013 and 2014 of certain of our prior period consolidated financial statements may affect shareholder confidence, may consume a significant amount of our time and resources, and may have a material adverse effect on our business and stock price

 

As discussed in our previously filed Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”) and Quarterly Reports on Form 10-Q/A for the first and second quarterly periods of 2013 (together, the “Amended Quarterly Reports”), we restated in such filings certain prior period consolidated financial statements to correct errors in the timing of when revenue was recognized and errors in stock-based compensation expense related to certain performance based equity awards. The restatements also included the correction of errors related to the income tax effects of the above errors as well as the correction of certain other income tax items.

 

We cannot be certain that the measures we have taken since we completed the restatements will ensure that restatements will not occur in the future. The restatements may affect investor confidence in the accuracy of our financial statements and disclosures, may raise reputational issues for our business and may result in a decline in our share price and related shareholder lawsuits. These risks may be heightened due to our having restated certain prior period financial statements in two consecutive years. We are currently a party to two shareholder lawsuits relating to the restatement in our 2012 Form 10-K of certain of our prior period consolidated financial statements.

 

The restatement in June 2014 of our previously filed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013 was resource-intensive and involved a significant amount of internal resources, including attention from management, and significant legal and accounting costs. Although we have now completed these restatements, we cannot guarantee that we will not receive further inquiries from the Securities Exchange Commission (the “SEC”) or The Nasdaq Stock Market (“Nasdaq”) regarding our restated financial statements or matters relating thereto or that our restated financial statements for the quarterly periods will not become the subject of additional shareholder lawsuits. Any future inquiries from the SEC or Nasdaq as a result of our 2013 and 2014 restatements of certain of our historical financial statements will, regardless of the outcome, likely consume a significant amount of our internal resources and result in additional legal and accounting costs. We are currently subject to a shareholder class action and a consolidated shareholder derivative action, as well as a pending SEC investigation, as described below under “We are subject to a shareholder class action and a consolidated shareholder derivative action, as well as a pending SEC investigation, and these lawsuits and investigation and any future such lawsuits and investigations may adversely affect our business, financial condition, results of operations and cash flows.”

 

Each of these risks described above could have a material adverse effect on our business, results of operations and financial condition.

 

We cannot assure investors that we will be able to fully address the three material weaknesses in our internal controls that existed at December 31, 2014, or that remediation efforts will be fully effective or will prevent future material weaknesses

 

Although we remediated one of the four material weaknesses in 2014 related to our internal controls that existed as of December 31, 2013 and that were reported in our Annual Report on Form 10-K for the year ended December 31, 2013, our management has identified, and we have disclosed in this Form 10-K, control deficiencies in our financial reporting process that, as of December 31, 2014, constituted three material weaknesses in our internal controls. These three material weaknesses, which relate to our control environment and monitoring, revenue recognition and manual journal entries, also existed at December 31, 2013. In 2014, we initiated certain measures to remediate these weaknesses, and we plan to implement in 2015 additional appropriate measures as part of this effort. There can be no assurance, however, that we will be able to fully remediate our existing material weaknesses or that the implementation of our planned remedial measures will fully remediate or prevent these weaknesses from re-occurring in the future.

 

These material weaknesses, together with our one remediated material weaknesses, contributed to our need to restate in June 2014 our condensed consolidated financial statements for the quarters ended March 31, 2013 and June 30, 2013. They also contributed to our inability to timely file with the SEC our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2013, March 31, 2014, and June 30, 2014, and our Annual Report on Form 10-K for the years ended December 31, 2014 and 2013.

 

Further, there can be no assurance that we will not suffer from other material weaknesses in the future. If we fail to remediate these material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements, limit our ability to raise capital and have a negative effect on the trading price of our common stock. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may also negatively impact our operating results and financial condition, impair our ability to timely file our periodic and other reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

 

 

Our quarterly and annual operating results have historically fluctuated or may fluctuate significantly in the future as a result of new product introductions, changes in judgments or estimates, and/or other factors, which fluctuations could cause our stock price to decline significantly

 

Our quarterly and annual operating results have historically fluctuated or may fluctuate significantly in the future as a result of new product introductions, changes in judgments or estimates, and/or other factors, which fluctuations could cause our stock price to decline significantly.

 

Our quarterly and annual operating results are difficult to predict and have fluctuated and may fluctuate significantly due to a variety of factors, many of which are outside of our control. Some of the factors that could cause our quarterly and annual operating results to fluctuate include the other risks discussed in this “Risk Factors” section. We may experience a shortfall or delay in generating or recognizing revenues for a number of reasons. Orders on hand at the beginning of a quarter and orders generated in a quarter do not always result in the shipment of products and the recognition of revenues for that quarter. For example, the deferral or cancellation of or failure to ship products by the end of the quarter in which they are ordered or our inability to recognize revenue for products shipped in a quarter due to nonstandard terms in our sales arrangements may adversely affect our operating results for that quarter. Our agreements with customers typically provide that the customer may delay scheduled delivery dates and cancel orders prior to shipment without significant penalty. Because we incur operating expenses based on anticipated revenues and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues could significantly harm our results of operations.

 

In addition, a significant portion of our orders generated and product shipments in each quarter occurs near the end of the quarter. Since individual orders can represent a meaningful percentage of our revenues and net income in any quarter, the deferral, or cancellation of, or failure to ship, an order in a quarter, may result in a revenue and net income shortfall, which could cause us to fail to meet securities analysts’ expectations, our business plan projections, or financial guidance provided by us. Revenue and net income shortfall of this type, in any given quarter, may also increase the amount our revenues and net income in future periods.

 

Our operating results may also vary as a result of the timing of our release of new products. The introduction of a new product in any quarter may cause an increase in revenues in that quarter that may not be sustainable in subsequent quarters. Conversely, a delay in introducing a new product in a quarter may result in a decrease in revenues in that quarter and lost sales. Our results may also fluctuate based on the mix of products and services (i.e., hardware, software and extended warranty and maintenance services) ordered in a particular quarter.

 

Further, actual events, circumstances, outcomes, and amounts differing from judgments, assumptions and estimates used in determining the values of certain assets (including the amounts of related valuation allowances), liabilities and other items reflected in our consolidated financial statements could significantly harm our results of operations.

 

The factors described above are difficult to forecast and mitigate. As a consequence, operating results for a particular period are difficult to predict, and therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our business, results of operations and financial condition and could adversely affect our stock price.

 

We expect our gross margins to vary over time and our recent level of gross margins may not be sustainable, which may have a material adverse effect on our future profitability

 

Our recent level of gross margins may not be sustainable and may be adversely affected by numerous factors, including:

 

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increased price competition;

 

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changes in customer, geographic or product mix (such as the mix of software versus hardware product sales);

 

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

 

 

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new product introductions by us and by our competitors;

 

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changes in shipment volume;

 

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excess or obsolete inventory costs;

 

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increased industry consolidation among our customers, which may lead to decreased demand for, and downward pricing pressure on, our products; and

 

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increases in labor costs.

 

Each of the above factors may be exacerbated by a decrease in demand for our established products and our transition to our next-generation products. Our failure to sustain our recent level of gross margins due to these or other factors may have a material adverse effect on our results of operations.

 

We are subject to a shareholder class action and a consolidated shareholder derivative action, as well as a pending SEC investigation, and these lawsuits and investigation and any future such lawsuits and investigations may adversely affect our business, financial condition, results of operations and cash flows

 

We and certain of our current and former executive officers and directors are defendants in a federal securities class action lawsuit and in a shareholder derivative action. These lawsuits and the SEC investigation are described in Part I, Item 3 “Legal Proceedings” in this Form 10-K. These matters may divert our attention from our ordinary business operations, and we may incur significant expenses associated with them (including, without limitation, substantial attorneys’ fees and other fees of professional advisors and potential obligations to indemnify current and former officers and directors who are or may become parties to or involved in such matters). We are unable at this time to predict the outcome of our potential liability in these matters, including what, if any, action the SEC might take in connection with the matters that are the subject of its investigation. Depending on the outcomes of the class action lawsuit and of the SEC investigation, we may be required to pay material damages and fines, consent to injunctions on future conduct, and/or suffer other penalties, remedies, or sanctions. Accordingly, the ultimate resolution of these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows, liquidity and ability to meet our debt obligations and, consequently, could negatively impact the trading price of our common stock. In addition, there is the potential for additional shareholder litigation and/or governmental investigations and we could be similarly materially and adversely affected by such matters. Any existing or future shareholder lawsuits and governmental investigations and/or any future governmental enforcement actions could also adversely impact our reputation, our relationships with our customers, and our ability to generate revenue.

 

The loss of any of our key personnel could significantly harm our business, results of operations and competitive position

 

In order to compete, we must attract, retain, and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, engineers, technical staff, and sales representatives are critical to our business, and competition for experienced employees in our industry can be intense. To help attract, retain, and motivate qualified employees, we use share-based incentive awards such as employee stock options and restricted stock units. If the value of such stock awards does not appreciate as measured by the performance of the price of our common stock, or if our share-based compensation otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees could be weakened, which could harm our results of operations.

 

Moreover, companies in our industry whose employees accept positions with competitors frequently claim that those competitors have engaged in unfair hiring practices. We may be subject to such claims as we seek to retain or hire qualified personnel, some of whom may currently be working for our competitors. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. Such claims could also discourage potential employees who currently work for our competitors from joining us.

 

Continued growth will strain our operations and require us to incur costs to maintain and upgrade our management and operational resources

 

We have experienced growth in our operations, including number of employees, sales, products, facility locations and customers, including as a result of our recent acquisitions, and expect to continue to experience growth in the future. Unless we manage our past and future growth effectively, we may have difficulty in operating our business. As a result, we may inaccurately forecast sales and materials requirements, fail to integrate new personnel or fail to maintain adequate internal controls or systems, which may result in fluctuations in our operating results and cause the price of our stock to decline. We may continue to expand our operations to enhance our product development efforts and broaden our sales reach, which may place a significant strain on our management and operational resources. In order to manage our growth effectively, we must improve and implement our operational systems, procedures and controls on a timely basis. If we cannot manage growth effectively, our profitability could be significantly harmed.

 

 

If we are unable to expand and maintain our sales and distribution channels or are unable to successfully manage our expanded sales organization, our revenues and results of operations will be harmed

 

Historically, we have relied primarily on a direct sales organization, supported by distributors, resellers and other partners, to sell our products. We may not be able to successfully expand our sales and distribution channels, and the cost of any expansion may exceed the revenues that we generate as a result of the expansion. To the extent that we are successful in expanding our sales and distribution channels, we cannot be certain that we will be able to compete successfully against the significantly larger and better-funded sales and marketing operations of many of our current or potential competitors. In some cases, we may grant exclusive rights to certain distributors to market our products in their specified territories. Our distributors may not market our products effectively or devote the resources necessary to provide us with effective sales, marketing and technical support. In the past, we have had distributors who entered bankruptcy or who performed poorly and were therefore terminated as distributors of our products. Moreover, if we terminate a distribution relationship for performance-related or other reasons, we may be subject to wrongful termination claims which may result in material litigation and could adversely impact our profitability. Our inability to effectively manage the expansion of our sales and support staff, or to maintain existing or establish new relationships with successful distributors and partners, would harm our business, revenues and results of operations.

 

Changes in industry and market conditions could lead to charges related to discontinuances of certain of our products and asset impairments

 

In response to changes in industry and market conditions, we may be required to strategically realign our resources by restructuring our operations and/or our product offerings. Any decision to limit investment in or dispose of a product offering may result in the recording of special charges to earnings, such as inventory, fixed asset and technology-related write-offs and charges relating to consolidation of excess facilities, which could adversely impact our business, results of operations and financial position.

 

International activity may increase our cost of doing business or disrupt our business

 

We plan to continue to maintain or expand our international operations and sales activities. Operating internationally involves inherent risks that we may not be able to control, including:

 

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difficulties in recruiting, hiring, training and retaining international personnel;

  

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increased complexity and costs of managing international operations;

  

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growing demand for and cost of technical personnel;

  

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changing governmental laws and regulations, including those related to income taxes, the UK Anti-Bribery Act, and the Foreign Corrupt Practices Act;

  

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increased exposure to foreign currency exchange rate fluctuations;

  

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political and economic instability, including military conflict and social unrest;

  

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commercial laws and business practices that favor local competition;

  

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differing labor and employment laws;

  

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supporting multiple languages;

  

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reduced or limited protections of intellectual property rights;

  

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more complicated logistical and distribution arrangements; and

  

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longer accounts receivable cycles and difficulties in collecting receivables.

 

 

The above risks associated with our international operations and sales activities can restrict or adversely affect our ability to sell in international markets, disrupt our business and subject us to additional costs of doing business.

 

Some key components in our products come from sole or limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products

 

We and our contract manufacturers currently purchase a number of key components used to manufacture our products from sole or limited sources of supply for which alternative sources may not be available. From time to time, we have experienced shortages of key components, including chips, oscillators, memory devices and optical modules. We and our contract manufacturers have no guaranteed or long-term supply arrangements for these or other components, including FPGAs and NPs, which are integrated circuits that can be repeatedly reprogrammed to perform different sets of functions as required. Financial or other difficulties faced by our suppliers or significant changes in market demand for necessary components could limit the availability to us and our contract manufacturers of these components. Any interruption or delay in the supply of any of these components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales.

 

In addition, the purchase of these components on a sole or limited source basis subjects us to risks of price increases and potential quality assurance problems. Consolidation involving suppliers could further reduce the number of alternatives available to us and affect the availability and cost of components. An increase in the cost of components could make our products less competitive and result in lower gross margins.

 

There are limited substitute supplies available for many of these components, including field programmable gate arrays. All of these components are critical to the production of our products, and competition exists with other manufacturers for these key components. In the event that we can no longer obtain materials from a sole source supplier, we might not be able to qualify or identify alternative suppliers in a timely fashion, or at all. Any extended interruption in the supply of any of the key components currently obtained from a sole or limited source or delay in transitioning to a replacement supplier’s product or replacement component into our systems could disrupt our operations and significantly harm our business in any given period.

 

Our reported financial results could suffer if there is an impairment of goodwill or acquired intangible assets

 

We are required (i) to test annually, and review when circumstances warrant, the value of our goodwill associated with acquisitions, and (ii) to test the value of our acquisition-related intangible assets when circumstances warrant determining if an impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the applicable carrying amount exceeds (i) the implied fair value of the goodwill or (ii) the estimated fair value of acquired intangible assets would be recognized. This would result in an incremental charge for that quarter which would adversely impact our earnings for the period in which the impairment was determined to have occurred. For example, such impairment could occur if the market value of our Common Stock falls below the carrying value of our net assets for a sustained period. The recent economic downturn contributed to extreme price and volume fluctuations in global stock markets that reduced the market price of many technology company stocks, including ours. Such declines in our stock price or the failure of our stock price to recover from these declines, as well as any marked decline in our level of revenues or profit margins increase the risk that goodwill may become impaired in future periods. We cannot accurately predict the amount and timing of any impairment of our goodwill or acquired intangible assets.

 

Restructuring our workforce can be disruptive and harm our operating results and financial condition

 

We have in the past restructured or made other adjustments to our workforce in response to the economic environment, performance issues, acquisitions and other internal and external considerations. Restructurings can among other things result in a temporary lack of focus and reduced productivity. These effects could recur in connection with future acquisitions and other restructurings and, as a result, our operating results and financial condition could be negatively affected.

 

 

Legal proceedings may harm our business, results of operations and financial condition

 

We are a party to lawsuits and other legal proceedings in the normal course of our business. Litigation and other legal proceedings can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. We cannot provide assurance that we will not be a party to additional legal proceedings in the future or that we will be able to favorably resolve our current lawsuits. To the extent legal proceedings continue for long time periods or are adversely resolved, our business, results of operations and financial position could be significantly harmed. For additional information regarding certain of the legal matters in which we are involved, see Item 3, “Legal Proceedings,” contained in Part I of this Form 10-K and in Note 10 to the consolidated financial statements included in this Form 10-K. For information regarding the risks associated with the shareholder class action and the consolidated shareholder derivative action, see “We are a defendant in a class action and in a consolidated shareholder derivative action, and these lawsuits and any future such lawsuits may adversely affect our business, financial condition, results of operations and cash flows” above.

 

Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products

 

From time to time, other parties may assert patent, copyright, trademark and other intellectual property rights to technologies and items that are important to our business. We cannot provide assurance that others will not claim that we have infringed upon or misappropriated their intellectual property rights or that we do not in fact infringe upon or misappropriate those intellectual property rights. We have not generally conducted searches to determine whether the technology we have in our products infringes or misappropriates intellectual property rights held by third parties.

 

Any claims asserting that any of our products or services infringe or misappropriate proprietary rights of third parties, if determined adversely to us, could significantly affect our ability to conduct business and harm our results of operations. Any such claims, with or without merit, could:

 

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be time-consuming;

  

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result in costly and protracted litigation;

  

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divert the efforts of our technical and management personnel;

  

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require us to modify the products or services at issue or to develop alternative technology, thereby causing delivery delays and the loss or deferral of revenues;

  

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require us to cease selling the products or services at issue;

  

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require us to pay substantial damage awards;

  

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expose us to indemnity claims from our customers;

  

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damage our reputation; or

  

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require us to enter into royalty or licensing agreements which, if required, may not be available on terms acceptable to us, if at all.

 

In the event any such claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms, license a substitute technology or redesign our products or services to avoid infringement or misappropriation, our revenues, results of operations, and competitive position could be harmed.

 

If we fail to accurately forecast our manufacturing requirements, we could incur additional costs and experience manufacturing delays

 

We provide our contract manufacturers with rolling forecasts based on anticipated product orders to determine our manufacturing requirements. Some of the components used in our products have significant lead times or lead times which may unexpectedly increase depending on factors such as the specific supplier, contract terms and the demand for components at a given time. Because of these long lead times, we are often required to forecast and order products before we know what our specific manufacturing requirements will be. If we overestimate our product orders, our contract manufacturers may have excess inventory of completed products which we would be obligated to purchase. This will lead to increased costs and the risk of obsolescence. If we underestimate our product orders, our contract manufacturers may have inadequate inventory, which could result in delays in shipments, the loss or deferral of revenues and/or higher costs of sales. Costs are also added to our products when we are required to expedite delivery of our products to customers or of components with long lead times to our contract manufacturers. We cannot be certain that we will be able to accurately forecast our product orders and may in the future carry excess or obsolete inventory, be unable to fulfill customer demand, or both, thereby harming our revenues, results of operations and customer relationships.

 

 

Failure by our contract manufacturers to provide us with adequate supplies of high quality products could harm our revenues, results of operations, competitive position and reputation

 

We currently rely on a limited number of contract manufacturers to manufacture and assemble our products. We may experience delays in receiving product shipments from contract manufacturers or other problems, such as inferior quality and insufficient quantity of product. We cannot be certain that we will be able to effectively manage our contract manufacturers or that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. We intend to introduce new products and product enhancements, which will require that we rapidly achieve adequate production volumes by effectively coordinating with our suppliers and contract manufacturers. The inability of our contract manufacturers to provide us with adequate supplies of high-quality products or the loss of any of our contract manufacturers would cause a delay in our ability to fulfill customer orders while we obtain a replacement manufacturer and would harm our revenues, results of operations, competitive position and reputation.

 

To the extent that our customers consolidate, they may reduce purchases of our products and demand more favorable terms and conditions from us, which would harm our revenues and profitability

 

Consolidation of our customers could reduce the number of customers to whom our products could be sold. These merged customers could obtain products from a source other than us or demand more favorable terms and conditions from us, which would harm our revenues and profitability. In addition, our significant customers may merge with or acquire our competitors and discontinue their relationships with us.

 

Our products may contain defects which may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers

 

Our existing products and any new or enhanced products we introduce may contain undetected software or hardware defects when they are first introduced or as new versions are released. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers and reputation, all of which would harm our results of operations. A successful claim against us for an amount exceeding the limit on our product liability insurance policy would force us to use our own resources, to the extent available, to pay the claim, which could result in an increase in our expenses and a reduction of our working capital available for other uses, thereby harming our profitability and capital resources.

 

Our failure to protect our intellectual property may significantly harm our results of operations and reputation

 

Our success and ability to compete is dependent in part on our ability to establish, protect and maintain our proprietary rights to our intellectual property. We currently rely on a combination of patent, trade secret, trademark and copyright laws, and restrictions on disclosure and use, to establish, protect, and maintain our intellectual property rights. To date, we have relied primarily on trade secret laws to protect our proprietary processes and know-how. We also have patent applications and existing patents in the United States and other jurisdictions. We cannot be certain that any of these applications will be approved or that any such patents, if issued, or our existing patents, will be upheld. We also cannot be certain that our existing patents and any such additional patents, if issued, will be effective in protecting our proprietary technology.

  

We generally enter into assignment of rights and confidentiality agreements with our officers, employees and consultants. We also generally limit access to and distribution of our source code and further limit the disclosure and use of our other proprietary information. However, these measures provide only limited protection of our intellectual property rights. In addition, we may not have signed agreements containing adequate protective provisions in every case, and the contractual provisions that are in place may not provide us with adequate protection in all circumstances. Any infringement or misappropriation of our intellectual property rights could result in significant litigation costs, and any failure to adequately protect our intellectual property rights could result in our competitors’ offering similar products, potentially resulting in loss of one or more competitive advantages, loss of market share and decreased revenues.

 

Despite our efforts to protect our intellectual property rights, existing trade secret, copyright, patent and trademark laws afford us only limited protection. In addition, the laws of some foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. Accordingly, we may not be able to prevent misappropriation of our proprietary technologies or to deter others from developing similar technologies. Others may attempt to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Further, monitoring the unauthorized use of our products and our intellectual property rights is difficult. Litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources and could significantly harm our results of operations and reputation.

 

 

 

The inability to successfully defend claims from taxing authorities or the adoption of new tax legislation could adversely affect our operating results and financial position

 

We conduct business in many countries, which requires us to interpret the income tax laws and rulings in each of those jurisdictions. Due to the complexity of tax laws in those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from tax authorities related to these differences could have an adverse impact on our results of operations, financial condition and cash flows. In addition, legislative bodies in the various countries in which we do business may from time to time adopt new tax legislation that could have a material adverse effect on our results of operations, financial condition and cash flows.

 

We have outstanding debt under our Convertible Notes and our Credit Facility and may incur other debt in the future, which could adversely affect our financial condition, liquidity, and results of operations

 

On December 7, 2010, we issued $200.0 million in aggregate principal amount of 3.00% Convertible Senior Notes (the “Convertible Notes”) due December 15, 2015 unless earlier repurchased or converted. On March 2, 2015, we entered into a credit agreement establishing a senior secured credit facility (the “Credit Facility”) with certain institutional lenders. The credit agreement provides for a (i) term loan in the aggregate principal amount of $40.0 million, which was advanced to us on March 3, 2015, and (ii) revolving credit facility in an aggregate amount of up to $60.0 million. We may in the future borrow amounts under the revolving credit facility or any other credit facilities that we may obtain and use the proceeds to fund working capital needs and capital expenditures and for other general corporate purposes, including acquisitions, stock repurchases and any partial refinancing of our Convertible Notes. Increases in our aggregate levels of debt may adversely affect our operating results and financial condition by, among other things:

 

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increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions;

  

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requiring the dedication of an increased portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes; and

  

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limiting our flexibility in planning for, or reacting to, changes in our business and our industry.

 

Servicing our existing debt under our Convertible Notes due in December 2015 and the Credit Facility we established in March 2015, as well as any future debt, requires a significant amount of cash, and we may not have sufficient cash flow from our business or from other available sources to service our existing debt or debt we may incur in the future, which would materially and adversely affect our business and financial condition

 

Our ability to make scheduled payments of principal, to pay interest on, and/or to refinance our existing or any new indebtedness, including without limitation our Convertible Notes in the aggregate principal amount of $200.0 million that are due to be paid on December 15, 2015, and indebtedness under the Credit Facility we established in March 2015, will depend on our future performance, which is subject to economic, financial, competitive, and other factors, many of which are beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our existing and any new indebtedness and to make necessary capital expenditures. If we are unable to generate sufficient cash flow, we may be required to adopt one or more alternatives, such as restructuring debt, obtaining additional equity capital on terms that may be onerous or highly dilutive, or selling assets. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default under current and any future debt obligations. As a result, our business and financial condition could be materially and adversely affected.

 

If we fail to comply with certain covenants under our Credit Facility, any borrowings must be repaid, we may be prevented from further borrowing and/or the Credit Facility may be terminated by the lenders

 

Our Credit Facility imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of certain of our subsidiaries to incur indebtedness, and requires us to maintain compliance with specified financial ratios. The financial covenants in the related credit agreement require us to maintain a minimum consolidated fixed charge ratio, a maximum consolidated senior leverage ratio, a maximum consolidated total leverage ratio and to meet certain liquidity requirements. The credit agreement that provides for our Credit Facility also requires us, among other things, to timely deliver certain financial statements to the lenders. Our failure to comply with such covenants or any other breach of the credit agreement could cause a default under the credit agreement. We may then be required to repay borrowings under the Credit Facility with capital from other sources. We could also be blocked from borrowing or obtaining letters of credit under the Credit Facility, and the credit agreement could be terminated by the lenders. Under these circumstances, other sources of capital, including any financing that may be required to repay or refinance our Convertible Notes (which mature in December 2015), may not be available or may be available only on unfavorable terms. In the event of a default, it is possible that our assets and certain of our subsidiaries’ assets may be attached or seized by the lenders. Any failure by us to comply with the covenants or other provisions of the credit agreement or any difficulty in securing any required future financing and any such seizure or attachment of assets could have a material adverse effect on our business and financial condition.

 

In the event of any fundamental change that triggers the requirement under the Indenture that we offer to repurchase our Convertible Notes, we may not have the funds necessary to repurchase them

 

The terms of our Convertible Notes require us to offer to repurchase them for cash in the event of 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). A non-stock takeover of our company may also trigger the requirement that we repurchase the Convertible Notes. In any the event of such a fundamental change, there can be no assurance that we will have sufficient financial resources, or would be able to arrange financing, to pay in cash the fundamental change purchase price in full for any Convertible Notes that are surrendered by the holders. Our failure to repurchase Convertible Notes would result in a default under the Indenture, which could result in acceleration of our Convertible Notes and in defaults under any then-existing agreements governing any other indebtedness of the Company. In addition, the terms of any credit facility that exists at the time of any fundamental change may limit our ability to utilize the facility to pay the fundamental change purchase price.

 

The issuance of shares of our Common Stock in any equity offering by the Company or upon any conversion of our Convertible Notes or of any other convertible debt that we may issue in the future, would dilute the ownership interest of our existing shareholders

 

The issuance of shares of our Common Stock in any equity financing by us or upon conversion of our Convertible Notes or any other convertible debt we may issue in the future, would dilute the ownership interests of our existing shareholders. Any sales in the public market of our Common Stock issuable in any such financing or upon any such conversion could adversely affect prevailing market prices of our Common Stock. In addition, the existence of the Convertible Notes or other convertible debt may encourage short selling by market participants because the conversion of the Convertible Notes could depress the price of our Common Stock.

 

Our investment portfolio may become impaired by deterioration of the financial markets

 

We follow an established investment policy and set of objectives designed to preserve principal and liquidity, to generate a market return given the policy’s guidelines and to avoid certain investment concentrations. The policy also sets forth credit quality standards and limits our exposure to any one non-government issuer. Our investment portfolio as of December 31, 2014 consisted of money market funds, U.S. Treasury, government agency debt securities and corporate debt securities.

 

These investments are classified as available-for-sale and are recorded on our consolidated balance sheets at fair value. Although our investment portfolio’s amortized cost approximated fair value as of December 31, 2014, we cannot predict future market conditions or market liquidity, or the future value of our investments. As a result, we can provide no assurance that our investment portfolio will not be impaired in the future and that any such impairment will not materially and adversely impact our financial condition, results of operations and cash flows.

 

Our business is subject to changing regulation that has resulted in increased costs and may continue to result in additional costs in the future

 

We are subject to laws, rules and regulations of federal and state regulatory authorities, including The Nasdaq and financial market entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. During the past few years, these entities, including the Public Company Accounting Oversight Board, the SEC and Nasdaq, have issued new requirements and regulations and continue to develop additional regulations and requirements partly in response to laws enacted by Congress, most notably the Sarbanes-Oxley Act of 2002 (“SOX”) and, more recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Our efforts to comply with these requirements and regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of substantial management time and attention from revenue-generating activities to compliance activities.

 

In particular, our efforts to comply with Section 404 of SOX and the related regulations regarding our required assessment of our internal control over financial reporting and our independent registered public accounting firm’s audit of the effectiveness of our internal control over financial reporting, have required, and continue to require, the commitment of significant financial and managerial resources. To the extent that we identify areas of our disclosures controls and procedures and/or internal controls requiring improvement (such as the material weaknesses, discussed in Item 9A herein, that existed as of December 31, 2014), we may have to incur additional costs and divert management’s time and attention.

 

 

Because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices.

 

We are also subject to laws, rules and regulations of authorities in other countries where we do business, and these laws, rules and regulations are also subject to change and uncertainty regarding their application and interpretation. The growth of our operations, both domestically and internationally, has resulted in and is likely to continue to result in increased expense, resources and time spent on matters relating to compliance, including monitoring and training activities.

 

Compliance with recently adopted rules of the SEC relating to “conflict minerals” may require us and our suppliers to incur substantial expense and may limit the supply and increase the costs of certain metals and minerals used in the manufacturing of our products

 

In 2012, the SEC adopted disclosure requirements under Section 1502 of the Dodd-Frank Act, regarding the source of certain conflict minerals for issuers for which such conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer, which are mined from the Democratic Republic of Congo (“DRC”) and adjoining countries. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” Because Ixia contracts to manufacture products which may contain tin, tantalum, tungsten, or gold, we will be required under these rules to determine whether those minerals are necessary to the functionality or production of our products and, if so, the rules require us to conduct a reasonable country of origin inquiry to determine if we know or have reason to believe any of the minerals used in the production process may have originated from the DRC or an adjoining country (collectively referred to as “covered countries”). The time required to be spent by our management and the management of our suppliers in this endeavor could be significant. There may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. There can be no assurance that these costs will not have an adverse effect on our business, financial condition or results of operations.

 

The implementation of these requirements could affect the sourcing and availability of products we purchase from our suppliers and contract manufacturers. This may also reduce the number of suppliers who provide products containing conflict free metals, and may affect our ability to obtain products in sufficient quantities, in a timely manner or at competitive prices. Our material sourcing is broad based and multi-tiered, and we may not be able to easily verify the origins for all metals used in our products. We may also encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

 

If we fail to maintain our relationships with industry experts, our products may lose industry and market recognition and sales could decline

 

Our relationships with industry experts, in particular in the field of performance analysis and measurement of networks and network equipment, are critical for maintaining our industry credibility and for developing new products. These experts have established standard testing methodologies that evaluate new network equipment products and technologies. We provide these experts and their testing labs with our products and engineering assistance to perform tests on these new network equipment products and technologies. These industry experts refer to our products in their publications which has given our products industry recognition. In addition, these labs offer us the opportunity to test our products on the newest network equipment and technologies, thereby assisting us in developing new products that are designed to meet evolving technological needs. We cannot be certain that we will be able to maintain our relationships with industry experts or that our competitors will not maintain similar or superior relationships with industry experts. If we are unable to maintain our relationships with industry experts or if competitors have superior relationships with them, our products may lose industry and market recognition which could harm our reputation and competitive position and cause our sales to decline.

 

Our business and operations are subject to the risks of earthquakes, floods, hurricanes and other natural disasters

 

Our operations could be subject to natural disasters and other business disruptions, which could adversely affect our business and financial results. A number of our facilities and those of our suppliers, our contract manufacturers, and our customers are located in areas that have been affected by natural disasters such as ice and snow storms, earthquakes, floods or hurricanes in the past. For example, currently, our corporate headquarters and many of our customers are located in California. California historically has been vulnerable to natural disasters and other risks, such as earthquakes, fires and floods, which at times have disrupted the local economy and posed physical risks to our property. To mitigate some of this risk, certain of our U.S. and international locations are insured up to certain levels against losses and interruptions caused by earthquakes, floods and/or other natural disasters. However, there can be no guarantee that such insurance may be adequate in the event of a natural disaster and a significant natural disaster could have a material adverse impact on our business, operating results and financial condition.

 

 

Man-made problems such as cybersecurity attacks, computer viruses or terrorism may disrupt our operations and harm our business, reputation and operating results

 

Despite our implementation of network security measures, our network may be vulnerable to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Cybersecurity attacks, in particular, are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, operating results and financial condition. We are not aware of any security breaches or cyber-attacks to our networking infrastructure.

 

Our daily business operations require us to retain sensitive data such as intellectual property, proprietary business information and data related to customers, suppliers and business partners within our networking infrastructure. The ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals, and organizations like Ixia are susceptible to multiple variations of attacks on our networks on a daily basis.

 

Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee errors, or other unforeseen activities. Such issues could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information and data related to our customers, suppliers and business partners. To the extent that such disruptions occur, they may cause delays in the manufacture or shipment of our products and the cancellation of customer orders and, as a result, our business operating results and financial condition could be materially and adversely affected resulting in a possible loss of business or brand reputation.

 

In addition, the effects of war or acts of terrorism could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruption to the economy and create further uncertainties in the economy. Energy shortages, such as gas or electricity shortages, could have similar negative impacts. To the extent that such disruptions or uncertainties result in delays or cancellations of customer orders or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.

  

Our use of open source software in our products could adversely affect our ability to sell our products and subject us to possible litigation

 

Many of our products contain software modules licensed to us by third-party authors under “open source” licenses. If we combine our proprietary software with open source software in a certain manner and then distribute the combined software, we could, under certain open source licenses, be required to license that combined software under the terms of that open source license as well as release the source code of the combined software to third parties. This could allow third parties to use our proprietary software at no charge, could enable our competitors to create similar products with lower development effort and time, and ultimately could result in a loss of product sales and lower revenues for us.

 

Although we attempt to monitor our use of open source software to avoid subjecting our products to conditions we do not intend, we cannot assure you that our processes for controlling our use of open source software in our products will be effective. Further, there have been claims against companies that distribute or use open source software in their products and services, asserting that open source software infringes the claimants’ intellectual property rights. We could be subject to suits by parties claiming infringement of intellectual property rights in what we believe to be licensed open source software. If we are held to have breached the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our products, to re-engineer our products, to discontinue the sale of our products if re-engineering could not be accomplished in a timely manner, to allow third parties to use our products at no charge under the terms of that open source software license, or to make generally available, in source code form, our proprietary software, any of which could adversely affect our business, operating results, and financial condition.

 

In addition to risks related to license requirements, use of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or assurance of title or controls on origin of the software. Many of the risks associated with the use of open source software, such as the lack of warranties or assurances of title, cannot be eliminated, and could, if not properly addressed, adversely affect our business.

 

 

Provisions of our articles of incorporation and bylaws may make it difficult for a third party to acquire us, despite the possible benefits to our shareholders

 

Our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders. The rights of the holders of our Common Stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Furthermore, some provisions of our articles of incorporation and bylaws could delay or make more difficult a merger, tender offer or proxy contest involving us. Our articles of incorporation include provisions that limit the persons who may call special meetings of shareholders and establish advance notice requirements for nominations for election to our Board of Directors and/or for proposing matters that can be acted on by shareholders at shareholder meetings. These and other provisions of our articles of incorporation and bylaws may have the effect of delaying, deferring or preventing a change in our control despite possible benefits to our shareholders, may discourage bids at a premium over the market price of our Common Stock and may harm the market price of our Common Stock and the voting and other rights of our shareholders.

 

Our stock price may continue to be volatile

 

The trading price of our Common Stock has fluctuated substantially in recent years. The trading price may be subject to future fluctuations in response to, among other events and factors: (i)  the global economic environment; (ii) variations in our quarterly operating results; (iii) the gain, loss or timing of significant orders; (iv) changes in earnings estimates by analysts who cover our stock or the stock of our competitors; (v) changes in our revenue and/or earnings guidance as periodically announced in our earnings calls or press releases; (vi) announcements of technological innovations and new products by us or our competitors; (vii) changes in domestic and international economic, political and business conditions; (viii) consolidation and general conditions in our industry; (ix) the announcement of significant transactions, such as a proposed business acquisition; and (x) changes in our executive management team. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market prices for many companies in our industry that have been unrelated to the operating performance of these companies. These market fluctuations have affected and may continue to affect the market price of our Common Stock.

 

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

As of December 31, 2014, our leased and owned properties in total provided us with aggregate square footage of approximately 447,000, of which approximately 1,000 square feet is owned. Our corporate headquarters are located in Calabasas, California, where we currently lease approximately 116,000 square feet of space which houses research and development, sales and marketing, finance and administration, and manufacturing operations. This lease terminates on May 31, 2023, with no extension options. We also lease office space for sales, support, marketing, operations and administration in the United Kingdom, Ireland, Germany, France, Finland, Sweden, Canada, South Korea, Japan, China, Singapore, India, Malaysia, United Arab Emirates, Spain, Brazil, and Israel and in various states throughout the United States. Additionally, we have leased research and development facilities in Romania, India, and Canada. We believe that our existing properties, including both owned and leased sites, will be adequate to meet our needs for the next 12 months, or that we will be able to obtain additional space when and as needed on acceptable terms.

 

From time to time we consider various alternatives related to our long-term facility needs. While we believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease or acquire additional or alternative space to accommodate future business needs.

 

Item 3. Legal Proceedings

 

For information on our legal proceedings, see Note 10 to the consolidated financial statements included in this Form 10-K.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

 

PART II

 

Item 5.     Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

(a)	Market Price, Dividends and Related Matters

 

Ixia’s Common Stock is traded on the Nasdaq Global Select Market under the symbol “XXIA.” The following table sets forth the high and low sales prices of our Common Stock as reported on the Nasdaq Global Select Market for the following time periods.

 

		High				Low
2014
Fourth quarter		$	11.38			$	8.40
Third quarter			11.78				8.77
Second quarter			13.27				11.14
First quarter			14.65				11.94
2013
Fourth quarter		$	16.33			$	11.89
Third quarter			18.93				13.31
Second quarter			21.81				14.11
First quarter			22.50				17.20

 

On March 26, 2015, the closing sales price reported for our Common Stock was $11.79 per share, and as of that date there were approximately 16 registered shareholders of record.

 

We have never declared or paid cash dividends on our Common Stock and do not anticipate paying any dividends in the foreseeable future. 

 

The following graph compares the cumulative total return on the Company's Common Stock with the cumulative total returns of the Nasdaq Composite Index and the Nasdaq Telecommunications Index for the five-year period commencing December 31, 2009. Ixia is one of the companies that make up the Nasdaq Telecommunications Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in the Company’s Common Stock and in each of the indices on December 31, 2009, and their relative performance is tracked through December 31, 2014. These indices are included only for comparative purposes as required by the rules of the Securities and Exchange Commission and do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance of the Company’s Common Stock. The stock price performance shown on the graph below is not necessarily indicative of future price performance. This graph shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Ixia under the Securities Act of 1933, as amended, or the Exchange Act.

  

 

 

 

		12/31/2009				12/31/2010				12/31/2011				12/31/2012				12/31/2013				12/31/2014
Ixia			100.00				225.23				141.07				227.92				178.66				151.01
NASDAQ Composite			100.00				117.61				118.70				139.00				196.83				223.74
NASDAQ Telecommunications			100.00				107.95				96.16				100.40				139.11				148.69

 

(b)	Use of Proceeds
	None.

 

(c)	Issuer Repurchases of Equity Securities
	None.

 

 

 

Item 6. Selected Financial Data

 

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements. The consolidated statement of operations data set forth below for the years ended December 31, 2014, 2013 and 2012 and the consolidated balance sheet data as of December 31, 2014 and 2013 are derived from the Company’s audited consolidated financial statements included elsewhere in this Form 10-K. The consolidated statements of operations data set forth below for the years ended December 31, 2011 and 2010 and the consolidated balance sheet data as of December 31, 2012, 2011 and 2010 are prepared on a consistent basis with the consolidated financial statements presented herein and have been derived from audited consolidated financial statements of the Company that are not included in this Form 10-K.

 

		2014					2013(3)				2012(4)				2011(5)				2010
Consolidated Statement of Operations Data (in thousands, except per share data):
Revenues:
Products		$	325,455			$	352,712			$	330,315			$	249,423			$	227,682
Services			139,003				114,544				83,119				61,947				50,825
Total revenues			464,458				467,256				413,434				311,370				278,507
Costs and operating expenses: (1)
Cost of revenues – products (2)			98,815				89,136				71,668				56,801				54,378
Cost of revenues – services			16,166				13,867				10,493				6,520				6,327
Research and development			115,156				117,502				98,169				75,101				72,488
Sales and marketing			151,765				137,724				117,214				87,011				79,986
General and administrative			66,475				47,158				45,607				33,648				35,142
Amortization of intangible assets			46,901				40,805				30,018				15,980				17,545
Acquisition and other related			3,277				6,920				11,861				1,100				2,991
Restructuring(6)			10,310				1,840				4,077				—				3,587
Total costs and operating expenses			508,865				454,952				389,107				276,161				272,444
(Loss) income from operations			(44,407	)			12,304				24,327				35,209				6,063
Interest income and other, net(7)			(24	)			6,269				2,255				2,059				10,970
Interest expense(8)			(8,266	)			(7,771	)			(7,215	)			(7,200	)			(480	)
(Loss) income before income taxes			(52,697	)			10,802				19,367				30,068				16,553
Income tax (benefit) expense(9)			(11,105	)			(1,068	)			(26,093	)			3,355				3,723
Net (loss) income		$	(41,592	)		$	11,870			$	45,460			$	26,713			$	12,830
(Loss) earnings per share:
Basic		$	(0.54	)		$	0.16			$	0.63			$	0.39			$	0.20
Diluted		$	(0.54	)		$	0.15			$	0.59			$	0.37			$	0.19
Weighted average number of common and common equivalent shares outstanding:
Basic			77,629				75,757				72,183				69,231				65,157
Diluted			77,629				77,513				84,505				71,664				67,769

  

 

33

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(1)

Stock-based compensation included in:

 

Cost of revenues – products		$	331			$	550			$	423			$	402			$	524
Cost of revenues – services			126				209				162				153				198
Research and development			6,843				8,065				6,242				4,286				5,195
Sales and marketing			5,624				7,367				5,352				3,296				3,592
General and administrative			3,595				4,571				7,462				4,454				3,406

 

(2)

Cost of revenues – products excludes amortization of intangible assets, related to purchased technology of $28.9 million, $26.0 million, $20.3 million, $10.8 million and $12.8 million for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, respectively, which is included in Amortization of intangible assets.

  

(3)

During the year ended December 31, 2013, we completed the acquisition of Net Optics, Inc. for approximately $187.4 million.

  

(4)

During the year ended December 31, 2012, we completed the acquisition of Anue, Inc. and BreakingPoint Systems, Inc. for approximately $152.4 million and $163.7 million, respectively.

  

(5)

During the year ended December 31, 2011, we completed the acquisition of VeriWave, Inc. for approximately $15.8 million.

  

(6)

In 2010, 2012 and 2014 our management approved, committed to and initiated a plan to restructure our operations in light of our acquisitions of N2X, BreakingPoint and Net Optics, respectively. In 2013, management approved, committed to and initiated a plan to restructure certain operations related to our network test products. In 2014, management approved, committed to and initiated a plan to restructure our operations to better align the Company’s operating costs with its business opportunities.

 

(7)

In 2010, we recorded $8.9 million and $1.0 million, respectively, relating to (i) settlement proceeds received for claims asserted by us against our former investment manager for damages and losses relating to our previous investments in auction rate securities with an aggregate par value of $19.0 million, and (ii) proceeds received for the sale of certain of these auction rate securities that were previously written-off. In 2013, we recorded realized gains of $2.9 million related to the sale of previously written down auction rate and corporate debt securities.

  

(8)

In December 2010, we issued $200.0 million in aggregate principal amount of 3.00% convertible senior notes that mature on December 15, 2015, if not converted. Interest expense consists of interest due to the holders of our notes, as well as the amortization of the associated debt issuance costs. The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011. During 2011, 2012, 2013 and 2014 we made interest payments of $6.0 million.

  

(9)

In 2012, we released $34.8 million of our valuation allowance previously established against our U.S. deferred tax assets. The 2012 partial releases related primarily to the net deferred tax liabilities recorded as part of the Anue and BreakingPoint acquisitions.

 

 

		2014				2013				2012				2011				2010
Consolidated Balance Sheet Data (in thousands):
Cash and cash equivalents		$	46,394			$	34,189			$	47,508			$	42,729			$	76,082
Short-term investments in marketable securities			79,760				51,507				126,851				156,684				151,696
Working capital			(44,758	)			128,960				227,309				234,723				256,034
Long-term investments in marketable securities			—				—				3,119				185,608				111,440
Total assets			869,911				887,723				819,249				634,467				589,883
Convertible senior notes			200,000				200,000				200,000				200,000				200,000
Total liabilities			388,820				388,611				371,751				282,231				293,467
Total shareholders’ equity			481,091				499,112				447,498				352,236				296,416

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, many of which are outside of our control and are difficult for us to forecast or mitigate. The factors that could cause our actual results to differ materially from those expressed or implied by us in any forward-looking statements contained herein or made elsewhere by or on behalf of us include the risks described elsewhere in this Form 10-K and in certain of our other Securities and Exchange Act Commission filings.

 

The consolidated results of operations for the years ended December 31, 2014, 2013 and 2012 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Part IV, Item 15 of this Form 10-K and in conjunction with the “Risk Factors” included in Part I, Item 1A of this Form 10-K.

 

Business Overview

 

Ixia provides application performance and security resilience solutions so that organizations can validate, secure and optimize their physical and virtual networks. Enterprises, service providers, network equipment manufacturers, and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure ongoing operation of their networks. Our network test and network visibility 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 $40.5 million to $126.2 million at December 31, 2014 from the $85.7 million reported at December 31, 2013. During 2014, total revenues decreased 0.6% to $464.5 million from $467.3 million in 2013. The decrease was primarily a result of lower shipments of our legacy network test and other visibility products to certain service provider and network equipment manufacturer customers partially offset by incremental revenues recognized from the sale of our Net Optics visibility products following our acquisition of Net Optics in December 2013 and an increase in revenues recognized on technical support, warranty and software maintenance services. Revenues related to our 2013 acquisition of Net Optics were $59.0 million and $4.8 million, in 2014 and 2013, respectively.

 

In 2014, we generated cash flows from our operations of $38.1 million, which represents a 56.0% decrease from the operating cash flows generated in 2013. This decrease was primarily due to the decline in revenues from our legacy network test and other visibility products and an increase in operating expenses, and certain charges, such as those associated with our restructuring initiatives, internal investigations, and other legal and accounting costs.

 

While we remain confident in our competitive position and our opportunities for long-term growth in both network test and network visibility, we believe there continues to be some near term uncertainty and weakness in the market, such as the capital spending plans of large service providers and network equipment manufacturers as they plan and prepare for the technological developments in networking (e.g., Virtualization, Software Defined Networks (SDN), and Network Functions Virtualization (NFV)). This uncertainty and weakness may adversely impact our sales, results of operations and financial position over the near term.

 

 

 

Establishment of Senior Secured Revolving Credit Facility. On March 2, 2015 (the “Closing Date”), we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with certain institutional lenders which amended and restated the Company’s prior credit agreement dated as of December 21, 2012, as amended (the “Prior Credit Agreement”). The Credit Agreement provides for a (i) term loan (the “Term Loan”) in the aggregate principal amount of $40.0 million, which amount was advanced to the Company on March 3, 2015, and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to $60.0 million, with sub-limits of $25.0 million for the issuance of standby letters of credit and $15.0 million for swingline loans. The aggregate amount available under the Credit Facility may, upon the Company’s request and subject to the receipt of increased commitments from the lenders or additional lenders, be increased by an aggregate amount of up to $80.0 million. We are permitted to voluntarily prepay outstanding loans under the Credit Facility at any time without premium or penalty. Prior to the maturity of the Credit Facility, we may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that are repaid or prepaid under the Term Loan.
 

The maturity date of the Credit Facility is February 15, 2018; provided, however, that if, at any time between June 15, 2015 and the maturity date for the unsecured Convertible Senior Notes (the “Notes”) (i.e., December 15, 2015), we do not have total available liquidity (defined as cash, cash equivalents, and marketable securities plus availability under the Revolving Credit Facility) of $25.0 million in excess of the amount then required to repay our Notes (as described above) in full, all amounts outstanding under the Credit Facility will become due and payable, and the Revolving Credit Facility will terminate, on September 14, 2015 (or if such date has passed, within 2 business days after the date we fail to have the required total available liquidity). If subsequent to June 15, 2015 and prior to September 14, 2015 we do not have the required total available liquidity but thereafter (and prior to September 15, 2015) achieve and maintain such liquidity level, the accelerated maturity date of September 14, 2015 shall not apply.
 

The Prior Credit Agreement originally provided for a revolving credit facility (the “Prior Credit Facility”) in an aggregate loan amount of up to $150 million. As a result of the termination of certain lenders’ commitments under the Prior Credit Agreement, the aggregate loan amount was reduced to $67.5 million in January 2015 and further reduced to $46.5 million in March 2015. As described below and due to our defaults under the Prior Credit Agreement, we were at the time of its amendment and restatement blocked from borrowing and obtaining letters of credit under the Prior Credit Agreement. As of December 31, 2014 and immediately prior to the March 2015 amendment and restatement of the Prior Credit Agreement, no amounts were outstanding under the Prior Credit Facility. See Note 3 to the consolidated financial statements included in this Form 10-K.

 

Acquisition of Net Optics. On December 5, 2013, we completed our acquisition of all of the outstanding shares of common stock and other equity interests of Net Optics. The aggregate cash consideration paid totaled $187.4 million, or $185.4 million net of Net Optics’ existing cash and investment balances at the time of the acquisition. The aggregate purchase price reflects certain post-closing adjustments related to the final determination of the Net Optics’ closing working capital under the purchase agreement and the final amount of tax reimbursements paid to the sellers. 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, strengthened our service provider and enterprise customer base and broadened 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 consolidated statements of operations and cash flows since the date of the acquisition. See Note 2 to the consolidated financial statements included in this Form 10-K.

 

Acquisition of BreakingPoint Systems, Inc. On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”). The aggregate cash consideration paid totaled $163.7 million, or $150.3 million net of BreakingPoint’s existing cash and cash equivalents balances at the time of the acquisition. The acquisition was funded from our existing cash and sale of investments. BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. The results of operations of BreakingPoint have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 2 to the consolidated financial statements included in this Form 10-K.

 

Acquisition of Anue Systems, Inc. On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock, and all other equity interests of Anue Systems, Inc. (“Anue”). The aggregate consideration paid totaled $152.4 million, or $148.7 million net of Anue’s existing cash and cash equivalents balances at the time of the acquisition. The acquisition was funded from our existing cash and sale of investments. Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. The results of operations of Anue have been included in our consolidated statements of operations and cash flows since the date of the acquisition. See Note 2 to the consolidated financial statements included in this Form 10-K.

 

Restructuring Activities. During the third quarter of 2014, our management approved, committed to and implemented a Company-wide restructuring initiative (“2014 Corporate Restructuring”) to restructure our operations to better align the Company’s operating costs with its business opportunities. The restructuring includes a reduction in force of approximately 96 positions across multiple business functions, which represented approximately 5% of our worldwide work force at that time. The 2014 Corporate Restructuring is estimated to cost approximately $6.3 million in restructuring expenses related to employee termination benefits and costs to exit our facilities in Austin, Santa Clara, India and Romania, which are included in the Restructuring expense line item in the consolidated statement of operations. The 2014 Corporate Restructuring was substantially completed by the fourth quarter of 2014. The 2014 Corporate Restructuring is estimated to provide future cost savings of approximately $16.8 million on an annualized basis, once fully completed in calendar year 2015, with the cost savings principally driven by headcount-related costs, and to a lesser extent, facilities-related savings, which will favorably impact the Company’s future earnings and cash flows.

 

 

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 at that time. The Net Optics Restructuring cost approximately $3.9 million in restructuring expenses related to employee termination benefits and other costs required to terminate the Net Optics facility lease in Israel, which are included in the Restructuring expense line item in the consolidated statement of operations. The Net Optics Restructuring was substantially completed by the second quarter of 2014. Significant future costs savings were not expected from the Company’s existing operations as the restructuring was executed in conjunction with the acquisition of Net Optics.

 

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 at that time. The Test Restructuring cost approximately $1.9 million in restructuring expenses related to employee termination benefits, which are included in the Restructuring expense line item in the consolidated statement of operations. The Test Restructuring was substantially completed by the fourth quarter of 2013 and all associated costs have been paid out. Significant future costs savings were not expected from the Test Restructuring as the restructuring served to realign our resources.

 

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

 

Sales of 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.

 

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. The 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.

 

During the three years ended December 31, 2014, our network test Ethernet interface cards, including our 1 Gigabit Ethernet, 10 Gigabit Ethernet and 40/100 Gigabit Ethernet interface cards, represented the majority of our product revenues. During 2014, our 10 Gigabit Ethernet interface cards continued to be our strongest seller, but we also saw a significant increase in demand for our 40/100 Gigabit Ethernet cards during 2013 and 2014 as a result of network infrastructure upgrades. Over the longer term, while we expect the sale of our network test Ethernet interface cards to represent a significant amount of our revenues, we expect to see some decline as a percentage of total revenues as the sales of our network visibility and other network test solutions increase.

 

Sales to our two largest customers, AT&T and Cisco Systems, accounted for $68.6 million, or 14.8%, of our total revenues in 2014, $116.3 million, or 24.9%, of our total revenues in 2013, and $86.3 million, or 20.9%, of our total revenues in 2012. 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 that we will continue to have some customer concentration with network equipment manufacturers, we expect to continue to see declines as a percentage of total revenues, given that we expect to sell our products to a wider variety and increasing number of service providers, 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 and our 2012 acquisitions of Anue and BreakingPoint will continue to further diversify our customer base.

 

 

From a geographic perspective, we generated revenues from shipments to international locations of $189.3 million, or 40.8%, of our total revenues in 2014, $172.5 million, or 36.9% of our total revenues in 2013, and $171.4 million, or 41.4% of our total revenues in 2012. During 2014, our total revenues generated from shipments to international locations increased in percentage terms, when compared to the same period in 2013, due in part to our 2013 acquisition of Net Optics. Total revenues from product shipments to Japan were $34.3 million, or 7.4%, of our total revenues in 2014, $36.4 million, or 7.8%, of our total revenues in 2013, and $43.6 million, or 10.6%, of our total revenues in 2012.

 

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 years ended December 31, 2014, 2013 and 2012, stock-based compensation expense was $16.5 million, $20.8 million and $19.6 million, respectively. Our stock-based compensation expense decreased for the year ended December 31, 2014 as compared to 2013 due to a higher volume of stock award cancellations resulting from our restructuring activities and the departure of our former CFO and lower valuations of awards from a decline in the Company’s stock price. The aggregate balance of gross unrecognized stock-based compensation to be expensed in the years 2015 through 2019 related to unvested share-based awards as of December 31, 2014 was approximately $19.8 million. To the extent that we grant additional share-based awards, future expense may increase by the additional unearned compensation resulting from those grants. We anticipate that we will continue to grant additional 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 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; Santa Clara, California 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 cost of 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 $28.9 million, $26.0 million and $20.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, which are included within our Amortization of intangible assets line item on our consolidated statements of operations.

  

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

 

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our pricing policies and those of our competitors;

 

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

 

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

 

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

 

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new product introductions by us and by our competitors;

 

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demand for and quality of our products; and

 

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shipment volume.

 

In the near term, although we anticipate that our cost of revenues as a percentage of total revenues will remain relatively flat, 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 expenses discussed below, to decrease in 2015 when compared to 2014, due primarily to the restructuring initiatives we implemented in 2014 and lower costs related to internal investigations, shareholder litigation and related matters.

 

 

	●	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. We plan to continue to strategically invest in research and development and new products/technology as we believe that such investment is critical to attaining our strategic objectives and will further differentiate us in the marketplace.
	●	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 tradeshow, 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.

 

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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. General and administrative expenses also include costs related to internal investigations, shareholder litigation and related matters.

 

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Amortization of intangible assets consists of the recognition of the purchase price of various intangible assets over their estimated useful lives. 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. See Note 8 to the consolidated financial statements included in this Form 10-K.

 

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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.

 

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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 consolidated financial statements included in this Form 10-K.

 

Interest income and other, net represents interest on cash and a variety of securities, including money market funds, U.S. 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 consists of interest due to the holders of our Notes issued in December 2010 and the associated amortization of debt issuance costs, as well as the amortization of debt issuance costs and commitment fees on the unused portion of our Prior Credit Agreement. See Note 3 to the consolidated financial statements included in this Form 10-K.

 

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 a substantial impact on the income tax provision. Our income tax provision could also be significantly impacted by estimates surrounding our uncertain tax positions and the recording of valuation allowances against certain deferred tax assets and changes to these valuation allowances in future periods. We reevaluate the judgments surrounding our estimates and make adjustments, as appropriate, each reporting period.

 

 

Our effective tax rate also differs from the federal statutory rate due to state taxes, significant permanent differences, federal and foreign tax rate differences, inter-company royalties, research and development tax credits and adjustments to our valuation allowance. Significant permanent differences also arise due to stock-based compensation expenses that are not expected to generate a tax deduction, such as stock-based compensation expenses on grants to foreign employees, offset by tax benefits from disqualifying dispositions. For additional information, see Note 9 to the consolidated 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.  Objectively verifiable evidence includes the Company’s realization of tax attributes, assessment of tax credits and utilization of net operating loss carryforwards during the year.

 

During the year ended December 31, 2012, we released $34.8 million of our valuation allowance previously established against our U.S. deferred tax assets. Management’s conclusion to release the valuation allowance was due to, among other reasons, (i) the three-year cumulative pre-tax accounting income realized in the U.S., (ii) the significant utilization of its net operating loss carry-forwards and R&D credits during 2011, and 2012, and (iii) the significant net deferred tax liabilities recorded in connection with the 2012 acquisitions of Anue and BreakingPoint. We continue to maintain a valuation allowance in the amount of $3.2 million and $1.1 million against our U.S. and Australian deferred tax assets, respectively. The U.S. valuation allowance is related to its realized capital loss carryforwards and the Australian valuation allowance is due to net operating loss carryforwards, which are not expected to be realized. The release of the remaining valuation allowance, or a portion thereof, will have a favorable impact on our effective tax rate. We will continue to monitor the need for a valuation allowance each reporting period, and at this time, it is uncertain when and if such a release may occur.

 

On December 16, 2014, the Senate approved the House bill to extend the federal research and development credit for one year retroactively for 2014. The 2014 research and development tax benefit of $1.6 million was recorded in the fourth quarter of 2014. On January 2, 2013, the American Taxpayer Relief Act of 2012 was enacted, which included a reinstatement of the federal research and development credit for the tax year ended December 31, 2012. The 2012 research and development tax benefit in the amount of $2.6 million was recorded in 2013.

 

Critical Accounting Policies and Estimates

 

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements 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 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. Actual results may differ materially from these estimates.

  

We apply the following critical accounting policies in the preparation of our consolidated financial statements:

 

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Revenue Recognition Policy. We exercise significant judgment and use estimates in connection with the determination of the amount of revenue that is recognized in each accounting period and the allocation of those amounts to either product or services revenue. We recognize our revenue in accordance with authoritative guidance on both hardware and software revenue recognition. For our hardware and software products, and related services, we recognize revenue based on the following four criteria: whether (i) evidence of an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv) collectability is deemed reasonably assured (or probable for software-related deliverables). Provided that the above criteria are met, revenue from hardware and software product sales is typically recognized upon shipment and service revenues are recognized as the services are provided or completed. Our service revenues from our initial and separately purchased technical support, warranty and software maintenance arrangements are recognized on a straight-line basis over the applicable contractual period.

 

 

		Our systems are typically fully functional at the time of shipment and do not require us to perform any significant production, modification, customization or installation after shipment. If our arrangements include acceptance provisions based on customer specified criteria for which we cannot reliably demonstrate that the delivered product meets all the specified criteria, revenue is deferred until the earlier of the receipt of written customer acceptance or the expiration of the acceptance period. In addition, our arrangements generally do not include any provisions for cancellation, termination or refunds.
		When sales arrangements involve a combination of hardware and software elements, we use a two-step process to allocate value to each element in the arrangement. First, we allocate the total arrangement fee to the separate non-software deliverables (e.g., chassis, interface cards, and software post contract customer support and maintenance (“PCS”) related to our operating system software that is essential to the functionality of our hardware platform) and the software-related deliverables as a group (e.g., application software and software PCS) based on a relative selling price (“RSP”) method applied to all elements in the arrangement using the selling price hierarchy, which is described below. Then, we allocate the value assigned to the software group for the software-related deliverables to each software element based on the residual method, whereby value is allocated first to the undelivered elements based on vendor specific objective evidence (“VSOE”), typically PCS, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met.
		Under the RSP method, the selling price to be used in the allocation of the total arrangement fee to each of the elements, or deliverables, is based on a selling price hierarchy, where the selling price for each element is based on (i) VSOE, if available; (ii) third-party evidence (“TPE”), if available and VSOE is not available; or (iii) the best estimate of selling price (“BESP”), if neither VSOE nor TPE are available.
		The allocation of value to each deliverable in a multiple element arrangement is completed at the inception of an arrangement, which is typically the receipt of a customer purchase order. While changes in the allocation of the estimated selling price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.
		The allocated value of each non-software deliverable is then recognized as revenue when each element is delivered, provided all of the other revenue recognition criteria discussed above have been met. For software deliverables, the total software group allocation (or total arrangement consideration for customer orders that include only software products and related services) is assigned to each deliverable based on VSOE in accordance with software revenue recognition guidance as described under step two of the allocation process above. We determine VSOE of fair value based on a bell-shaped curve approach, considering the actual sales prices charged to customers when the same element is sold separately, provided it is substantive. As we do not sell our software products without technical support, warranty and software maintenance services, we are unable to establish VSOE for our software products, and therefore use the residual method under the software revenue recognition guidance to allocate the software group (or arrangement) value to each software deliverable. Under the residual method, the software group (or arrangement) value is allocated first to the undelivered elements, typically technical support, warranty and software maintenance services based on VSOE, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met. If VSOE cannot be established for an undelivered element within the software group (or arrangement), we defer the entire value allocated to the software group (or arrangement) until the earlier of (i) delivery of all elements (other than technical support, warranty and software maintenance services, provided VSOE has been established) or (ii) establishment of VSOE of the undelivered element(s). If the only undelivered element(s) relates to a service for which VSOE has not been established, the entire allocated value of the software group (or arrangement) is recognized as revenue over the longer of the service or contractual period of the technical support, warranty and software PCS. Refer to Note 1, Significant Accounting Policies, for further detail regarding the allocation of value and revenue recognition timing on multiple element revenue arrangements.

 

 

 

		VSOE of fair value typically only exists for the Company’s technical support, warranty and software maintenance services (“Support”). VSOE of fair value is established using the bell-shaped curve approach for a subgroup when a substantial majority (generally greater than 75%) of the transactions are priced within a reasonably narrow range (generally plus or minus 15% from the list price, which approximates the median). On a regular basis, the Company separately sells Support upon the expiration of the initial contractual periods included in an initial sales arrangement (“Support Renewals”). The population of Support Renewals is used in the bell-shaped curve approach to establish VSOE of fair value of Support and consists of actual sales prices charged to customers for Support Renewals and includes only Support Renewals sold separately on a stand-alone basis. The Company reviews these standalone sales of its Support Renewals for VSOE of fair value of its Support on a quarterly basis (“VSOE Analysis”). The Company’s pricing for Support Renewal transactions is generally based on a percentage of the Company’s list price for the product for which the Support Renewal is being purchased. When pricing conditions vary significantly, the Company further stratifies the population of stand-alone sales of its Support Renewals based on Support Renewal pricing conditions and separately analyzes these subgroups of Support Renewal transactions. The Company’s Support Renewal pricing conditions consist of the underlying product type, product family, customer type and the geographic region in which the sale is made.
		Our pricing practices may be required to be modified as our business and offerings evolve over time, which could result in changes in selling prices, including both VSOE and BESP, in subsequent periods. In determining BESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of users allowed for a given license.
		We use distributors and resellers to complement our direct sales and marketing efforts in certain markets and/or for certain products. Due to the broad range of features and options available with our hardware and software products, distributors and resellers generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors and resellers receive business terms of sale similar to those received by our other customers; and payment to Ixia is not contingent on sell-through to and receipt of payment from the end customer. As such, for sales to distributors and resellers, we recognize revenue when the risks and rewards of ownership have transferred to the distributor or reseller provided that the other revenue recognition criteria noted above have been met.
	●	Acquisition Purchase Price Allocation. When we acquire a business, product line or rights to a product or technology, we allocate the purchase price to the various tangible and intangible assets acquired and the liabilities assumed, based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, some of which may be based in part on historical experience and information obtained from the management of the acquired business, and are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those for purchased technologies and customer relationships, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the determination of estimated useful lives of acquired intangible assets, we may obtain appraisals from valuation specialists. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates and assumptions.

 

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Write-Down of Excess or Obsolete Inventory. We write down inventory for estimated obsolescence, excessive quantities or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. If actual future demand is less favorable than our initial estimate, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period the revision is made. Once written down, the inventory reserves are not reversed until the inventory is disposed of or sold.

 

 

 

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Allowance for Doubtful Accounts. We review the allowance for doubtful accounts and provisions are made upon a specific review of all significant past due receivables. For those receivables not specifically reviewed, provisions are provided at a general rate that considers historical write-off experience and current economic trends. We also consider the concentration of receivables outstanding with a particular customer in assessing the adequacy of our allowances for doubtful accounts. If a major customer's creditworthiness deteriorates, if actual defaults are higher than our historical experience, or if other circumstances arise, our estimates of the recoverability of amounts due to us could be overstated, and additional allowances could be required, which could have an adverse impact on our operating results. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.

 

	●	Income Taxes. We operate in numerous states and countries through our various subsidiaries, and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions.  Accordingly, our provision for income taxes represents our total estimate of the liability that we have incurred in doing business each year in all of our locations.  Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. In determining whether we need to record a valuation allowance against our deferred tax assets, management must make a number of estimates, assumptions and judgments, including estimates of future earnings and taxable income. We establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. The determination to record or release valuation allowances requires significant judgment. During 2014, management concluded that it is more likely than not that all of its U.S. deferred tax assets, with the exception of its U.S. deferred tax assets for capital loss carry-forwards, will be realized.  Management’s conclusion was due to, among other reasons, (i) the three-year cumulative adjusted pre-tax accounting income realized in the U.S. and (ii) the significant utilization of its net operating loss carry-forwards and R&D credits during 2013 and 2012.
		Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our tax return liabilities. Each jurisdiction has the right to audit those returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. We may provide for estimated liabilities in our consolidated financial statements associated with uncertain tax return filing positions that are subject to audit by various tax authorities. Because the determinations of our annual provisions are subject to assumptions, judgments and estimates, it is likely that actual results may vary from those recognized in our consolidated financial statements. As a result, additions to, or reductions of, income tax expense will occur each year for prior reporting periods as our estimates or judgments change, or as actual tax returns and tax audits are settled. We recognize any such prior year adjustment in the discrete quarterly period in which it is determined.

 

●

Goodwill. We record goodwill as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. We evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist. We have determined that we have one reporting unit for goodwill impairment testing purposes. The fair value of the Company’s reporting unit is determined using the market capitalization of Ixia, which considers the observed market price of the Company’s publicly-traded equity securities on the impairment test date. The fair value of the Company’s reporting unit is then compared to the carrying amount of the Company’s reporting unit under “step 1” of the impairment testing model. If the carrying value of the reporting unit exceeds its fair value, then the fair value of goodwill is determined and compared to its carrying value under “step 2.” Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. Currently management believes that it is not at risk of failing the “step 1” impairment test because the Company’s market capitalization is significantly in excess of the carrying value of the reporting unit.  We completed our annual goodwill impairment test of our single reporting unit as of December 31, 2014 and determined that there was no impairment.

 

 

●

Long-lived Asset Valuation (Intangible Assets and Property, Plant and Equipment). We test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Fair value is determined using a discounted cash flow analysis that involves the use of significant estimates and assumptions, some of which may be based in part on historical experience, forecasted information and discount rates. No such impairment charges were recorded during the years ended December 31, 2014, 2013 and 2012.

 

●

Stock-Based Compensation. Share-based payments, including grants of stock options, restricted stock units and employee stock purchase rights, are recognized based on the estimated fair values for accounting purposes on the grant date. We use the Black-Scholes option pricing model to estimate the fair value for accounting purposes of stock options and employee stock purchase rights. We use the grant date closing share sales price of a share of our common stock to estimate the fair value for accounting purposes of restricted stock units. The determination of the fair value of share-based awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life and risk-free interest rate. The expected life and expected volatility are estimated based on historical data. The risk-free interest rate assumption is based on observed interest rates appropriate for the lives of our share-based awards. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated forfeitures based on historical experience as well as future expectations. We recognize stock-based compensation expense based on the graded, or accelerated multiple-option, approach over the vesting period.

 

	●	Impairment of Marketable Securities. We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost and our intent and ability to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. We have evaluated our investments as of December 31, 2014 and have determined that no investments with unrealized losses are other-than-temporarily impaired.
	●	Contingencies and Litigation. We evaluate contingent liabilities, including threatened or pending litigation, and record accruals when the loss is deemed probable and the liability can reasonably be estimated. We make these assessments based on the facts and circumstances of each situation and in some instances based in part on the advice of outside legal counsel.

 

 

Results of Operations

 

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

 

		2014				2013				2012
Revenues:
Products			70.1	%			75.5	%			79.9	%
Services			29.9				24.5				20.1
Total revenues			100.00				100.0				100.0
Costs and operating expenses: (1)
Cost of revenues - products (2)			21.3				19.1				17.3
Cost of revenues – services			3.5				3.0				2.5
Research and development			24.8				25.1				23.7
Sales and marketing			32.7				29.5				28.4
General and administrative			14.3				10.1				11.0
Amortization of intangible assets			10.1				8.7				7.3
Acquisition and other related			0.7				1.5				2.9
Restructuring			2.2				0.4				1.0
Total costs and operating expenses			109.6				97.4				94.1
(Loss) income from operations			(9.6	)			2.6				5.9
Interest income and other, net			(0.0	)			1.3				0.5
Interest expense			(1.8	)			(1.7	)			(1.7	)
(Loss) income before income taxes			(11.4	)			2.2				4.7
Income tax (benefit) expense			(2.4	)			(0.2	)			(6.3	)
Net (loss) income			(9.0	)%			2.4	%			11.0	%

 

---

(1)

Stock-based compensation included in:

Cost of revenues – products			0.1	%			0.1	%			0.1	%
Cost of revenues - services			0.0				0.0				0.0
Research and development			1.5				1.7				1.5
Sales and marketing			1.2				1.6				1.3
General and administrative			0.8				1.0				1.8

 

(2)

Cost of revenues – products excludes amortization of intangible assets related to purchased technology, as a percentage of total revenues, of 6.2%, 5.6% and 4.9% for the years ended December 31, 2014, 2013 and 2012, respectively, which is included in Amortization of intangible assets.

 

 

Comparison of the Years Ended December 31, 2014 and 2013

 

We acquired Net Optics, Inc. on December 5, 2013, and our 2014 and 2013 consolidated results of operations include the financial results of such acquisition from its acquisition date.

 

Revenues. During the year ended December 31, 2014, total revenues decreased 0.6% to $464.5 million from the $467.3 million recorded in the year ended December 31, 2013. Revenues for the year ended December 31, 2014 and 2013 included $59.0 million and $4.8 million, respectively, related to the 2013 acquisition of Net Optics. Excluding the revenues of Net Optics, total revenues decreased by $57.0 million, or 12.3%, to $405.5 million in year ended December 31, 2014 from $462.5 million in the year ended December 31, 2013.

 

The following table presents revenue by product line (in thousands):

 

		Year ended December 31,
		2014				2013
Product revenues		$	238,282			$	282,630
Service revenues			107,391				93,667
Total Network Test Solutions			345,673				376,297
Product revenues			87,173				69,539
Service revenues			31,612				21,420
Total Network Visibility Solutions			118,785				90,959
Total		$	464,458			$	467,256

 

During the year ended December 31, 2014 revenues from our Network Test Solutions product line decreased 8.1% to $345.7 million from $376.3 million in the year ended December 31, 2013. The year-over-year decrease in revenue for Network Test Solutions was principally driven by a decrease in product revenues primarily due to a $31.9 million decrease in shipments of our Network Test Solutions hardware products (primarily our network test Ethernet interface cards), partially offset by a $13.7 million increase in services revenues recognized on technical support, warranty and software maintenance services.

 

During the year ended December 31, 2014 revenues from our Network Visibility Solutions product line increased 30.6% to $118.8 million in 2014 from $91.0 million in the year ended December 31, 2013. The year-over-year increase in revenue for Network Visibility Solutions was principally the result of the revenues from our acquisition of Net Optics in 2014 of $59.0 million and a $2.3 million increase in services revenues recognized on technical support, warranty and software maintenance services. This year-over-year increase was partially offset by a decrease in legacy Network Visibility Solutions product revenues of $38.2 million, primarily due to a decrease in shipments to certain service provider customers.

 

Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 24.8% during the year ended December 31, 2014 from 22.1% in year ended December 31, 2013. The increase in cost of revenues as a percentage of total revenues was primarily driven by a higher volume of Net Optics related product sales in 2014, which generally are lower margin products as compared to our legacy Ixia products, and higher costs for excess and obsolete inventory of $2.6 million.

 

Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $28.9 million and $26.0 million for the years ended December 31, 2014 and 2013, respectively, which are included within our Amortization of intangible assets line item on our consolidated statements of operations.

 

Research and Development Expenses. During the year ended December 31, 2014, research and development expenses decreased 2.0% to $115.2 million from $117.5 million in the year ended December 31, 2013. Research and development expenses attributable to Net Optics were approximately $9.6 million and $1.3 million for the years ended December 31, 2014 and 2013, respectively. Research and development costs included stock-based compensation expense of $6.8 million and $8.1 million for the years ended December 31, 2014 and 2013, respectively.

 

 

Our research and development expenses in the year ended December 31, 2014, other than those attributable to the activities of Net Optics or comprised of stock-based compensation expense, were in the aggregate amount of $98.7 million, representing an 8.7% decrease compared to $108.2 million of such expenses in the year ended December 31, 2013. This decrease was primarily due to a decrease in compensation and related employee costs of $6.8 million, a reduction in costs to develop prototypes of $2.1 million and lower expenses for depreciation and amortization. The decrease in compensation and related employee costs was primarily a result of headcount reductions from our various restructuring activities.

 

Sales and Marketing Expenses. During the year ended December 31 2014, sales and marketing expenses increased 10.2% to $151.8 million from $137.7 million in the year ended December 31, 2013. Sales and marketing expenses attributable to Net Optics were approximately $12.2 million and $1.0 million for the years ended December 31, 2014 and 2013, respectively. Sales and marketing costs included stock-based compensation expense of $5.6 million and $7.4 million for the years ended December 31, 2014 and 2013, respectively.

 

Our sales and marketing expenses in the year ended December 31, 2014, other than those attributable to the activities of Net Optics or comprised of stock-based compensation expense, were in the aggregate amount of $133.9 million, representing a 3.6% increase compared to $129.3 million of such expenses in the year ended December 31, 2013. This increase was primarily due to an increase in net compensation and related employee costs, including travel, of $3.6 million and a $1.1 million net change in bad debt expense (primarily the result of a net expense in 2014 as compared to a net recovery in 2013). 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 year ended December 31, 2014, general and administrative expenses increased 40.9% to $66.5 million from $47.2 million in the year ended December 31, 2013. General and administrative expenses attributable to the activities of Net Optics were approximately $3.1 million and approximately $555,000 for the years ended December 31, 2014 and 2013, respectively. General and administrative expenses included stock-based compensation expense of $3.6 million and $4.6 million for the years ended December 31, 2014 and 2013, respectively.

 

Our general and administrative expenditures in the year ended December 31, 2014 included charges of $14.4 million related (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 other related expenses.

 

Our general and administrative expenditures in 2013 included charges of $1.5 million related to the internal investigation initiated by the Audit Committee of the Board of Directors as a result of the resignation of our former chief executive officer (Victor Alston) and $1.0 million for costs related to the April 2013 restatement of certain of our previously filed financial statements. These charges were partially offset by $1.2 million of proceeds from the settlement of a legal matter in the first quarter of 2013. 

 

Our general and administrative expenses in the year ended December 31, 2014, other than those attributable to the activities of Net Optics or comprised of stock-based compensation expense or the other charges noted above, were in the aggregate amount of $45.3 million, representing an 11.5% increase compared to $40.6 million of such expenses in the year ended December 31, 2013. This increase was primarily due to an increase in net compensation and related employee costs of $2.3 million, higher depreciation and amortization costs of $1.1 million and higher facilities costs. The increase in compensation and other related costs was primarily due to an increase in our administrative headcount.

 

Amortization of Intangible Assets. During the year ended December 31, 2014, amortization of intangible assets increased 14.9% to $46.9 million from $40.8 million in the year ended December 31, 2013. These increases were primarily due to the full year and incremental amortization of intangible assets related to our 2013 Net Optics acquisition, partially offset by the completion of amortization periods for certain intangible assets.

 

 

Acquisition and Other Related Expenses. During the year ended December 31, 2014, acquisition and other related expenses decreased 52.6% to $3.3 million from $6.9 million in the year ended December 31, 2013. During the years ended December 31, 2014 and 2013, acquisition and other related expenses were primarily related to the acquisitions of Net Optics and BreakingPoint Systems. Acquisition and other related expenses 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. For additional information, see Note 2 to the consolidated financial statements.

 

Restructuring. Restructuring costs for the year ended December 31, 2014 were $10.3 million compared to $1.8 million for the year ended December 31, 2013. Restructuring costs incurred in the year ended December 31, 2014 were primarily related to expenses for employee termination benefits consisting of severance and other employee-related costs and lease termination costs associated with the 2014 Corporate Restructuring and the Net Optics Restructuring. Restructuring costs incurred in the year ended December 31, 2013 were primarily related to employee termination benefits associated with a plan to restructure our offshore research and development group in India. For additional information, see Note 4 to the consolidated financial statements.

 

Interest Income and Other, Net. Interest and other income, net decreased to approximately ($24,000) in the year ended December 31, 2014 from $6.3 million in the year ended December 31, 2013. These decreases were primarily due to a $2.9 million realized gain recorded during the second quarter of 2013 for the sale of certain auction rate securities that were previously written-down and a $1.0 million realized gain recorded during the third quarter of 2013 for the sale of corporate bonds that were previously written-down. The decrease was also impacted by lower net realized gains incurred on investment activity in 2014 as compared to 2013.

 

Interest expense. Interest expense, including the amortization of debt issuance costs, increased to $8.3 million in the year ended December 31, 2014 from $7.8 million in the year ended December 31, 2013. Interest expense relates to our Notes, as well as the amortization of deferred issuance costs and commitment fees related to our Prior Credit Agreement, which we established in December 2012. The increase was primarily due to a write-off of the remaining unamortized debt issuance costs related to our Prior Credit Agreement. For additional information, see Note 3 to the consolidated financial statements.
 

Income Tax Expense. Income tax benefit was ($11.1) million, or an effective rate of 21.1%, in 2014 as compared to an income tax benefit of ($1.1) million, or an effective rate of (9.9%), in 2013. The lower effective tax rate of 21.1% when compared to the federal statutory income tax rate was mainly due increases to unrecognized tax benefits, and intercompany activity such as inter-company royalties and transfers. The lower effective tax rate in 2013 of (9.9%) when compared to the federal statutory income tax rate was primarily due to R&D credits generated during 2013, the benefit recorded for the 2012 Federal R&D credit during the first quarter of 2013 as a result of the statutory extension of the credit during the 2013 first quarter, and the release of certain reserves related to uncertain tax benefits.

 

Comparison of the Years Ended December 31, 2013 and 2012

 

As a result of our acquisitions of Net Optics on December 5, 2013, Anue on June 1, 2012, and BreakingPoint on August 24, 2012 (the “2012 Acquisitions”), our 2013 and 2012 consolidated results of operations include the financial results of these acquisitions from their respective acquisition dates.

 

Revenues. In 2013, total revenues increased 13.0% to $467.3 million from $413.4 million in 2012. The increase in total revenues for 2013 and 2012 included $138.2 million and $54.9 million, respectively, related to the 2012 Acquisitions. Total revenues for 2013 included $4.8 million related to the 2013 acquisition of Net Optics. Excluding the revenues from our 2013 acquisition of Net Optics and the 2012 Acquisitions, revenues decreased by $34.3 million or 9.6%, to $324.2 million in 2013 primarily due to a $25.6 million decrease in shipments of our hardware products (primarily our core network test Gigabit and 10 Gigabit Ethernet interface cards) partially offset by an increase in the recognition of revenues from initial and extended technical support, warranty and software maintenance services. The year-over-year decrease in shipments of our hardware products (primarily our core network test Gigabit and 10 Gigabit Ethernet interface cards), was a byproduct of the challenges we saw in the test market (e.g., reduced spend from our network equipment manufacturer customers, as well as increased pricing pressures). While our Gigabit and 10 Gigabit Ethernet interface cards declined in terms of dollar volume on a year-over-year basis, we saw an increase in shipments of our 40 and 100 Gigabit Ethernet interface cards as our customers move to next generation higher speed network infrastructures.

 

 

Total revenue from services increased 37.8% to $114.5 million from $83.1 million in 2012. Total services revenues for 2013 and 2012 included $40.2 million and $11.8 million related to the 2012 Acquisitions. Excluding the services revenues from our 2013 acquisition of Net Optics and the 2012 Acquisitions, services revenues increased by $3.0 million or 4.2%, to $74.3 million in 2013.

 

Cost of Revenues. As a percentage of total revenues, our total cost of revenues increased to 22.1% in 2013 from 19.8% in 2012. The increase in 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 19.1% in 2013 as compared to 17.3% in 2012. The increase from 2012 to 2013 was primarily driven by larger year-over-year percentage increase in personnel and related costs and material-related costs, including additional charges related to inventory excess and obsolescence when compared to our growth in total revenues. Cost of revenues does not include the amortization of purchased technology related to our acquisitions of certain businesses, product lines and technologies of $26.0 million and $20.3 million for the years ended December 31, 2013 and 2012, respectively, which are included within our Amortization of intangible assets line item on our consolidated statements of operations.

 

Research and Development Expenses. In 2013, research and development expenses increased 19.7% to $117.5 million from $98.2 million in 2012. Research and development costs attributable to the activities of the acquired operations were approximately $31.7 million and $11.4 million for 2013 and 2012, respectively. Research and development costs included stock-based compensation expense of $8.1 million and $6.2 million for 2013 and 2012, respectively.

 

Our research and development expenses in 2013, other than those attributable to the activities of our acquired operations or comprised of stock-based compensation expense, were in the aggregate amount of $77.8 million, representing a 3.5% decrease compared to $80.6 million of such expenses in 2012. This decrease was primarily due to a decrease in compensation and related employee costs of $2.9 million. The decrease in compensation and related employee costs was primarily a result of lower bonus expense as we did not fully achieve our annual company-wide objectives in 2013.

 

Sales and Marketing Expenses. In 2013, sales and marketing expenses increased 17.5% to $137.7 million from $117.2 million in 2012. Sales and marketing expenses attributable to the activities of the acquired operations were approximately $34.3 million and $19.0 million for 2013 and 2012, respectively. Sales and marketing costs included stock-based compensation expense of $7.4 million and $5.4 million for 2013 and 2012, respectively.

 

 Our sales and marketing expenses in 2013, other than those attributable to the activities of our acquired operations or comprised of stock-based compensation expense, were in the aggregate amount of $96.0 million, representing a 3.4% increase compared to $92.8 million of such expenses in 2012. This increase was primarily due to an increase in (i) marketing events and related costs (e.g., trade shows) of $2.9 million, (ii) net compensation and related employee costs of $1.4 million, and (iii) travel costs of $1.0 million. These increases were partially offset by a decrease in depreciation expense related to demonstration equipment. The increase in compensation and related employee costs was primarily due to increased headcount in sales and marketing personnel.

 

General and Administrative Expenses. In 2013, general and administrative expenses increased 3.5% to $47.2 million from $45.6 million in 2012. General and administrative expenses attributable to the activities of the acquired operations were approximately $4.2 million and $2.6 million for 2013 and 2012, respectively. General and administrative expenses included stock-based compensation expense of $4.6 million and $7.5 million for 2013 and 2012, respectively.

 

Our general and administrative expenditures in 2013 included charges of $1.5 million related to the internal investigation initiated by the Audit Committee of the Board of Directors as a result of the resignation of our former chief executive officer (Victor Alston) and $1.0 million for costs related to the April 2013 restatement of certain of our previously filed financial statements. These charges were partially offset by $1.2 million of proceeds from the settlement of a legal matter in the first quarter of 2013. Our general and administrative expenditures in 2012 included charges of $1.7 million incurred in the first quarter of 2012 in connection with the transition of our former chief executive officer (Atul Bhatnagar) and $401,000 incurred in the second quarter of 2012 to settle a legal matter.

 

Our general and administrative expenses in 2013, other than those attributable to the activities of our acquired operations or comprised of stock-based compensation expense or the other charges and settlements noted above, were in the aggregate amount of $37.0 million, representing a 10.4% increase compared to $33.5 million of such expenses in 2012. This increase was primarily due to an increase in professional services fees (e.g., accounting and legal services) and outside services (e.g., certain IT infrastructure and support costs) of $1.5 million and $1.1 million, respectively.

 

 

Amortization of Intangible Assets. In 2013, amortization of intangible assets increased 35.9% to $40.8 million from $30.0 million in 2012. These increases were primarily due to the full year and incremental amortization of intangibles related to our 2012 Acquisitions, and to a lesser extent, the 2013 Net Optics acquisition, partially offset by the completion of amortization periods for certain intangible assets.

 

Acquisition and Other Related Expenses. Acquisition and other related expenses for 2013 and 2012 were $6.9 million and $11.9 million, respectively. For 2013, acquisition and other related expenses were principally due to our 2013 Net Optics acquisition and consisted of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting and tax services, integration related consulting fees, certain employee, facility and infrastructure costs, and other acquisition-related costs. For 2012, acquisition and other related expenses were principally due to our 2012 Acquisitions and consisted of transaction and integration related costs such as success-based banking fees, professional fees for legal, accounting and tax services, integration related consulting fees, amortization of deferred compensation payable to certain pre-acquisition employees of BreakingPoint, certain employee, facility and infrastructure costs, and other acquisition-related costs.

 

Restructuring. Restructuring expenses for 2013 totaled $1.8 million and consisted primarily of employee termination benefits. During the fourth quarter of 2013, our management approved, committed to and initiated a plan to restructure our operations primarily impacting our offshore research and development group in India. The restructuring was substantially completed during the fourth quarter of 2013, and included a net reduction in force of approximately 120 positions.

 

Restructuring expenses for 2012 totaled $4.1 million and consisted primarily of employee termination benefits, costs related to the closure of our office in Melbourne, Australia, and other associated costs. During the third quarter of 2012, our management approved, committed to and initiated a plan to restructure our operations following our August 2012 acquisition of BreakingPoint (the “BreakingPoint Restructuring”). The BreakingPoint Restructuring was substantially completed during the fourth quarter of 2012, and included a net reduction in force of approximately 29 positions (primarily impacting our research and development team in Melbourne, Australia). For additional information, see Note 4 to the consolidated financial statements.

 

Interest Income and Other, Net. Interest and other income, net increased to $6.3 million in 2013 from $2.3 million in 2012. These increases were primarily due to a $2.9 million realized gain recorded during the second quarter of 2013 for the sale of certain auction rate securities that were previously written-down and a $1.0 million realized gain recorded during the third quarter of 2013 for the sale of corporate bonds that were previously written-down.

 

Interest expense. Interest expense, including the amortization of debt issuance costs, were $7.8 million and $7.2 million for 2013 and 2012. Interest expense relates to our Notes, as well as the amortization of deferred issuance costs and commitment fees related to our Prior Credit Agreement, which we established in December 2012. For additional information, see Note 3 to the consolidated financial statements.

  

Income Tax Expense. Income tax benefit was ($1.1) million, or an effective rate of (9.9%), in 2013 as compared to an income tax benefit of ($26.1) million, or an effective rate of (134.7%), in 2012. The lower effective tax rate of (9.9%) when compared to the federal statutory income tax rate was mainly due to R&D credits generated during the year, benefit recorded for the 2012 Federal R&D credit during the first quarter of 2013 as a result of the statutory extension of the credit during the first quarter, and the release of accrual for uncertain tax benefits. The lower effective tax rate in 2012 of (134.7%) when compared to the federal statutory income tax rate was primarily due to the $34.8 million partial release of valuation allowances against its U.S. deferred tax assets.

 

 Liquidity and Capital Resources

 

Our cash, cash equivalents and investments in the aggregate increased by $40.5 million to $126.2 million at December 31, 2014 from the $85.7 million reported at December 31, 2013, primarily due to $38.1 million in net cash provided by our operating activities and $9.4 million of proceeds from exercises of share-based awards, partially offset by capital expenditures of $8.1 million.

 

Our cash, cash equivalents and investments in the aggregate decreased by $91.8 million to $85.7 million at December 31, 2013 from $177.5 million as of December 31, 2012, primarily due to the $188.3 million of net cash used for our 2013 acquisition of Net Optics and capital expenditures of $12.1 million. These amounts were partially offset by the $86.5 million in net cash provided by our operating activities and $19.4 million of cash generated from the exercises of share-based option awards.

 

 

Of our cash, cash equivalents and investments in the aggregate, $33.6 million and $25.3 million were held outside of the United States in various foreign subsidiaries as of December 31, 2014 and December 31, 2013, respectively. Cumulative undistributed earnings of foreign subsidiaries for which no deferred income taxes have been provided approximated $83.9 million and $91.8 million at December 31, 2014 and 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, including for the purpose of repaying the Company’s Notes as discussed below. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. We had no exposure to European sovereign debt as of December 31, 2014 and 2013.

 

The following table sets forth our summary cash flows for the years ended December 31, 2014, 2013 and 2012 (in thousands):

 

		Year Ended December 31,
		2014				2013				2012
Cash provided by operating activities		$	38,071			$	86,500			$	80,314
Cash used in investing activities			(34,916	)			(121,710	)			(104,216	)
Cash provided by financing activities			9,050				21,891				28,681

 

Cash Flows from Operating Activities

 

Operating cash inflows are principally provided by cash collections on sales to our customers. Our primary uses of cash from operating activities are for personnel-related expenditures, product costs and facility-related payments. Going forward, our cash flows from operating activities will be impacted by (i) the extent to which we grow our customer sales, (ii) the extent to which we increase our headcount and enhance our infrastructure to generate additional business, develop new products and features, and support our growth, (iii) our working capital management, and (iv) interest paid to service our debt (See Note 3 to consolidated financial statements).

 

Net cash provided by operating activities was $38.1 million for the year ended December 31, 2014 compared to $86.5 million for the year ended December 31, 2013. This decrease in cash flow generated from operations was primarily driven by a net loss of $41.6 million for the year ended December 31, 2014 compared to net income of $11.9 million for the year ended December 31, 2013 as a result of higher operating expenses and other charges, including legal and accounting costs, associated with our restructuring initiatives, internal investigations, and restatements during the year ended December 31, 2014 as compared to the year ended December 31, 2013.

  

Net cash provided by operating activities was $86.5 million for the year ended December 31, 2013 compared to $80.3 million for the year ended December 31, 2012. This increase in cash flow generated from operations was primarily driven by higher revenues from our 2012 acquisitions of Anue and BreakingPoint (full year of activity in 2013), partially offset by a much smaller increase in accounts receivable balances in 2013 compared to 2012. Cash was also impacted by a $3.1 million decrease in working capital changes resulting from an increase in inventory in 2013 as compared to 2012 and the timing of payments made on accounts payable and accrued liabilities (i.e., higher accrued balances as of December 31, 2013 as compared to December 31, 2012), partially offset by an increase in deferred revenues in 2013 as compared to 2012 from a higher volume of extended warranty and software maintenance contracts.

  

Cash Flows from Investing Activities

 

Our cash inflow from investing activities principally relates to proceeds from the sale and maturities of our investments in marketable securities. Our primary uses of cash from investing activities are for payments to acquire products, technologies and businesses, purchases of marketable securities investments and capital expenditures to support our growth. Going forward, we expect our cash flows from investing activities to fluctuate based on the number of product, technology and/or business acquisitions, if any, we close using cash, and the timing of our sales, maturities and purchases of marketable securities.

 

 

Net cash used in investing activities was $34.9 million and $121.7 million for the years ended December 31, 2014 and 2013, respectively. The decrease in net cash used in investing activities was primarily a result of less cash used for acquisitions and lower purchases of property and equipment during the year ended December 31, 2014 as compared to the year ended December 31, 2013, partially offset by lower cash provided from the proceeds of the sales of investments in marketable securities.

 

Net cash used in investing activities was $121.7 million and $104.2 million for the years ended December 31, 2013 and 2012, respectively. Excluding marketable securities purchases and proceeds, net cash used in investing activities was $201.3 million and $317.5 million in 2013 and 2012, respectively. The decrease in net cash used in 2013 was primarily due to less aggregate cash used for our acquisition of Net Optics in 2013 as compared to our acquisitions of Anue and BreakingPoint in 2012.

 

Cash Flows from Financing Activities

 

Historically, cash inflows from financing activities have been principally related to proceeds from the exercise of stock options and employee stock purchase plan options. On December 7, 2010, we raised $194.0 million in net proceeds from the issuance of our Notes, which mature on December 15, 2015. On March 2, 2015, we entered into the Credit Agreement with certain institutional lenders under which we secured the Term Loan in the aggregate principal amount of $40.0 million, which has been advanced to us, and established the Revolving Credit Facility in the aggregate loan amount of up to $60.0 million, with sub-limits of $25.0 million for the issuance of standby letters of credit and $15.0 million for swingline loans. The aggregate amount available under the Credit Agreement may, upon our request and subject to the receipt of increased commitments from the current or additional lenders, be increased by an aggregate amount of up to $80.0 million.
 

As required by the Credit Agreement, we have deposited the funds advanced under the Term Loan, together with additional cash, cash equivalents, and marketable securities in the aggregate amount of $50.0 million, in collateral accounts (the “Collateral Accounts”). We are also required, within 60 days after March 2, 2015, to deposit in the Collateral Accounts additional cash, cash equivalents, and marketable securities in the aggregate amount of $25.0 million. We may only withdraw amounts deposited in the Collateral Accounts for the repurchase or repayment of our outstanding $200.0 million in aggregate principal amount of Notes. We may use the proceeds of the Revolving Credit Facility for (i) working capital, capital expenditures, and general corporate purposes, (ii) share repurchases, (iii) the partial refinancing of our Notes, and/or (iv) acquisitions, in each case as permitted by applicable law and the Credit Agreement. The restrictions on acquisitions as set forth in the Credit Agreement include a restriction that precludes us from funding an acquisition in whole or in part with cash unless we will have, after giving effect to the transaction, cash, cash equivalents and marketable securities in an amount not less than $75.0 million in excess of the amount then required to be on deposit in the Collateral Accounts.

 

 The maturity date of the Credit Facility is February 15, 2018; provided, however, that if, at any time between June 15, 2015 and the maturity date for the Notes (i.e., December 15, 2015), we do not have total available liquidity (defined as cash, cash equivalents, and marketable securities plus availability under the Revolving Credit Facility) of $25.0 million in excess of the amount then required to repay our Notes (as described above) in full, all amounts outstanding under the Credit Facility will become due and payable, and the Revolving Credit Facility will terminate, on September 14, 2015 (or if such date has passed, within 2 business days after the date we fail to have the required total available liquidity). If subsequent to June 15, 2015 and prior to September 14, 2015 we do not have the required total available liquidity but thereafter (and prior to September 15, 2015) achieve and maintain such liquidity level, the accelerated maturity date of September 14, 2015 shall not apply.

 

The Credit Agreement amended and restated our credit agreement dated as of December 21, 2012, as amended (the “Prior Credit Agreement”), under which we had established a senior secured revolving credit facility (the “Prior Credit Facility”) with certain institutional lenders that originally provided for an aggregate loan amount of up to $150.0 million and that provided for a potential maximum aggregate loan amount of $46.5 million immediately prior to the March 2015 amendment and restatement of the Prior Credit Agreement. Beginning in August 2014, however, we could not access the Prior Credit Facility due to our default under certain provisions of the Prior Credit Agreement. No amounts were drawn down under the Prior Credit Facility as of December 31, 2014. Following our default under the Prior Credit Agreement and before the March 2015 amendment and restatement of the Prior Credit Agreement, certain lenders elected to terminate their commitments under the Prior Credit Agreement, reducing the potential maximum aggregate loan amount to $46.5 million.

 

Going forward, we expect our cash flows from financing activities to fluctuate based on (i) the number of exercises of share-based awards which is partially dependent on the performance of our stock price and (ii) the utilization of our revolving credit facility under the Credit Agreement. If deemed appropriate, and approved by our Board of Directors, we may: raise capital through additional debt or equity financings; refinance our existing debt; initiate stock buyback programs; and/or repurchase our outstanding Notes.

  

 

Net cash provided by financing activities was $9.1 million and $21.9 million for the years ended December 31, 2014 and 2013, respectively. This decrease in cash flow provided by financing activities was primarily due to a $10.0 million decrease in proceeds received from exercises of share-based awards during the year ended December 31, 2014 as compared to the year ended December 31, 2013.

 

Net cash provided by financing activities was $21.9 million and $28.7 million for the years ended December 31, 2013 and 2012, respectively. This decrease in cash flow provided by financing activities was primarily due to a $7.2 million decrease in proceeds received from exercises of share-based awards in 2013 as compared to 2012.

  

We believe that our existing balances of cash and cash equivalents, investments, and cash flows expected to be generated from our operations, and borrowings advanced and expected to be available under the Credit Agreement that we entered into in March 2015, will be sufficient to satisfy our operating requirements for the next 12 months and to also repay in full our indebtedness under our Notes when they mature in December 2015. We also believe that during the next 12 months such resources would be sufficient to satisfy our obligations in the event of 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 during the next 12 months.

 

We also 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 limitations, including the conditions in U.S. capital markets. We are not currently able to sell our securities using short-form registration statement on Form S-3 under the Securities Act of 1933, as amended, due to our late filing with the SEC of certain of our periodic reports for prior periods, including most recently our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. We expect to be eligible to use short-form registration on April 1, 2016. If we want to access the capital markets during the period of time that we are unable to use Form S-3, we may experience delays due to having to wait for a regulatory review of a Form S-1 registration statement. Any such delay may result in offering terms that may not be advantageous to us, may not allow us to obtain capital in a timely fashion, and would increase our transaction costs.

 

Our Notes were issued under an 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.

  

 

On July 16, 2014, the trustee provided us with notice that we were in default under the Indenture as a result of our delinquency in filing our 2014 First Quarter Form 10-Q with the trustee. In accordance with the terms of the Indenture, we had 60 days after receipt of the notice to cure such default. The cure period expired on 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, however, and by delivery of notice to the trustee, the paying agent and the holders of the Notes, we elected to pay additional interest at a rate equal to 0.50% as the sole remedy to the holders of the Notes for the up to 180 day period commencing on September 14, 2014. We cured such default and the related event of default by filing the 2014 First Quarter Form 10-Q with the SEC on September 15, 2014. Such filing of the 2014 First Quarter Form 10-Q was, pursuant to the terms of the Indenture, also deemed a filing with the trustee, and we were thereafter no longer 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 were delinquent in filing our 2014 Second Quarter Form 10-Q with the trustee. In accordance with the terms of the Indenture, we had 60 days to cure such default before it would become an event of default. We cured the default within the 60-day period by filing the 2014 Second Quarter Form 10-Q with the SEC on September 15, 2014. Such filing was, pursuant to the terms of the Indenture, also deemed a filing with the trustee.

 

We also defaulted under the Indenture as a result of our failure to timely file with the SEC and the trustee our 2013 Third Quarter Form 10-Q, our 2013 Form 10-K, and a Form 8-K/A. Such defaults were cured by our filing of the three reports with the SEC on June 23, 2014. Such filings were, pursuant to the terms of the Indenture, also deemed to be filings with the trustee.

 

Contractual Obligations 

 

Our significant financial commitments at December 31, 2014 are as follows (in thousands):

 

		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years				Other
		(in thousands)
Operating leases (1)			52,375				10,689				15,990				12,865				12,831				-
Purchase obligations (2)			26,039				26,039				-				-				-				-
Convertible senior notes (Principal and Interest) (3)			206,000				206,000				-				-				-				-
Total		$	284,414			$	242,728			$	15,990			$	12,865			$	12,831			$	-

 

(1)	Minimum lease payments have not been reduced by minimum sublease rentals of $1.0 million due in the future under non-cancelable subleases. See Note 10 to consolidated financial statements.

 

(2)

Purchase obligations in the table above consist of purchase orders issued to certain of our contract manufacturers in the normal course of business to purchase specified quantities of our hardware products. It is not our intent, nor is it reasonably likely, that we would cancel these executed purchase orders.

 

 

(3)

In December 2010, we issued $200.0 million in aggregate principal amount of 3.00% convertible senior notes that mature on December 15, 2015, if not converted. The interest is payable semi-annually on June 15 and December 15 of each year, beginning on June 15, 2011. During 2014, we made interest payments of $6.0 million. See Note 3 to consolidated financial statements.

 

Recent Accounting Pronouncements

 

Information regarding new accounting pronouncements is included in Note 1 to the consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Sensitivity

 

Investment Activities

 

We maintain a portfolio of cash equivalents and investments in a variety of fixed and variable rate securities, including U.S. government and federal agency securities, corporate debt securities, and money market funds. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Fixed-rate securities are subject to market risk so changes in prevailing interest rates may adversely impact their fair market value should interest rates rise. While we do not intend to sell these fixed rate securities prior to maturity based on a sudden change in market interest rates, should we choose to sell these securities in the future, our consolidated operating results or cash flows may be adversely affected. A smaller portion of our cash equivalents and investment portfolio consists of variable interest rate securities. Accordingly, we also have interest rate risk with these variable rate securities as the income produced may decrease if interest rates fall. We do not use derivatives or similar instruments to manage our interest rate risk. Due to the high investment quality and relatively short duration of these investments, we do not believe that they present any material exposure to changes in fair market value as a result of changes in interest rates.

 

Senior Secured Revolving Credit Facility 

 

On March 2, 2015, we entered into a credit agreement with certain institutional lenders under which we secured a term loan in the aggregate principal amount of $40.0 million (the “Term Loan”), which amount has been advanced to us, and established a revolving credit facility for an aggregate loan amount of up to $60.0 million (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”). Borrowings under the Term Loan and for the first year of the Revolving Credit Facility bear interest, at our option, at a rate per annum of (i) 4.25% above the Eurodollar rate or (ii) 3.25% above a defined base rate. After the first anniversary of the Closing Date, interest rates for the Revolving Credit Facility are established, at our option, based on the Eurodollar rate or the defined base rate. Such interest rates range from 2.0% to 3.0% above the Eurodollar rate for Eurodollar-based borrowings and from 1.0% to 2.0% above the defined base rate for base rate borrowings, in each case depending on the Company’s total leverage ratio. We are also required to pay a quarterly commitment fee, ranging from 0.30% to 0.50% per annum, on the undrawn portion of the Revolving Credit Facility. Letter of credit fees accrue based on the daily amount available to be drawn under outstanding letters of credit and range from 2.0% to 3.0%, depending on our leverage ratio. Swingline loans bear interest at the applicable margin for loans under the Revolving Credit Facility based on the defined base rate. If we default under the Credit Facility, the lenders may also increase the interest rate(s) to 2.0% more than the rate(s) otherwise applicable. Interest is payable quarterly.

 

The Credit Agreement amended and restated our credit agreement dated as of December 21, 2012 (the “Prior Credit Agreement”) under which we had established a senior secured revolving credit facility (the “Prior Credit Facility”) with certain institutional lenders. The Prior Credit Agreement initially provided for an aggregate loan amount of up to $150.0 million and provided for a potential maximum aggregate loan amount of $46.5 million at the time of its amendment and restatement. Beginning in August 2014, however, we could not access the Prior Credit Facility because of our defaults under the Prior Credit Agreement. See Note 3 to the consolidated financial statements included in this Form 10-K. No amounts were drawn down under the Prior Credit Facility as of December 31, 2014. Borrowings under the Prior Credit Facility bore interest at either (i) the base rate, which is equal to the highest of (a) Bank of America'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 were from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, and depended on the Company’s total leverage ratio. Interest was payable quarterly (as defined in the Prior Credit Agreement). In addition, we were required to pay a commitment fee on the unused portion of the Prior Credit Facility of up to a maximum of $450,000 or 0.30% depending on the Company’s total leverage ratio.
 

Unsecured Convertible Senior Notes

 

On December 7, 2010, we closed our offering of $200.0 million aggregate principal amount of our Notes. The Notes bear a fixed interest rate of 3.00% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2011. During 2014, we made interest payments of $6.0 million. A hypothetical change in interest rates would not impact the interest expense or carrying value of the Notes as the coupon rate is fixed. The Notes are carried on the consolidated balance sheet at amortized cost and they are not hedged.

 

Exchange Rate Sensitivity

 

The majority of our revenue and expenses are denominated in U.S. dollars. However, since we have sales, research and development, and other operations outside of the United States, we do incur operating expenses in foreign currencies, primarily the Japanese Yen, Romanian Lei, Indian Rupee, Chinese Yuan, Canadian Dollar, Euro and British Pound. If these currencies strengthen against the U.S. dollar, our costs reported in U.S. dollars will increase, which would adversely affect our operating expenses.

 

 

Approximately 29% of our operating expenses, excluding stock-based compensation expense and amortization of intangible assets, are exposed to foreign currency movements, and historically, we have not entered into foreign currency forward contracts to hedge our operating expense exposure to foreign currencies, but we may do so in the future. We estimate that the impact of changes in foreign currency rates in 2014 on our operating expenses, excluding stock-based compensation expense and amortization of intangible assets, was less than 1%.

 

The fair value of our foreign currency forward contracts is sensitive to changes in foreign currency exchange rates. When possible, we use foreign currency forward contracts to minimize the short-term impact of currency fluctuations on foreign currency receivables that are denominated in Japanese Yen, Euros and British Pounds. The duration of our foreign currency forward contracts typically have maturities of one to four months. We do not enter into foreign exchange forward contracts for speculative or trading purposes. Due to the relatively short duration of these forward contracts, we do not believe that they present any material exposure to changes in fair market value as a result of changes in foreign currency exchange rates. Additionally, these contracts are intended to offset exchange losses and gains on underlying exposures in foreign currency receivables. During the years ended December 31, 2014, 2013 and 2012, the net impact from changes to foreign currency exchange rates related to forward contracts was not material.

 

As of December 31, 2014, we held three open foreign currency forward contracts with a notional value of $8.5 million and a net fair value of approximately $24,000. As of December 31, 2013, we held five open foreign currency forward contracts with a notional value of $7.0 million and a net fair value of approximately $54,000.

  

Item 8. Financial Statements and Supplementary Data

 

Our financial statements and supplementary data required by this Item are provided in the consolidated financial statements of the Company included in this Form 10-K as listed in Item 15(a) of this Form 10-K.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None. 

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management (with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)) evaluated the effectiveness, as of the end of the period covered by this Form 10-K, of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our CEO and CFO have concluded that, due to certain material weaknesses in our internal control over financial reporting as of December 31, 2014, our disclosure controls and procedures were not effective as of such date to ensure that the information required to be disclosed in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Notwithstanding such material weaknesses, which are described below in Management’s Report on Internal Control over Financial Reporting, our management has concluded that the consolidated financial statements included in this Form 10-K present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the U.S.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed by, or under the supervision of, our CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

 

Our management (with the participation of our CEO and CFO) conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

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 Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

In connection with management’s assessment of our internal control over financial reporting described above, management has identified the following deficiencies that constituted individually, or in the aggregate, material weaknesses in our internal control over financial reporting as of December 31, 2014:

 

●

Control Environment and Monitoring – The Company’s controls were ineffective to establish and communicate standards of conduct outlined in the Company’s Code of Conduct and Ethics Policy throughout the organization. The Company’s 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 did not sufficiently consider fraud in performing its risk assessment procedures. The Company did not have controls that were present and functioning to appropriately segregate duties within certain areas of the organization. The Company lacked certain monitoring controls necessary to detect circumstances in which management might override controls or deviate from expected standards of conduct. Such monitoring controls are often addressed through the use of an internal audit function.

 

●

Revenue Recognition – The Company’s internal controls were not designed to: (i) appropriately identify each deliverable, including those deliverables within related orders, to allocate the arrangement consideration and assess the accounting impact of certain multiple-element sales arrangements, (ii) ensure that vendor specific objective evidence (VSOE) and best estimate of selling price (BESP) used to allocate arrangement consideration were properly determined, applied and documented, (iii) properly identify and account for arrangements that included payment terms that extended beyond the Company’s customary terms, and (iv) ensure proper cut-off for certain transaction types. The Company had also insufficiently trained its 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 had 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 properly accounted for. 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 operating effectively and in a consistent manner to prevent the potential recording of inappropriate manual journal entries in the Company’s books and records. Specifically, management’s review process over the recording of manual journal entries, at times, lacked the appropriate level of approval or evidence of the appropriate journal entry supporting documentation.

 

Because of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2014.

 

The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in its report which is included elsewhere herein.

 

Changes in Internal Control Over Financial Reporting

 

During the quarter ended December 31, 2014, the only changes to our internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting were:

 

Control Environment. We completed implementation of internal controls with respect to background checks to validate education, credit, criminal and employment history of current and future senior officers, including existing employees that are subsequently promoted to senior management positions and acquired employees placed in senior management positions. We also hired a Director of Internal Audit, who reports directly to the Audit Committee, to lead our internal audit function.

 

Sufficiency of Accounting Department Resources. We further enhanced our finance and accounting department staff in terms of both number and competency of personnel throughout the fourth quarter of 2014. During the 2014 fourth quarter, we developed and delivered to the finance and accounting department personnel a technical revenue recognition training course that was led by our CFO and Corporate Controller.

 

Manual Journal Entries. We designed, established and documented detailed global accounting policies and procedures regarding the documentation required to support manual journal entries and the storage of the documentation that supports our manual journal entries. We also designed a process requiring accounting supervisors and/or managers who are independent of the preparers of manual journal entries to review and approve all manual journal entries and to ensure proper supporting evidence is maintained.  

 

 

Remediation Efforts to Address Identified Material Weaknesses

 

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. If not remediated, the material weaknesses in our internal controls could result in material misstatements in our financial statements.

 

Our Board of Directors and management take internal controls over and the integrity of the Company’s financial statements seriously and believe that the remediation steps described below 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 to address our material weaknesses as of December 31, 2014:

 

Control Environment and Monitoring

 

●

We have developed and are in the process of implementing a global training program, with the participation of our CEO and CFO, regarding the importance of financial reporting integrity and the Company’s Code of Conduct and Ethics Policy. The training program is mandatory for all employees. We plan to complete this training program during the second quarter of 2015.

 

●

We developed and communicated to all employees in the first quarter of 2015 a revised whistleblower program. The program includes enhanced visibility of the Company’s whistleblower hotline and an enhanced written policy. Training on the revised whistleblower program is in process and will be completed during the second quarter of 2015. In addition, the Company is in the process of establishing a formal set of procedures that govern our assessment, evaluation and communications regarding whistleblower matters. The process will provide for the Audit Committee’s action on certain matters related to senior management as well as for the Audit Committee’s direct oversight and monitoring of senior management’s actions undertaken to assess, evaluate and resolve whistleblower matters.

 

●

Our Director of Internal Audit is currently working to establish an independent internal audit function and develop a risk-based internal audit plan for the Company to improve monitoring controls necessary to detect circumstances in which management might override controls or deviate from expected standards of conduct as well as to assess and monitor compliance with internal controls over financial reporting.

 

●

We are in the process of defining within our enterprise resource planning (ERP) system the roles and responsibilities for key accounting and operations personnel. This will allow us to better incorporate segregation of duties considerations and ensure that conflicts of interest are avoided or minimized when we are processing transactions within our ERP system.

 

●

In the second quarter of 2015, we will conduct a formal fraud risk assessment as part of our overall risk assessment process to ensure fraud risks are considered and adequately mitigated.

 

  

Revenue Recognition

 

●

We have developed and are in the process of implementing a global training program, with the participation of our CEO and CFO (and to be reinforced by senior accounting personnel with the appropriate level of expertise), for executives and for finance, accounting, operations, sales and other personnel involved in the sales process to enhance awareness and understanding of the Company’s revenue recognition policies and procedures. We plan to complete the implementation of this training program during the second and third quarters of 2015.

 

●

The Company will continue to enhance the deal desk function that it established in December 2013 to detect and then direct non-standard sales transactions, proposed or executed, to a central location where revenue recognition personnel will assess them and then account for the related revenues accordingly. Specifically, we plan to further refine and formally document deal desk procedures in the second and third quarters of 2015 to improve deal desk communication with sales, technical support, order management, legal and operations personnel regarding sales transactions, proposed or executed, to proactively identify non-standard sales transactions.

 

●

We have enhanced and will continue to enhance the documentation, oversight and monitoring of accounting policies and procedures relating to revenue recognition, including those around cutoff, allocation of arrangement consideration, VSOE and BESP. We have implemented a deal review checklist and extensive review process for all sales arrangements that helps to ensure that all deliverables within a multiple-element sales arrangement have been properly identified and accounted for. We have also implemented a process to review and assess sales arrangements that are documented in foreign languages.

 

●

We have developed and delivered revenue recognition training to finance, accounting, and legal personnel, and our sales force and other personnel required to sign quarterly representation letters. We will continue to conduct revenue recognition training on an annual basis and also periodically for new hires in the finance, accounting and legal departments as well as for other new hires who will be required to sign quarterly representation letters. We also plan on broadening our revenue recognition training to additional personnel involved in the sales process as noted above.

 

●

We are in the process of enhancing our general information technology controls over our data warehouse and licensing systems.

 

●

We purchased an information technology system to assist the Company in applying its revenue recognition policies, which will help streamline the Company’s revenue recognition processes. The Company plans to implement the system over the next twelve months.

 

Manual Journal Entries

 

●

We will provide additional training to personnel recording and reviewing manual journal entries to ensure consistent compliance with our policies and controls over manual journal entries. Internal Audit will conduct testing of manual journal entries to assess the remediation efforts.

 

The Audit Committee has directed management to develop a detailed plan and timetable for the completion of the implementation of the remedial measures outlined above (other than measures that we indicate have already been completed) and will continue to monitor such 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 our 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. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. 

 

Item 9B. Other Information

 

None.

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of Ixia

Calabasas, California

 

 

We have audited Ixia and subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

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 company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

 

Control Environment – The Company’s controls were ineffective to establish and communicate standards of conduct outlined in the Company’s Code of Conduct and Ethics Policy throughout the organization. The Company’s 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 did not sufficiently consider fraud in performing its risk assessment procedures. The Company did not have controls that were present and functioning to appropriately segregate duties within certain areas of the organization. The Company lacked certain monitoring controls necessary to detect circumstances in which management might override controls or deviate from expected standards of conduct. Such monitoring controls are often addressed through the use of an internal audit function.

 

 

Revenue Recognition – The Company’s internal controls were not designed to: (i) appropriately identify each deliverable, including those deliverables within related orders, to allocate the arrangement consideration and assess the accounting impact of certain multiple-element sales arrangements, (ii) ensure that vendor specific objective evidence (VSOE) and best estimate of selling price (BESP) used to allocate arrangement consideration were properly determined, applied and documented, (iii) properly identify and account for arrangements that included payment terms that extended beyond the Company’s customary terms, and (iv) ensure proper cut-off for certain transaction types. The Company had also insufficiently trained its 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 had not adequately designed controls to ensure the proper assessment of sales arrangements documented in foreign languages. As a result of these design defects, the Company’s policies and controls related to its revenue recognition practices were not effective in ensuring that revenue was properly accounted for. 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 operating effectively and in a consistent manner to prevent the potential recording of inappropriate manual journal entries in the Company’s books and records. Specifically, management’s review process over the recording of manual journal entries, at times, lacked the appropriate level of approval or evidence of the appropriate journal entry supporting documentation.

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2014, of the Company and this report does not affect our report on such financial statements.

 

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2014, of the Company and our report dated March 30, 2015, expressed an unqualified opinion on those financial statements.

 

 

 

/s/ Deloitte & Touche LLP

 

Los Angeles, California

March 30, 2015

 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

Certain information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on June 1, 2015, which information will appear under the captions entitled “Proposal 1 - Election of Directors – Nominees,” and “Proposal 1 – Election of Directors - Information Regarding our Board of Directors and its Committees,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The Proxy Statement will be filed with the Commission within 120 days after our last fiscal year-end which was December 31, 2014.

 

The Registrant has adopted a Code of Ethics for its Chief Executive and Senior Financial Officers, a copy of which is included as Exhibit 14.1 to Annual Report on Form 10-K for fiscal year-ended December 31, 2003.

 

Item 11. Executive Compensation

 

The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on June 1, 2015, which information will appear under the captions “Proposal 1 - Election of Directors - Compensation of Directors,” “Executive Compensation and Other Information” (other than under the subcaption “Equity Compensation Plan Information”), “Compensation Discussion and Analysis” and “Compensation Committee Report.”   The Proxy Statement will be filed with the Commission within 120 days after our last fiscal year-end which was December 31, 2014.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 

 

The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on June 1, 2015, which information will appear under the captions “Common Stock Ownership of Principal Shareholders and Management” and “Executive Compensation and Other Information - Equity Compensation Plan Information.” The Proxy Statement will be filed with the Commission within 120 days after our last fiscal year-end which was December 31, 2014.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

Any information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on June 1, 2015, which information will appear under the captions “Certain Relationships and Related Transactions,” and “Proposal 1 – Election of Directors – Information Regarding our Board of Directors and its Committees.” The Proxy Statement will be filed with the Commission within 120 days after our last fiscal year-end which was December 31, 2014.

 

Item 14. Principal Accounting Fees and Services

 

The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Shareholders to be held on June 1, 2015, which information will appear under the captions “Proposal 3 - Ratification of Appointment of Independent Registered Public Accounting Firm.” The Proxy Statement will be filed with the Commission within 120 days after our last fiscal year-end which was December 31, 2014.

 

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(a)	The following documents are filed as part of this Report:

 

(1)

Consolidated Financial Statements

 

The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this report.

 

(2)

Financial Statement Schedule

 

The financial statement schedules have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.

 

(3)

Exhibits

 

2.1	Agreement and Plan of Merger dated as of May 4, 2012, by and among the Company, Anue Systems, Inc., Emily Acquisition Corp. and Alexander Pepe, as the Representative (1)
2.2	Agreement and Plan of Merger dated as of June 30, 2012, by and among the Company, BreakingPoint Systems, Inc., Camden Acquisition Corp. and Desmond P. Wilson III, as the Representative (2)
2.3	Agreement and Plan of Merger dated as of October 29, 2013, by and among the Company, Net Optics, Inc., Matthew Acquisition Corp. and Charlotte Matityahu, as the Representative (3)
3.1	Amended and Restated Articles of Incorporation, as amended (4)
3.2	Bylaws, as amended (5)
4.1	Indenture dated as of December 7, 2010 between the Company and Wells Fargo Bank, National Association, as trustee, including the form of 3.00% Convertible Senior Notes due 2015 (included as Exhibit A to the Indenture) (6)
10.1	Credit Agreement dated as of December 21, 2012, among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation and VeriWave, Inc., as the Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and Letter of Credit Issuer, and the Other Lenders a Party Thereto (7)
10.1.1	First Amendment to Credit Agreement dated as of May 8, 2013, among the Company, as the Borrower, Anue Systems, Inc., BreakingPoint Systems, Inc., Catapult Communications Corporation and VeriWave, Inc., as the Guarantors, Bank of America, N.A., as Administrative Agent and Lender, and the Other Lenders a Party Thereto (8)
10.1.2	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 (9)
10.1.3	Third Amendment to Credit Agreement 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 (10)

 

 

 

10.1.4	Fourth Amendment to Credit Agreement dated as of April 30, 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 (11)
10.1.5	Waiver to Credit Agreement effective April 30, 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 (12)
10.1.6	Fifth Amendment to Credit Agreement and Waiver dated as of May 15, 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 (13)
10.1.7	Sixth Amendment to Credit Agreement dated as of June 12, 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 (14)
10.1.8	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 (15)
10.1.9	Eighth Amendment and Consent to the Credit Agreement, dated as of December 12, 2014, by and 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
10.1.10	Resignation and Appointment Agreement dated as of January 30, 2015, by and 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 (16)
10.1.11	Ninth Amendment to Credit Agreement dated as of January 30, 2015, by and 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, Silicon Valley Bank, as Administrative Agent and Lender, and the Other Lenders a Party Thereto (17)
10.2*	Amended and Restated 1997 Equity Incentive Plan (18)
10.3*	Amended and Restated Non-Employee Director Stock Option Plan (19)
10.4*	Ixia 2010 Employee Stock Purchase Plan, as amended (20), together with Amendment No. 2 dated May 9, 2013 (21) and Amendment No. 3 dated June 19, 2013 (22)
10.5*	Officer Severance Plan (23), together with Amendment dated December 31, 2008 (24), Amendment No. 2 dated March 22, 2011 (25) and Amendment No. 3 dated December 21, 2012 (26)
10.6*	Ixia Officer Severance Plan (as Amended and Restated effective January 1, 2009) (27), together with Amendment No. 1 dated December 21, 2012 (28)
10.7*	Form of Indemnity Agreement between Ixia and its directors and executive officers (29)
10.8	Office Lease Agreement dated September 14, 2007 between MS LPC Malibu Property Holdings, LLC and the Company (30)

 

 

10.8.1	First Amendment to Office Lease dated February 11, 2010, between MS LPC Malibu Property Holdings, LLC and the Company (31)
10.8.2	Second Amendment to Office Lease dated November 15, 2010, between MS LPC Malibu Property Holdings, LLC and the Company (32)
10.8.3	Third Amendment to Office Lease dated January 10, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (33)
10.8.4	Fourth Amendment to Office Lease dated June 1, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (34)
10.8.5	Fifth Amendment to Office Lease dated November 1, 2012 between MS LPC Malibu Property Holdings, LLC and the Company (35)
10.8.6	Sixth Amendment to Office Lease dated June 18, 2013 between MS LPC Malibu Property Holdings, LLC and the Company (36)
10.9*	Compensation of Named Executive Officers as of December 31, 2014
10.10*	Summary of Compensation for the Company’s Non-Employee Directors effective April 1, 2013 (37)
10.11*	Ixia 2012-2013 Executive Officer Integration Bonus Plan (38)
10.12*	Ixia 2014 Senior Officer Bonus Plan (39)
10.13*	Amended and Restated Ixia 2008 Equity Incentive Plan, including Amended and Restated First Amendment dated as of May 4, 2011 and Second Amendment dated as of April 8, 2011 (40)
10.14*	Second Amended and Restated Ixia 2008 Equity Incentive Plan (41)
10.15*	Employment Offer Letter Agreement dated as of August 8, 2014 and effective as of August 13, 2014 between the Company and Bethany Mayer, as amended (42)
10.16*	Letter Agreement effective August 4, 2014 between the Company and Brent Novak (43)
10.17*	Employment Agreement entered into as of May 4, 2012 between the Company, as assignee of Anue Systems, Inc., and Alexander J. Pepe (44)
10.18*	Amendment No. 1 to Employment Agreement entered into as of August 14, 2013 between the Company and Alexander J. Pepe (45)
10.19*	Amendment No. 2 to Employment Agreement entered into as of October 24, 2013 between the Company and Alexander J. Pepe, as executed by the parties on August 5, 2014 (46)
10.20*	Employment and Retention Agreement entered into as of December 23, 2014 between the Company and Ronald W. Buckly (47)
10.21*	Employment Separation Agreement effective as of June 30, 2014 between the Company and Thomas B. Miller
10.22	Amended and Restated Credit Agreement dated as of March 2, 2015, by and among Ixia, 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, Silicon Valley Bank, as Administrative Agent, Swingline Lender, and Letter of Credit Issuer, and the Other Lenders Parties Thereto (48)
10.23	Corrective Amendment to Credit Agreement effective as of March 20, 2015 between the Company and Silicon Valley Bank, as Administrative Agent

  

 

14.1	Code of Ethics for Chief Executive Officer and Senior Financial Officers (49)
21.1	Subsidiaries of the Company
23.1	Consent of Deloitte & Touche, LLP, Independent Registered Public Accounting Firm

 

23.2	Consent of PricewaterhouseCoopers, LLP, Independent Registered Public Accounting Firm
31.1	Certificate of 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	Certificate of 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	Certificate of Chief Executive Officer and Chief Financial Officer of Ixia pursuant to Rule 13a-14(b) under the Exchange Act and Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Document

 

---

*	Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

 

(1)	Incorporated by reference to Exhibit 2.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on May 7, 2012.

 

(2)	Incorporated by reference to Exhibit 2.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on July 2, 2012.

 

(3)	Incorporated by reference to Exhibit 2.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on October 31, 2013.

 

(4)	Incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000.

 

(5)	Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on April 4, 2013.

 

(6)	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on December 8, 2010.

 

(7)	Incorporated by reference to Exhibit 10.1 to Ixia’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on December 28, 2012.

 

(8)	Incorporated by reference to Exhibit 10.1.1 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

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

 

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

 

(11)	Incorporated by reference to Exhibit 10.1.4 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

 

(12)	Incorporated by reference to Exhibit 10.1.5 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

(13)	Incorporated by reference to Exhibit 10.1.6 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

(14)	Incorporated by reference to Exhibit 10.1.7 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

(15)	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.

 

(16)	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 February 2, 2015.

(17)	Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on February 2, 2015.

(18)	Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.

 

(19)	Incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004.

 

(20)	Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 333-176237) filed with the Commission on August 11, 2011.

 

(21)	Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Reg. No. 333-188689) filed with the Commission on May 17, 2013.

 

(22)	Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 0-31523) filed with the Commission on June 25, 2013.

 

(23)	Incorporated by reference to Exhibit 10.4 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000.

  

(24)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on January 7, 2009.

 

(25)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on March 28, 2011.

 

(26)	Incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on April 4, 2013.

 

(27)	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 January 7, 2009.

 

(28)	Incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on April 4, 2013.

 

(29)	Incorporated by reference to Exhibit 10.5 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-42678) filed with the Commission on September 5, 2000.

 

(30)	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 25, 2007.

 

(31)	Incorporated by reference to Exhibit 10.7.1 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on March 5, 2012.

 

(32)	Incorporated by reference to Exhibit 10.7.2 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on March 5, 2012.

 

 

(33)	Incorporated by reference to Exhibit 10.8.3 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on April 4, 2013.

 

(34)	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 July 10, 2012.

 

(35)	Incorporated by reference to Exhibit 10.8.5 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on April 4, 2013.

 

(36)	Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the Commission on August 9, 2013.

 

(37)	Incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on June 23, 2014.

 

(38)	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 December 12, 2012.

 

(39)	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 October 8, 2014.

 

(40)	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 May 25, 2011.

 

(41)	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 June 25, 2013.

 

(42)	Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 0-31523) filed with the Commission on November 7, 2014.

 

(43)	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 August 5, 2014.

 

(44)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on August 5, 2014.

 

(45)	Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on August 5, 2014.

 

(46)	Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on August 5, 2014.

 

(47)	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 December 23, 2014.

 

(48)	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 March 6, 2015

(49)	Incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-K (File No. 0-31523) filed with the Commission on March 3, 2004.

  

(b)

Exhibits

 

We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above.

  

(c)	Financial Statement Schedules

 

None.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Dated: March 30, 2015	IXIA
	/s/ BETHANY MAYER
	Bethany Mayer
	Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Name		Title		Date
/s/ BETHANY MAYER		President, Chief Executive Officer, Director		March 30, 2015
Bethany Mayer		(Principal Executive Officer)
/s/ BRENT NOVAK		Chief Financial Officer		March 30, 2015
Brent Novak		(Principal Financial and Accounting Officer)
/s/ ERROL GINSBERG		Chairman of the Board, Director		March 30, 2015
Errol Ginsberg
/s/ JONATHAN FRAM		Director		March 30, 2015
Jonathan Fram
/s/ GAIL HAMILTON		Director		March 30, 2015
Gail Hamilton
/s/ LAURENT ASSCHER		Director		March 30, 2015
Laurent Asscher

 

 

IXIA

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
	Page
Reports of Independent Registered Public Accounting Firms	72
Consolidated Balance Sheets as of December 31, 2014 and 2013	74
Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012	75
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2014, 2013 and 2012	76
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012	77
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012	78
Notes to Consolidated Financial Statements	79

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of Ixia

Calabasas, California

 

We have audited the accompanying consolidated balance sheets of Ixia and subsidiaries (the "Company") as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows for the years ended December 31, 2014 and 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ixia and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for the years ended December 31, 2014 and 2013, in conformity with accounting principles generally accepted in the United States of America.

  

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 30, 2015, expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.

 

 

/s/ Deloitte & Touche LLP

Los Angeles, California

March 30, 2015

 

 

Report of Independent Registered Public Accounting Firm

 

 

To Board of Directors and Shareholders of Ixia:

 

In our opinion, the consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2012 present fairly, in all material respects, the results of operations and cash flows of Ixia and its subsidiaries for the year ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

 

 

/s/ PricewaterhouseCoopers LLP

Los Angeles, CA

April 4, 2013

 

 

IXIA

Consolidated Balance Sheets

(in thousands)

 

		As of December 31,
		2014				2013
Assets
Current assets:
Cash and cash equivalents		$	46,394			$	34,189
Short-term investments in marketable securities			79,760				51,507
Accounts receivable, net of allowances of $1,011 and $840 as of December 31, 2014 and 2013, respectively			99,528				109,590
Inventories			44,826				47,136
Prepaid expenses and other current assets			47,077				48,514
Total current assets			317,585				290,936
Property, plant and equipment, net			37,648				35,932
Intangible assets, net			145,108				189,949
Goodwill			338,873				338,836
Other assets			30,697				32,070
Total assets		$	869,911			$	887,723
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	16,902			$	19,011
Accrued expenses and other			45,271				53,748
Deferred revenues			100,170				89,217
Convertible senior notes			200,000				-
Total current liabilities			362,343				161,976
Deferred revenues			18,046				15,106
Other liabilities			8,431				11,529
Convertible senior notes			-				200,000
Total liabilities			388,820				388,611
Commitments and contingencies (Note 10)
Shareholders’ equity:
Preferred stock, without par value; 1,000 shares authorized and none outstanding			—				—
Common stock, without par value; 200,000 shares authorized at December 31, 2014 and 2013; 78,575 and 76,849 shares issued and outstanding as of December 31, 2014 and 2013, respectively			187,397				178,347
Additional paid-in capital			206,913				191,976
Retained earnings			87,574				129,166
Accumulated other comprehensive loss			(793	)			(377	)
Total shareholders’ equity			481,091				499,112
Total liabilities and shareholders’ equity		$	869,911			$	887,723

 

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

  

 

IXIA

Consolidated Statements of Operations

(in thousands, except per share data)

 

		Year Ended December 31,
		2014				2013				2012
Revenues:
Products		$	325,455			$	352,712			$	330,315
Services			139,003				114,544				83,119
Total revenues			464,458				467,256				413,434
Costs and operating expenses: (1)
Cost of revenues – products (2)			98,815				89,136				71,668
Cost of revenues – services			16,166				13,867				10,493
Research and development			115,156				117,502				98,169
Sales and marketing			151,765				137,724				117,214
General and administrative			66,475				47,158				45,607
Amortization of intangible assets			46,901				40,805				30,018
Acquisition and other related			3,277				6,920				11,861
Restructuring			10,310				1,840				4,077
Total costs and operating expenses			508,865				454,952				389,107
(Loss) income from operations			(44,407	)			12,304				24,327
Interest income and other, net			(24	)			6,269				2,255
Interest expense			(8,266	)			(7,771	)			(7,215	)
(Loss) income before income taxes			(52,697	)			10,802				19,367
Income tax (benefit) expense			(11,105	)			(1,068	)			(26,093	)
Net (loss) income		$	(41,592	)		$	11,870			$	45,460
(Loss) earnings per share:
Basic		$	(0.54	)		$	0.16			$	0.63
Diluted		$	(0.54	)		$	0.15			$	0.59
Weighted average number of common and common equivalent shares outstanding:
Basic			77,629				75,757				72,183
Diluted			77,629				77,513				84,505

 

---

(1)	Stock-based compensation included in:

Cost of revenues – products		$	331			$	550			$	423
Cost of revenues – services			126				209				162
Research and development			6,843				8,065				6,242
Sales and marketing			5,624				7,367				5,352
General and administrative			3,595				4,571				7,462

 

(2)	Cost of revenues – products excludes amortization of intangible assets related to purchased technologies of $28.9 million, $26.0 million and $20.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, which is included in Amortization of intangible assets.

 

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

  

 

IXIA

Consolidated Statements of Comprehensive (Loss) Income

(in thousands) 

 

		Year Ended December 31,
		2014				2013				2012
Net (loss) income		$	(41,592	)		$	11,870			$	45,460
Unrealized (loss) gain on investments, net of tax			(74	)			(2,028	)			586
Foreign currency translation adjustment			(342	)			(638	)			(527	)
Other comprehensive (loss) income			(416	)			(2,666	)			59
Comprehensive (loss) income		$	(42,008	)		$	9,204			$	45,519

 

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

 

 

IXIA

Consolidated Statements of Shareholders' Equity

(in thousands)

 

										Additional								Accumulated Other				Total
		Common Stock - No Par									Paid-in-				Retained			Comprehensive					Shareholders'
		Shares				Amount					Capital				Earnings			Income (Loss)					Equity
Balance at December 31, 2011			70,240			$	132,330			$	145,840			$	71,836			$	2,230			$	352,236
Net income			-				-				-				45,460				-				45,460
Change in unrealized gains and losses on investments, net of tax			-				-				-				-				586				586
Cumulative translation adjustment			-				-				-				-				(527	)			(527	)
Shares issued pursuant to stock incentive plans and employee stock purchase plan options			3,886				26,603				-				-				-				26,603
Stock-based compensation			-				-				19,641												19,641
Stock award tax benefit			-				-				3,499				-				-				3,499
Balance at December 31, 2012			74,126			$	158,933			$	168,980			$	117,296			$	2,289			$	447,498
Net income			-				-				-				11,870				-				11,870
Change in unrealized gains and losses on investments, net of tax			-				-				-				-				(2,028	)			(2,028	)
Cumulative translation adjustment			-				-				-				-				(638	)			(638	)
Shares issued pursuant to stock incentive plans and employee stock purchase plan options			2,723				19,414				-				-				-				19,414
Stock-based compensation			-				-				20,762												20,762
Stock award tax benefit			-				-				2,234				-				-				2,234
Balance at December 31, 2013			76,849			$	178,347			$	191,976			$	129,166			$	(377	)		$	499,112
Net loss			-				-				-				(41,592	)			-				(41,592	)
Change in unrealized gains and losses on investments, net of tax			-				-				-				-				(74	)			(74	)
Cumulative translation adjustment			-				-				-				-				(342	)			(342	)
Shares issued pursuant to stock incentive plans and employee stock purchase plan options			1,726				9,050				-				-				-				9,050
Stock-based compensation			-				-				16,519				-				-				16,519
Stock award tax deficiency			-				-				(1,582	)			-				-				(1,582	)
Balance at December 31, 2014			78,575			$	187,397			$	206,913			$	87,574			$	(793	)		$	481,091

 

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

 

 

IXIA

Consolidated Statements of Cash Flows

(in thousands)      

 

		Year Ended December 31,
		2014				2013				2012
Cash flows from operating activities:
Net (loss) income		$	(41,592	)		$	11,870			$	45,460
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation			16,525				16,061				16,034
Amortization of intangible assets			46,901				40,805				30,018
Realized gain on sale of available-for-sale securities, net			(85	)			(4,469	)			-
Stock-based compensation			16,519				20,762				19,641
Deferred income taxes			(14,382	)			(6,664	)			(42,363	)
Excess tax benefits from stock-based compensation			-				(2,477	)			(3,025	)
Amortization of debt issuance costs			1,870				-				-
Amortization of investment premiums			63				-				-
Changes in operating assets and liabilities, net of the effect of acquisitions:
Accounts receivable, net			10,062				3,416				(21,771	)
Inventories			(8,028	)			(11,036	)			(2,445	)
Prepaid expenses and other current assets			(4,586	)			(6,773	)			1,483
Other assets			5,538				3,154				54
Accounts payable			(2,419	)			3,195				5,521
Accrued expenses and other			(5,400	)			(7,442	)			11,135
Deferred revenues			13,853				24,362				18,389
Other liabilities			3,232				1,736				2,183
Net cash provided by operating activities			38,071				86,500				80,314
Cash flows from investing activities:
Purchases of property and equipment			(8,063	)			(12,131	)			(17,726	)
Purchases of available-for-sale securities			(96,886	)			(191,973	)			(168,623	)
Proceeds from available-for-sale securities			68,580				271,585				381,904
Purchases of other intangible assets			(771	)			(893	)			(843	)
Proceeds from purchase price adjustments related to previous acquisitions			6,081				-				-
Payments in connection with acquisitions, net of cash acquired			(3,857	)			(188,298	)			(298,928	)
Net cash used in investing activities			(34,916	)			(121,710	)			(104,216	)
Cash flows from financing activities:
Debt issuance costs			-				-				(947	)
Proceeds from exercise of stock options and employee stock purchase plan options			9,443				19,414				26,603
Cash paid for shares withheld for taxes			(393	)			-				-
Excess tax benefits from stock-based compensation			-				2,477				3,025
Net cash provided by financing activities			9,050				21,891				28,681
Net increase (decrease) in cash and cash equivalents			12,205				(13,319	)			4,779
Cash and cash equivalents at beginning of year			34,189				47,508				42,729
Cash and cash equivalents at end of year		$	46,394			$	34,189			$	47,508
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest		$	6,003			$	6,000			$	6,000
Income taxes		$	(1,446	)		$	10,334			$	7,596
Supplemental disclosure of non-cash investing activities:
Purchased and unpaid property and equipment		$	1,088			$	1,104			$	-
Transfers of inventory to property and equipment		$	10,464			$	7,663			$	-

 

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

 

 

IXIA

Notes to Consolidated Financial Statements

  

1.

Description of Business, Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements

 

Description of Business

 

Ixia was incorporated on May 27, 1997 as a California corporation. Ixia provides application performance and security resilience solutions so that organizations can validate, secure and optimize their physical and virtual networks. Enterprises, service providers, network equipment manufacturers and governments worldwide rely on Ixia’s solutions to deploy new technologies and achieve efficient, secure ongoing operation of their 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.

 

The Company is headquartered in Calabasas, California with operations across the U.S. and the rest of the world.  Our revenues are principally derived from shipments within the U.S. and to the Europe, Middle East and Africa (EMEA) and Asia Pacific regions.

 

Basis of Presentation

 

The accompanying consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

 

Use of Estimates

 

In the normal course of preparing financial statements in conformity with accounting principles generally accepted in the United States, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

All subsidiaries are consolidated as they are 100% owned by us. All intercompany transactions and accounts are eliminated in consolidation.

 

Significant Accounting Policies

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair value. We generally place funds that are in excess of current needs in high credit quality instruments such as money market funds. There are no restrictions on the use of cash and cash equivalents.

 

 

Fair Value of Financial Instruments

 

Our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates their fair values because of the short-term maturity of these instruments and the relative stability of interest rates. The fair values of our money market funds, U.S. treasury, government and agency debt securities and corporate debt securities are based on quoted market prices as shown in our investment brokerage/custodial statements. See Note 3 for information related to the fair value of our convertible senior notes.

 

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect the assumptions about the factors that market participants would use in valuing the asset or liability.

 

Foreign Currency Forward Contracts

 

We utilize foreign currency forward contracts to hedge certain accounts receivable amounts that are denominated in Japanese Yen, Euros and British Pounds.  These contracts are cash flow hedges used to reduce the risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures.  Foreign currency contracts are typically short-term in duration ranging from one to four months. We do not enter into foreign exchange forward contracts for speculative or trading purposes. In accordance with ASC 815, “Derivatives and Hedging,” the Company records all derivatives in the consolidated balance sheet as either assets or liabilities measured at fair value. The Company’s foreign currency contracts are generally not designated as hedges and any gains or losses on the movement in their fair values is recognized in the results of operations immediately. Foreign currency contracts are recorded at fair market values as a component of Prepaid expenses and other current assets in the consolidated balance sheet and the change in their fair value is recorded as a gain or loss in the consolidated statements of operations as a component of Interest income and other, net.

 

As of December 31, 2014, we held three open foreign currency forward contracts with a notional value of $8.5 million and a net fair value of approximately $24,000. As of December 31, 2013, we held five open foreign currency forward contracts with a notional value of $7.0 million and a net fair value of approximately $54,000. During 2014 and 2013, net gains related to the change in fair value of such foreign currency forward contracts were approximately $531,000 and $658,000, respectively. During 2012, net losses related to the change in fair value of such foreign currency forward contracts were not significant.

 

Investments in Marketable Securities

 

We maintain a portfolio of cash equivalents and investments in a variety of fixed and variable rate securities, including U.S. government and federal agency securities, corporate debt securities, and money market funds. The primary objective of our investment activities is to maintain the safety of principal and preserve liquidity while maximizing yields without significantly increasing risk. We do not enter into investments for trading or speculative purposes. We determine the appropriate classification of investments in marketable securities at the time of purchase.  Accretion and amortization of purchase discounts and premiums are included in interest income and other, net. Available-for-sale securities are stated at fair value. The net unrealized gains or losses on available-for-sale securities are reported as a separate component of accumulated other comprehensive income or loss, net of tax. The specific identification method is used to compute realized gains and losses on our marketable securities. In 2014, 2013 and 2012, we had gross realized gains of approximately $94,000, $4.5 million and $1.3 million, respectively. In 2014, 2013 and 2012, gross realized losses were not significant.

  

We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other things, the duration and extent to which the fair value of a security is less than its cost and our intent and ability to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. We have evaluated our investments as of December 31, 2014 and have determined that no investments with unrealized losses are other-than-temporarily impaired. We do not intend to sell and it is not more likely than not that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.

 

It is possible that we could recognize future impairment charges on our investment securities we currently own if future events, new information or the passage of time cause us to determine that a decline in our carrying value is other-than-temporary. We will continue to review and analyze these securities for triggering events each reporting period. See Note 6 for additional information.

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is based on our best estimate of the amount of probable credit losses in existing accounts receivable.  We review the allowance for doubtful accounts and provisions are made upon a specific review of all significant past due receivables. For those receivables not specifically reviewed, provisions are provided at a general rate that considers historical write-off experience and other qualitative factors. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered. 

 

Inventories

 

Inventories are goods held for sale in the normal course of business. Inventories are stated at the lower of cost (first-in, first-out) or market. The inventory balance consists of raw materials, work in process (“WIP”) and finished goods. Raw materials include low level components, many of which are purchased from vendors, WIP is partially assembled products and finished goods are products that are ready to be shipped to end customers. Consideration is given to inventory shipped and received near the end of a period and the transaction is recorded when transfer of title occurs. We evaluate inventory for excess and obsolescence and adjust to net realizable value based on inventory that is obsolete or in excess of current demand.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation of our computer software and equipment is computed using the straight-line method based upon the estimated useful lives of the applicable assets, ranging from three to five years. Building and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. Useful lives are evaluated periodically by management in order to determine recoverability in light of current technological conditions. Property, plant and equipment also include the cost of our products used for research and development which are classified as development equipment and are depreciated over five years to research and development. 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, which is included in Sales and marketing in the consolidated statements of operations. Repairs and maintenance are charged to expense as incurred while renewals and improvements are capitalized. Upon the sale or retirement of Property, plant and equipment, the accounts are relieved of the cost and the related Accumulated depreciation, with any resulting gain or loss included in the consolidated statements of operations.

 

Goodwill

 

We record goodwill as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquired net tangible and intangible assets. We evaluate the recoverability of our goodwill on an annual basis or if events or changes in circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist. We have determined that we have one reporting unit for goodwill impairment testing purposes. The fair value of the Company’s reporting unit is determined using the market capitalization of Ixia, which considers the observed market price of the Company’s publicly-traded equity securities on the impairment test date. The fair value of the Company’s reporting unit is then compared to the carrying amount of the Company’s reporting unit under “step 1” of the impairment testing model. If the carrying value of the reporting unit exceeds its fair value, then the fair value of goodwill is determined and compared to its carrying value under “step 2.” Impairment losses are recorded to the extent that the carrying value of the goodwill exceeds its estimated fair value. We completed our annual goodwill impairment test of our single reporting unit as of December 31, 2014 and determined that there was no impairment.

 

 

Intangible Assets

 

Intangible assets consist primarily of acquired intellectual property, such as technologies, customer relationships, and trade names.

 

Acquired intangible assets with finite lives, including purchased technology, customer relationships, service agreements, trade names, and non-compete agreements are amortized over their estimated useful lives and reflected in the Amortization of intangible assets line item on our consolidated statements of operations.

 

Intangible assets with finite lives are tested for impairment whenever events or circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant adverse change in the extent or manner in which the intangible asset is being used, significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; or current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life.

 

An impairment loss is recognized when the carrying amount of an asset exceeds the estimated undiscounted cash flows used in determining the fair value of the asset. The amount of the impairment loss recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis and may involve the use of significant estimates and assumptions, some of which may be based in part on historical experience, forecasted information and discount rates. No such impairment charges were recorded during the years ended December 31, 2014, 2013 and 2012.

 

Litigation

 

We are a defendant in one class action and in one consolidated shareholder derivative action. We accrue for losses when the loss is deemed probable and the liability can reasonably be estimated. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record the minimum estimated liability related to the claim. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. See Note 10 for additional information.

 

Product Warranty

 

We generally provide an initial standard warranty (90-day or 12-month periods) on our hardware products after product shipment and accrue for estimated future warranty costs based on actual historical experience and other relevant data, as appropriate, at the time product revenue is recognized. All product warranty expenses associated with our initial standard warranty are reflected within Cost of revenues-products in the accompanying consolidated statements of operations. Accrued product warranty costs are included as a component of accrued expenses and other in the accompanying consolidated balance sheets.

 

Activity in the product warranty liability account for the years presented is as follows (in thousands):

 

		December 31, 2014				December 31, 2013				December 31, 2012
Balance at beginning of year		$	646			$	665			$	703
Current year provision			1,759				2,219				629
Acquired liability (Net Optics acquisition)			—				117				—
Expenditures			(1,689	)			(2,355	)			(667	)
Balance at end of year		$	716			$	646			$	665

 

Revenue Recognition

 

Sales of 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.

 

 

Our service revenues primarily consist of technical support, warranty and software maintenance services related to our network test and visibility hardware and software products. Many 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. The 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.

 

As our systems typically include hardware and software products, and the related services, we recognize our revenue in accordance with authoritative guidance on both hardware and software revenue recognition. Furthermore, in accordance with the current revenue recognition guidance, our hardware platform and certain other products that include both tangible products and software elements that function together to deliver the tangible product’s essential functionality have been scoped out of software revenue recognition guidance, and therefore these products are accounted for as hardware products for revenue recognition purposes.

 

For our hardware and software products, and related services, we recognize revenue based on the following four criteria: whether (i) evidence of an arrangement exists, which is typically in the form of a customer purchase order; (ii) delivery has occurred (i.e., risks and rewards of ownership have passed to the customer); (iii) the sales price is fixed or determinable; and (iv) collectability is deemed reasonably assured (or probable for software-related deliverables). Provided that the above criteria are met, revenue from hardware and software product sales is typically recognized upon shipment and service revenues are recognized as the services are provided or completed. Our service revenues from our initial and separately purchased technical support, warranty and software maintenance arrangements are recognized on a straight-line basis over the applicable contractual period.

 

Our systems are generally fully functional at the time of shipment and do not require us to perform any significant production, modification, customization or installation after shipment. If our arrangements include acceptance provisions based on customer specified criteria for which we cannot reliably demonstrate that the delivered product meets all the specified criteria, revenue is deferred until the earlier of the receipt of written customer acceptance or the expiration of the acceptance period. In addition, our arrangements generally do not include any provisions for cancellation, termination or refunds.

 

Multiple Element Arrangements and Allocation of Value

 

Our arrangements with our customers to provide our systems typically include a combination of our hardware and software products, as well as the related technical support, warranty and software maintenance services of these products, and therefore are commonly referred to as multiple element arrangements. When sales arrangements involve hardware and software elements, we use a two-step process to allocate value to each element in the arrangement:

 

(1)

The total arrangement fee is allocated to the separate non-software deliverables (e.g., chassis, interface cards, and software post contract customer support and maintenance (“PCS”) related to our operating system software that is essential to the functionality of our hardware platform) and the software-related deliverables as a group (e.g., application software and software PCS) based on a relative selling price (“RSP”) method applied to all elements in the arrangement using the selling price hierarchy in the amended revenue recognition guidance as discussed below, and

 

(2)

The value assigned to the software group for the software deliverables is then allocated to each software element based on the residual method, whereby value is allocated first to the undelivered elements, typically PCS, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met. The fair value of an element must be based on vendor specific objective evidence (“VSOE”) of the selling price, which typically only exists for technical support, warranty and software maintenance services as discussed below.

 

 

Under the RSP method, the selling price to be used in the allocation of the total arrangement fee to each of the elements, or deliverables, is based on a selling price hierarchy, where the selling price for each element is based on (i) VSOE, if available; (ii) third-party evidence (“TPE”), if available and VSOE is not available; or (iii) the best estimate of selling price (“BESP”), if neither VSOE nor TPE are available.

 

We determine VSOE of fair value based on a bell-shaped curve approach, considering the actual sales prices charged to customers when the same element is sold separately, provided it is substantive. All of our products are sold as multiple element arrangement and not sold separately, as our products include an initial period (generally 90-day or 12-month periods) of free technical support, warranty and software maintenance services. Accordingly, we have not established VSOE for nearly all of our products. On a regular basis, we separately sell extended technical support, warranty and software maintenance services upon the expiration of the initial contractual periods included in an initial sales arrangement and have been able to establish VSOE for our technical support, warranty and software maintenance services.

 

We generally are not able to determine TPE for our products or services because our products are not interchangeable with those of our competitors. Furthermore, we are unable to reliably determine competitive selling prices when the applicable competitive products are sold separately. As such, we use BESP for all of our products and services when allocating the total consideration of multiple element arrangements to each of the deliverables under step one of the allocation process described above except for our technical support, warranty and software maintenance services where we use VSOE. We determine BESP for a product or service by considering multiple factors including, analyzing historical sales price data for standalone and bundled arrangements, published price lists, geographies and customer types. Our estimate of BESP used in our allocation of arrangement consideration requires significant judgment and we review these estimated selling prices on a quarterly basis.

 

The allocation of value to each deliverable in a multiple element arrangement is completed at the inception of an arrangement, which is typically the receipt of a customer purchase order. The allocated value of each non-software deliverable is then recognized as revenue when each element is delivered, provided all of the other revenue recognition criteria discussed above have been met. For software deliverables, the total software group allocation (or total arrangement consideration for customer orders that include only software products and related services) is allocated based on the residual method which requires that we first allocate value to the undelivered element at VSOE of the selling price of the undelivered element and the remaining portion of the arrangement fee is allocated to the delivered elements. As we do not sell our software products without technical support, warranty and software maintenance services, we are unable to establish VSOE for our software products, and therefore use the residual method under the software revenue recognition guidance to allocate the software group (or arrangement) value to each software deliverable. Under the residual method, the software group (or arrangement) value is allocated first to the undelivered elements, typically technical support, warranty and software maintenance services based on VSOE, and the residual portion of the value is then allocated to the delivered elements (typically the software products) and recognized as revenue, provided all other revenue recognition criteria discussed above have been met. If VSOE cannot be established for an undelivered element within the software group (or arrangement), we defer the entire value allocated to the software group (or arrangement) until the earlier of (i) delivery of all elements (other than technical support, warranty and software maintenance services, provided VSOE has been established) or (ii) establishment of VSOE of the undelivered element(s). If the only undelivered element(s) relates to a service for which VSOE has not been established, the entire allocated value of the software group (or arrangement) is recognized as revenue over the longer of the service or contractual period of the technical support, warranty and software maintenance services.

 

VSOE of fair value typically only exists for the Company’s technical support, warranty and software maintenance services (“Support”). VSOE of fair value is established using the bell-shaped curve approach for a subgroup when a substantial majority (generally greater than 75%) of the transactions are priced within a reasonably narrow range (generally plus or minus 15% from the list price, which approximates the median). On a regular basis, the Company separately sells Support upon the expiration of the initial contractual periods included in an initial sales arrangement (“Support Renewals”). The population of Support Renewals is used in the bell-shaped curve approach to establish VSOE of fair value of Support and consists of actual sales prices charged to customers for Support Renewals and includes only Support Renewals sold separately on a stand-alone basis. The Company reviews these standalone sales of its Support Renewals for VSOE of fair value of its Support on a quarterly basis (“VSOE Analysis”). The Company’s pricing for Support Renewal transactions is generally based on a percentage of the Company’s list price for the product for which the Support Renewal is being purchased. When pricing conditions vary significantly, the Company further stratifies the population of stand-alone sales of its Support Renewals based on Support Renewal pricing conditions and separately analyzes these subgroups of Support Renewal transactions. The Company’s Support Renewal pricing conditions consist of the underlying product type, product family, customer type and the geographic region in which the sale is made.  

 

 

Sales to Distributors

 

We use distributors and resellers to complement our direct sales and marketing efforts in certain markets and/or for certain products. Due to the broad range of features and options available with our hardware and software products, distributors and resellers generally do not stock our products and typically place orders with us after receiving an order from an end customer. These distributors and resellers receive business terms of sale similar to those received by our other customers; and payment to Ixia is not contingent on sell-through to and receipt of payment from the end customer. As such, for sales to distributors and resellers, we recognize revenue when the risks and rewards of ownership have transferred to the distributor or reseller provided that the other revenue recognition criteria noted above have been met.

 

Cost of Revenues

 

Our cost of revenues related to the sale of our hardware and software products includes 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, Santa Clara, California and in 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 and the cost of 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 $28.9 million, $26.0 million and $20.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, which are included within our Amortization of intangible assets line item on our consolidated statements of operations.

 

Shipping and Handling Costs

 

Shipping and handling costs are reported in Sales and marketing expenses in our consolidated statements of operations. For the years ended December 31, 2014 and 2013, we recorded shipping and handling costs of $1.7 million and $1.3 million, respectively.

 

Research and Development

 

Research and development expenses consist primarily of salaries and other personnel costs related to the design, development, testing and enhancement of our products. Costs related to research and development activities, including those incurred to establish the technological feasibility of a software product, and are expensed as incurred. If technological feasibility is established, all development costs incurred until general product release are subject to capitalization. To date, establishment of technological feasibility of our products and general release have substantially coincided. As a result, we have not capitalized any development costs.

 

Software Developed for Internal Use

 

We capitalize costs of software, consulting services, hardware and payroll-related costs incurred to purchase or develop internal-use software in accordance with the authoritative guidance on accounting for the costs of computer software developed or obtained for internal use. Internally developed software includes enterprise-level business software that we are customizing to meet our specific operational needs. To date, internal costs incurred to purchase or develop software for internal use have not been significant. Internally developed software is amortized over five years. Purchased software is amortized over three years. 

 

Advertising

 

Advertising costs are expensed as incurred. Advertising costs included in sales and marketing were $2.6 million, $2.9 million and $2.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.

 

Acquisition and Other Related Costs

 

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.

  

 

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 the financial statements based on the estimated fair values for accounting purposes on the grant date. We use the Black-Scholes option pricing model to estimate the fair value for accounting purposes of stock options and employee stock purchase rights. We use the grant date closing share sales price of a share of our common stock to estimate the fair value for accounting purposes of restricted stock units. The determination of the fair value of share-based awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life and risk-free interest rate. The expected life and expected volatility are estimated based on historical data. The risk-free interest rate assumption is based on U.S. constant maturities over the expected life of the award. Stock-based compensation expense recognized in our consolidated financial statements is based on awards that are ultimately expected to vest. The amount of stock-based compensation expense is reduced for estimated forfeitures based on historical experience as well as future expectations. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if estimated and actual forfeitures differ from these initial estimates. We evaluate the assumptions used to value share-based awards on a periodic basis. We recognize stock-based compensation expense based on the graded, or accelerated multiple-option, approach over the vesting period.

 

We have outstanding share-based awards that have performance-based vesting conditions. Awards with performance-based vesting conditions require the achievement of certain financial or other performance criteria as a condition to the vesting. We recognize the estimated fair value of performance-based awards, net of estimated forfeitures, as stock-based compensation expense over the performance period, using graded approach, based upon our determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of stock-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no stock-based compensation expense is recognized, and, to the extent stock-based compensation was previously recognized, such stock-based compensation is reversed.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected more likely than not to be realized.

 

We recognize, in our consolidated financial statements, the impact of tax positions that are more likely than not to be sustained upon examination based on the technical merits of the positions. We recognize interest and penalties related to uncertain tax positions in income tax expense. See Note 9 for additional information.

 

(Loss) Earnings Per Share

 

Basic (loss) earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of shares underlying our convertible senior notes, employee stock options and restricted stock units. See Note 13 for additional information.

 

Foreign Currency Translation and Transactions

 

Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated to U.S. Dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments included as a separate component in accumulated other comprehensive income (loss). Income and expense accounts are translated at average exchange rates during the year. Where the U.S. Dollar is the functional currency, certain balance sheet and income statement accounts are remeasured at historical exchange rates and translation adjustments from the remeasurement of the local currency amounts to U.S. Dollars are included in interest income and other, net. During the years ended December 31, 2014, 2013 and 2012, we had net foreign currency income (losses) of approximately ($767,000), $267,000 and ($519,000), respectively, attributable to our foreign operations, which includes net gains and losses on forward contracts.

 

 

Comprehensive (Loss) Income

 

Comprehensive (loss) income includes all changes in equity (net assets) during a period from non-owner sources. Accumulated other comprehensive (loss) income includes unrealized gains and losses on investments and foreign currency translation adjustments.

 

Segments

 

Operating segments are defined as components of an enterprise engaged in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker (“CODM”) of the enterprise to make decisions about resources to be allocated to the segment and to assess its performance. Our CODM is our Chief Executive Officer who reviews our consolidated budgets and results for the purposes of allocating resources and evaluating financial performance.  Accordingly, we have determined that we operated within one business segment as of, and for the years ended, December 31, 2014, 2013 and 2012. See Note 5 for entity-wide disclosures about products and services, geographic areas and major customers.

 

Recent Accounting Pronouncements

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-15, Presentation of Financial Statements-Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern, which provides guidance about management's responsibility to evaluate whether or not there is substantial doubt about the Company's ability to continue as a going concern and to provide related footnote disclosure. The standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is permitted. We are in the process of evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

 

In June 2014, the 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 updated 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 are in the process of evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

 

In 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 are in the process of evaluating the impact of the adoption of this accounting standard update on our consolidated financial position or results of operations.

 

2.

Acquisitions

 

Anue Systems, Inc.

 

On June 1, 2012, we completed our acquisition of all of the outstanding shares of capital stock and other equity interests of Anue Systems, Inc. (“Anue”).  Anue provides solutions to monitor and test complex networks, including Anue’s Net Tool Optimizer solution that efficiently aggregates and filters network traffic to help optimize network monitoring tool usage.  With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base.  In addition, we are leveraging Anue’s sales channels and assembled workforce, including its experienced development team.  These factors, among others, contributed to a purchase price in excess of the estimated fair value of Anue’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction.  

 

In the second quarter of 2013, we finalized our purchase price allocation. The aggregate cash consideration paid totaled $152.4 million and was funded from our existing cash and sale of investments.

 

 

Acquisition and other related costs, including integration activities, approximated $269,000 and $4.9 million for the years ended December 31, 2013 and 2012, 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 consolidated statements of operations.

 

The following table summarizes the 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		$	3,659
Accounts receivable			12,016
Inventories			4,380
Prepaid and other assets			2,980
Fixed assets			1,600
Identifiable intangible assets			74,700
Goodwill			91,008
Total assets acquired			190,343
Accounts payable, accrued expenses and other liabilities			(7,942	)
Deferred revenues			(6,997	)
Deferred tax liability, net			(22,964	)
Net assets acquired		$	152,440

 

During 2013, we updated the allocation of our purchase price to increase the value of our accounts receivable balance by $173,000, decrease accounts payable, accrued expenses and other liabilities by $172,000, and decrease our deferred tax liability, net by $22,000, resulting in a net decrease in goodwill of $367,000. As these changes were not material, we did not recast our prior period financial statements for such changes. The above table reflects these changes.

 

The identifiable intangible assets of $74.7 million consist of $45.0 million of acquired technology, $21.9 million of customer relationships, $4.0 million for the trade name, $2.1 million related to non-compete agreements and $1.7 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 six months to six years.  The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

 

BreakingPoint Systems, Inc.

 

On August 24, 2012, we completed our acquisition of all of the outstanding shares of capital stock of BreakingPoint Systems, Inc. (“BreakingPoint”).  BreakingPoint is a leader in security testing, and its solutions provide global visibility into emerging threats and applications, along with advance insight into the resiliency of an organization’s information technology infrastructure under operationally relevant conditions and malicious attacks. With this acquisition, we have expanded our addressable market, broadened our product portfolio and grown our customer base. In addition, we are leveraging BreakingPoint’s sales channels and assembled workforce, including its experienced product development and sales teams. These factors, among others, contributed to a purchase price in excess of the estimated fair value of BreakingPoint’s net identifiable assets acquired (see summary of net assets below), and, as a result, we have recorded goodwill in connection with this transaction. 

 

In the third quarter of 2013, we finalized our purchase price allocation. The aggregate cash consideration paid totaled $163.7 million and was funded from our existing cash and sale of investments.

 

Acquisition and other related costs, including integration activities, approximated $2.1 million and $6.9 million for the years ended December 31, 2013 and 2012, 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 consolidated statements of operations.

 

In connection with the acquisition, we were obligated to pay up to $3.2 million to certain pre-acquisition employees of BreakingPoint over a weighted average period of less than two years provided they remained employees of Ixia. During 2014 the amount expensed was not significant. During 2013 and 2012, $1.1 million and $2.1 million, respectively, was expensed and recorded within the Acquisitions and other related line item on our consolidated statements of operations. As of December 31, 2014, the remaining obligation was not significant.

 

 

The following table summarizes the 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		$	13,417
Accounts receivable			4,610
Inventories			3,156
Prepaid and other assets			796
Fixed assets			936
Identifiable intangible assets			65,600
Goodwill			102,330
Total assets acquired			190,845
Accounts payable, accrued expenses and other liabilities			(6,889	)
Deferred revenues			(6,387	)
Deferred tax liability, net			(13,882	)
Net assets acquired		$	163,687

 

During 2013, we updated the preliminary allocation of our purchase price to increase the value of our accounts receivable balance by $58,000, decrease the value of our deferred tax liability balance by $264,000 and decrease goodwill by $322,000. As these changes were not material, we did not recast our prior period financial statements for such changes. The above table reflects these changes.

 

The identifiable intangible assets of $65.6 million consist of $22.7 million of acquired technology, $20.6 million of customer relationships, $16.6 million of service agreements, $2.9 million for the trade name, $2.2 million related to non-compete agreements and $600,000 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 two weeks to six years.  The goodwill recorded in connection with this transaction is not deductible for U.S. income tax purposes.

 

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. 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 $187.4 million, and reflects certain post-closing adjustments, related to the final determination of the Net Optics’ closing working capital under the purchase agreement and the final amount of the tax reimbursements due to the sellers that were determined based upon the filing of certain tax returns. The acquisition was funded from our existing cash and sale of investments.

 

Acquisition and other related costs, including integration activities, approximated $3.5 million and $4.0 million for the years ended December 31, 2014 and 2013, 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 consolidated statements of operations.

 

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).

 

 

During the first quarter of 2014, we also recorded a measurement period adjustment 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.

 

During the fourth quarter of 2014, we reduced our aggregate purchase price for Net Optics from $187.7 million to $187.4 million due to a measurement period adjustment to finalize certain post-closing adjustments, including the final amount of the tax reimbursements due to the sellers that were determined upon the filing of certain tax returns. The adjustment reduced the value of our accrued expenses and other liabilities and goodwill balances by approximately $341,000. As these changes were not material, we did not recast our prior period financial statements for such changes. The below table reflects these changes.

 

The following table summarizes the 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			78,727
Total assets acquired			200,981
Accounts payable, accrued expenses and other liabilities			(8,440	)
Deferred revenues			(5,170	)
Net assets acquired		$	187,371

 

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 approximately $358,000 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 January 1, 2012, and the acquisitions of Anue and BreakingPoint had occurred on January 1, 2011 (in thousands):

 

		Year Ended December 31,
		2013				2012
Total revenues		$	516,767			$	514,075
Net loss			(2,097	)			(2,006	)

 

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 and increases in costs related to the estimated fair value adjustments to deferred revenues and inventory, respectively, certain acquisition related costs, amortization of identifiable intangible assets, and the related income tax effects for these adjustments (including to record the $22.7 million and $12.1 million partial releases of our valuation allowance in the first quarter of 2011 rather than in the second and third quarters of 2012, respectively).

 

Post-acquisition results for Net Optics operations have been included in our consolidated financial statements since the acquisition date (i.e., December 5, 2013), which approximated $4.8 million of total revenues and a loss before income taxes of approximately $1.9 million for the year ended December 31, 2013. Post-acquisition results for Anue and BreakingPoint’s operations have been included in our consolidated financial statements, which included combined revenues of $54.9 million and a combined loss before income taxes of approximately $7.9 million for the year ended December 31, 2012.

 

 

The pro forma combined results 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 applicable periods noted above, or the future results of operations of the combined entity.

 

3.

Debt

 

Unsecured Convertible Senior Notes

 

On December 7, 2010, the Company issued $200.0 million in aggregate principal amount of 3.00% Convertible Senior Notes (the “Notes”) due December 15, 2015 unless earlier repurchased or converted. 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 agreement (the “Indenture”) dated December 7, 2010 between the Company and Wells Fargo Bank, N.A., as trustee. The Indenture was filed with the Securities and Exchange Commission (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, commencing 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 relating to our failure to comply with our reporting obligations to the trustee and the SEC. After such 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%. 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.

 

During each of the years ended December 31, 2014, 2013 and 2012, we made scheduled interest payments of $6.0 million. During the quarter ended December 31, 2014 and as a result of our late filing with the SEC and the trustee of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 (the “2014 First Quarter Form 10-Q”) and as described in more detail below, we were required to pay, for a one-day period, additional interest on the Notes at an annual rate of 0.50%.

   

Debt issuance costs were approximately $6.0 million, which were capitalized to deferred issuance costs and are being amortized to interest expense over the five year term of the Notes using the straight-line method. During each of the years ended December 31, 2014, 2013 and 2012, amortization recorded to interest expense pertaining to deferred issuance costs were $1.2 million. 

 

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, including our agreement to timely file certain reports with the trustee, (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.

 

 

On July 16, 2014, the trustee provided us with notice that we were in default under the Indenture as a result of our delinquency in filing our 2014 First Quarter Form 10-Q with the trustee. In accordance with the terms of the Indenture, we had 60 days after receipt of the notice to cure such default. The cure period expired on 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, however, and by delivery of notice to the trustee, the paying agent and the holders of the Notes, we elected to pay additional interest at an annual rate equal to 0.50% as the sole remedy to the holders of the Notes for the up to 180 day period commencing on September 14, 2014. We cured such default and the related event of default by filing the 2014 First Quarter Form 10-Q with the SEC on September 15, 2014. Such filing of the 2014 First Quarter Form 10-Q was, pursuant to the terms of the Indenture, also deemed a filing with the trustee, and we were thereafter no longer 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 were delinquent in filing our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “2014 Second Quarter Form 10-Q”) with the trustee. In accordance with the terms of the Indenture, we had 60 days to cure such default. We cured the default by filing the 2014 Second Quarter Form 10-Q with the SEC on September 15, 2014. Such filing was, pursuant to the terms of the Indenture, also deemed a filing with the trustee.

 

We also defaulted under the Indenture as a result of our failure to timely file with the SEC and the trustee our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 (the “2013 Third Quarter Form 10-Q”), our Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), and a Current Report on Form 8-K/A relating to our acquisition of Net Optics in December 2013 (the “Form 8-K/A”). Such defaults were cured by our filing of the three reports with the SEC on June 23, 2014. Such filings were, pursuant to the terms of the Indenture, also deemed to be filings with the trustee.

 

As of December 31, 2014 and 2013, the estimated fair value of our Notes was $202.4 million and $215.7 million, respectively. The estimated fair value of the Notes was determined based on the market price of the Notes as of December 31, 2014 and 2013, which are based on Level 2 inputs.

 

Senior Secured Credit Agreements 

 

2015 Credit Agreement

 

On March 2, 2015 (the “Closing Date”), we entered into an amended and restated credit agreement (the “Credit Agreement”) by and among the Company, as borrower, certain of the Company’s wholly owned direct and indirect subsidiaries, as guarantors, Silicon Valley Bank, as administrative agent, swingline lender and letter of credit issuer, and the other lenders parties thereto (Silicon Valley Bank and the other lenders hereinafter collectively referred to as the “Lenders”). The Credit Agreement amended and restated our prior credit agreement dated as of December 21, 2012, as amended (the “Prior Credit Agreement”), by and among Ixia, the guarantors, Silicon Valley Bank, as administrative agent, swingline lender, and letter of credit issuer (as successor to Bank of America, N.A. in such capacities), and the other lenders parties thereto.

 

The Credit Agreement provides for a (i) term loan (the “Term Loan”) in the aggregate principal amount of $40.0 million, which amount was advanced to the Company on March 3, 2015, and (ii) revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loan, the “Credit Facility”) in an aggregate amount of up to $60.0 million, with sub-limits of $25.0 million for the issuance of standby letters of credit and $15.0 million for swingline loans. The aggregate amount available under the Credit Facility may, upon our request and subject to the receipt of increased commitments from the Lenders or additional lenders, be increased by an aggregate amount of up to $80.0 million. We are permitted to voluntarily prepay outstanding loans under the Credit Facility at any time without premium or penalty. Prior to the maturity of the Credit Facility, we may re-borrow amounts under the Revolving Credit Facility, but we may not re-borrow amounts that are repaid or prepaid under the Term Loan.

 

The maturity date of the Credit Facility is February 15, 2018; provided, however, if, at any time between June 15, 2015 and the maturity date for the Notes (i.e., December 15, 2015), we do not have total available liquidity (defined as cash, cash equivalents, and marketable securities plus availability under the Revolving Credit Facility) of $25.0 million in excess of the amount then required to repay our Notes (as described above) in full, all amounts outstanding under the Credit Facility will become due and payable and the Revolving Credit Facility will terminate, on September 14, 2015 (or if such date has passed, within 2 business days after the date we fail to have the required total available liquidity). If subsequent to June 15, 2015 and prior to September 14, 2015 we do not have the required total available liquidity but thereafter (and prior to September 14, 2015) achieve and maintain such liquidity level, the accelerated maturity date of September 14, 2015 shall not apply.

 

As required by the terms of the Credit Agreement, we have deposited the funds advanced under the Term Loan, together with additional cash, cash equivalents, and marketable securities in the aggregate amount of $50.0 million, in collateral accounts (the “Collateral Accounts”). We are required, within 60 days after the Closing Date, to deposit in the Collateral Accounts additional cash, cash equivalents, and marketable securities in the aggregate amount of $25.0 million. We may only withdraw amounts deposited in the Collateral Accounts for the repurchase or repayment of the Notes. We may use the proceeds of the Revolving Credit Facility for (i) working capital, capital expenditures, and general corporate purposes, (ii) share repurchases, (iii) the partial refinancing of the Notes, and/or (iv) acquisitions, in each case as permitted by applicable law and the Credit Agreement. The restrictions on acquisitions as set forth in the Credit Agreement include a restriction that precludes the Company from funding an acquisition in whole or in part with cash unless the Company will have, after giving effect to the transaction, cash, cash equivalents and marketable securities in an amount not less than $75.0 million in excess of the amount then required to be on deposit in the Collateral Accounts.
 

The Company plans to satisfy its repayment obligations under the Notes, and to pay the purchase price for any earlier Note repurchases (whether mandatory or negotiated by the Company) using some combination of (i) cash, cash equivalents, and marketable securities, including those deposited in the Collateral Accounts, (ii) proceeds from the Term Loan, (iii) borrowings under the Revolving Credit Facility, and/or (iv) future cash flows from operations.

  

 

The Term Loan requires quarterly repayments of principal on the last day of the next eleven fiscal quarters, commencing with the fiscal quarter ending June 30, 2015. The first four payments will be in the amount of $500,000 each, the following four payments will be in the amount of $1.0 million each, and the next three payments will be in the amount of $1.5 million each. The remaining principal balance of the Term Loan will be due and payable on the maturity date of the Credit Facility.

 

The Company’s and the guarantors’ obligations under the Credit Agreement are secured by (i) a first priority perfected security interest in substantially all existing and after acquired tangible and intangible personal property of the Company and the guarantors and (ii) the pledge by the Company and the guarantors of (a) all outstanding equity securities of their existing and future domestic subsidiaries, including, in the case of the Company, the outstanding equity securities of each of the guarantors, and (b) 65% of the outstanding equity securities of their existing and future respective first-tier foreign subsidiaries, including, in the case of Catapult Communications Corporation (one of our wholly owned domestic subsidiaries), 65% of the outstanding equity securities of Ixia Technologies International Limited, a company organized under the laws of Ireland.

 

Interest rates for the Term Loan and for the first year of the Revolving Credit Facility are established, at our option, at a rate per annum of (i) 4.25% above the Eurodollar rate or (ii) 3.25% above a defined base rate. After the first anniversary of the Closing Date, interest rates for the Revolving Credit Facility are established, at the Company’s option, based on the Eurodollar rate or the defined base rate. Such interest rates range from 2.0% to 3.0% above the Eurodollar rate for Eurodollar-based borrowings and from 1.0% to 2.0% above the defined base rate for base rate borrowings, in each case depending on the Company’s leverage ratio. We are also required to pay a quarterly commitment fee, ranging from 0.30% to 0.50% per annum, on the undrawn portion of the Revolving Credit Facility. Letter of credit fees accrue based on the daily amount available to be drawn under outstanding letters of credit and range from 2.0% to 3.0%, depending on our leverage ratio. Swingline loans bear interest at the defined base rate plus the applicable margin for loans under the Revolving Credit Facility based on the defined base rate. If we default under the Credit Facility, the Lenders may increase the interest rate(s) to 2.0% more than the rate(s) otherwise applicable. The interest rate applicable to the Term Loan on the funding date was 4.42% based on the one month Eurodollar rate plus 4.25%.

 

The Credit Agreement requires the Company to comply with certain covenants, including maintaining (i) a fixed charge coverage ratio (as defined in the Credit Agreement) of not less than 1.25 to 1.00, measured quarterly on a trailing twelve months basis, (ii) a consolidated senior leverage ratio (as defined in the Credit Agreement) of not greater than 2.50 to 1.00 through December 31, 2015 and 2.25 to 1.00 thereafter, measured quarterly on a trailing 12 months basis, and (iii) a consolidated total leverage ratio (as defined in the Credit Agreement) of not greater than 3.00 to 1.00, measured quarterly on a trailing 12 months basis. The consolidated funded indebtedness (as defined in the Credit Agreement) used in the calculation of the consolidated leverage ratio is reduced by the amounts deposited in the Collateral Accounts (except in connection with the calculation of the applicable margin for loans).

 

The Credit Agreement also contains reporting covenants typical for transactions comparable to the Credit Facility provided for therein, including covenants to furnish the lenders with financial statements, business plans, annual budgets, and other financial and business information and with notice of certain material events and information regarding collateral. The Credit Agreement also contains customary affirmative covenants, including covenants relating to the payment of obligations, preservation of the existence of and registrations for patents, trademarks, trade names and copyrights, maintenance of properties and insurance, compliance with laws and material contractual obligations, books and records, inspection rights, use of proceeds, addition of subsidiary guarantors, and security for the Credit Facility. The Credit Agreement contains customary negative covenants, including restrictions relating to liens and additional indebtedness, investments, mergers, liquidations and other fundamental changes, the sale and other disposition of properties and assets, restricted payments, changes in lines of business, transactions with affiliates, entering into certain burdensome agreements, and use of proceeds.

 

The Credit Agreement contains customary events of default, including the non-payment of amounts due, failure to perform under covenants, breaches of representations and warranties, cross-defaults relating to certain indebtedness, institution of insolvency proceedings, inability to pay debts as they become due, entry of certain judgments, events relating to the Employee Retirement Income Security Act of 1974, as amended, invalidity of loan documents, change of control events, and ineffectiveness of subordination provisions. The occurrence of an event of default may result in the acceleration of all of our outstanding obligations under the Credit Agreement and in an increase in the applicable interest rate(s) as described above.

 

Prior Credit Agreement

 

The Company’s Prior Credit Agreement provided for a credit facility (the “Prior Credit Facility”) that originally consisted of a revolving loan commitment of up to $150 million. As a result of the termination of certain lenders’ commitments under the Prior Credit Facility, the aggregate loan amount was reduced to $67.5 million in January 2015 and further reduced to $46.5 million in March 2015. As described below and due to our defaults under the Prior Credit Agreement, we were at the time of its amendment and restatement blocked from borrowing and obtaining letters of credit under the Prior Credit Facility. As of December 31, 2014, and immediately prior to the March 2015 amendment and restatement of the Prior Credit Agreement, no amounts were outstanding under the Prior Credit Facility.

 

The Prior Credit Facility was originally scheduled to mature on December 21, 2016, except that the Prior Credit Facility would mature on September 14, 2015 if beginning on June 15, 2015 we did not have available liquidity (domestic cash and investments, plus availability under the Prior Credit Facility) of $25 million in excess of the amount required to repay our Notes in full. If we had satisfied this requirement between June 15, 2015 and September 14, 2015, but failed to do so after September 15, 2015 and prior to December 15, 2015, the maturity date would have been the date on which the requirement was no longer satisfied. On December 12, 2014, the maturity date for the Prior Credit Facility was advanced to January 31, 2015, and on January 30, 2015, the maturity date was extended to March 2, 2015 to allow the Company additional time to renegotiate an amendment and restatement of the Prior Credit Facility with the institutional lenders that are parties to the March 2015 Credit Agreement.

   

 

Borrowings under the Prior Credit Facility bore interest at either (i) the base rate, which was 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 were from 1.75% to 2.25% for LIBOR loans and 0.75% to 1.25% for base rate loans, and depended on the Company’s total leverage ratio (as defined in the Prior Credit Facility). In addition, we were required to pay a commitment fee on the unused portion of the Prior Credit Facility of up to a maximum of $450,000 or 0.30% depending on the Company’s total leverage ratio.

 

Our obligations under the Prior Credit Facility were guaranteed by the Guarantors and 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 including, in the case of Catapult Communications Corporation, 65% of the outstanding equity securities of Ixia Technologies International Limited. .

 

Debt issuance costs were approximately $947,000 which were capitalized to deferred issuance costs and were being amortized as interest expense over the expected four year term of the Prior Credit Facility using the straight-line method, which is not materially different from the effective interest method. Amortization recorded to interest expense pertaining to debt issuance costs were approximately $670,000 and $270,000 for the years ended December 31, 2014 and 2013, respectively, and the amount was not significant in 2012.

 

The Prior Credit Facility required that we comply with certain covenants, including maintaining (i) an interest coverage ratio (as defined in the Prior Credit Facility) 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 Prior Credit 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 12 months basis. For the quarters ended September 30, 2014 and December 31, 2014, our leverage ratio exceeded 3.00 to 1.00 and therefore constituted events of default under the Prior Credit Agreement.

 

The Prior Credit Facility also required 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 Prior Credit Facility to extend the dates for such deliveries. Each such delivery, other than the delivery of our financial statements for the quarter ended June 30, 2014, was made within the applicable extension period.

 

The Prior Credit Facility required us to comply with the Indenture governing our Notes, and the Indenture requires us to timely file certain reports with the trustee. To the extent that any breach of the Indenture resulting from our delayed filing with the SEC of our 2013 Third Quarter Form 10-Q, 2013 Form 10-K and Form 8-K/A may have constituted events of default under the Prior Credit Agreement, we obtained waivers from the lenders. To the extent that any breach of the Indenture resulting from our delayed filing with the SEC of our 2014 First Quarter Form 10-Q and 2014 Second Quarter Form 10-Q may have constituted events of default under the Prior Credit Facility, we either did not have a waiver from the lenders or had a waiver that expired. On August 29, 2014, the administrative agent provided us with notice that we were in default under the Prior Credit Agreement as a result of our failure to timely deliver to the administrative agent our financial statements and a related compliance certificate for the quarter ended June 30, 2014, and because we were in default under the Indenture for failing to timely file the 2014 Second Quarter Form 10-Q with the trustee. On November 19, 2014, the administrative agent provided us with notice that we were in default under the Prior Credit Agreement because we had not provided the administrative agent with a compliance certificate relating to the quarter ended September 30, 2014. On November 26, 2014, the administrative agent provided us with notice that we were in default under the Prior Credit Agreement as a result of our not being in compliance with the leverage ratio requirements as of September 30, 2014 and as a result of our failure to maintain the leverage ratio for the fiscal quarter ended September 30, 2014.

 

As a result of the occurrence of such events of default, commencing on or about August 29, 2014, we were blocked from borrowing and obtaining letters of credit under the Prior Credit Facility.

 

4.

Restructuring Costs

 

During the years ended December 31, 2014, 2013 and 2012, the Company recorded restructuring charges of $10.3 million, $1.8 million and $4.1 million, respectively. The Company’s restructuring charges include severance and other employee termination costs, lease termination costs and other related costs, which are reported in the Restructuring line item in our consolidated statements of operations. The timing of associated cash payments depend upon the type of restructuring charge and can extend over multiple periods.

 

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). We have recognized restructuring costs to date of $4.1 million, of which $2.7 million related to employee termination benefits consisting of severance and other related employee costs and $1.4 million related to facility and other costs. The BreakingPoint Restructuring was substantially completed by the fourth quarter of 2012, and no significant further charges are expected.

 

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 at that time. We have recognized restructuring costs to date of $1.9 million which were primarily related to employee termination benefits consisting of severance and other employee related costs. The Test Restructuring was substantially completed by the fourth quarter of 2013, and no significant further charges are expected.

 

 

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 at that time. During 2014, we recognized total restructuring costs of $3.9 million, of which $2.4 million related to employee termination benefits consisting of severance and other related employee costs, $1.1 million related to costs required to terminate our lease in Israel, and approximately $337,000 for other related costs. The Net Optics Restructuring was substantially completed by the second quarter of 2014, and no significant further charges are expected.

 

During the third quarter of 2014, our management approved, committed to and implemented a company-wide restructuring initiative (“2014 Corporate Restructuring”) to restructure our operations to better align the Company’s operating costs with its business opportunities. The restructuring includes a reduction in force of approximately 96 positions across multiple business functions, which represented approximately 5% of our worldwide work force at that time. During 2014, we recognized total restructuring charges of $6.3 million, of which $4.2 million related to expenses for employee termination benefits, $2.0 million for facility related charges in Austin, Santa Clara, India and Romania, and approximately $122,000 for other related costs. The 2014 Corporate Restructuring was substantially completed by the fourth quarter of 2014, and no significant further charges are expected.

 

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

 

						BreakingPoint				Test				Net Optics				2014 Corporate
		Total				Restructuring				Restructuring				Restructuring				Restructuring
Accrual at December 31, 2011		$	-			$	-			$	-			$	-			$	-
Charges			4,077				4,077				-				-				-
Payments			(2,275	)			(2,275	)			-				-				-
Non-cash items			(776	)			(776	)			-				-				-
Accrual at December 31, 2012		$	1,026			$	1,026			$	-			$	-			$	-
Charges			1,840				58				1,782				-				-
Payments			(1,161	)			(474	)			(687	)			-				-
Non-cash items			(198	)			(198	)			-				-				-
Accrual at December 31, 2013			1,507				412				1,095				-				-
Charges			10,310				-				136				3,852				6,322
Payments			(9,288	)			(160	)			(1,231	)			(3,515	)			(4,382	)
Non-cash items			(6	)			(6	)			-				-				-
Accrual at December 31, 2014		$	2,523			$	246			$	-			$	337			$	1,940

 

At December 31, 2014, the remaining accrual related to our restructuring activities totaled $2.5 million and was included in Accrued expenses and other in our consolidated balance sheets. The remaining accrual primarily relates to severance, other employee related termination expenses, and lease termination costs, which are anticipated to be fully paid by the second quarter of 2015.

 

5.

Concentrations

 

Credit Risk

 

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade accounts receivable. We maintain our cash and cash equivalents with financial institutions that management deems reputable, and at times, cash balances may be in excess of FDIC insurance limits. We extend differing levels of credit to customers, typically do not require collateral, and maintain reserves for potential credit losses based upon the expected collectability of accounts receivable.

 

 

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):

 

		Year ended December 31,
		2014				2013				2012
Network Test Solutions		$	345,673			$	376,297			$	376,673
Network Visibility Solutions			118,785				90,959				36,761
Total		$	464,458			$	467,256			$	413,434

Significant Customers

 

For the year ended December 31, 2014, no customer comprised more than 10% of revenues. For the year ended December 31, 2013, two customers comprised more than 10% of total revenues. For the year ended December 31, 2012, only one customer comprised more than 10% of total revenues as follows:

 

		Year Ended December 31,
		2014				2013				2012
Customer A			*				10.6	%			13.5	%
Customer B			*				14.3	%			*

 

* Less than 10%

 

As of December 31, 2014 and 2013, no one customer had a receivable balance totaling more than 10% of total accounts receivable.

 

International Data

 

For the years ended December 31, 2014, 2013 and 2012, total international revenues as a percentage of total revenues based on customer location consisted of the following:

 

		Year Ended December 31,
		2014				2013				2012
International revenues			40.8	%			36.9	%			41.4	%

 

For the years ended December 31, 2014, 2013 and 2012, the percentage of total revenues from product shipments to Japan was as follows:

 

		Year Ended December 31,
		2014				2013				2012
Japan			*				*				10.6	%

 

* Less than 10%

 

 

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

 

		As of December 31,
		2014				2013
United States		$	24,697			$	22,614
Romania			6,035				4,715
India			3,857				5,300
Other			3,059				3,303
Total		$	37,648			$	35,932

 

6.

Selected Balance Sheet Data

 

Allowance for Doubtful Accounts

 

Activity in the allowance for doubtful accounts during the years presented is as follows (in thousands):

 

		December 31, 2014				December 31, 2013				December 31, 2012
Balance at beginning of year		$	840			$	1,436			$	1,747
Additions: charged to costs and expenses			275				125				131
Deductions: write-offs, net of recoveries			(104	)			(721	)			(442	)
Balance at end of year		$	1,011			$	840			$	1,436

 

Investments in Marketable Securities

 

Investments in marketable securities as of December 31, 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		$	42,289			$	9			$	(17	)		$	42,281
Corporate debt securities			37,476				41				(38	)			37,479
Total		$	79,765				50				(55	)		$	79,760

 

 

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 December 31, 2014 and 2013, the unrealized losses of our investment in available-for-sale securities that have been in a continuous unrealized loss position for more the 12 months or longer were insignificant. Unrealized losses related to these investments are due to interest rate fluctuations as opposed to changes in credit quality. In addition, we do not intend to sell and it is not more likely than not that we would be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. As a result, there is no other-than-temporary impairment for these investments at December 31, 2014.

 

 

The amortized cost and fair value of our investments at December 31, 2014, by contractual years-to-maturity, are as follows (in thousands):

 

		Amortized Cost				Fair Value
Due in less than 1 year		$	8,491			$	8,497
Due within 1-2 years			48,793				48,796
Due within 2-5 years			21,931				21,917
Due after 5 years			550				550
Total		$	79,765				79,760

 

Inventories

 

Inventories consisted of the following (in thousands):

 

		December 31, 2014				December 31, 2013
Raw materials		$	5,502			$	7,468
Work in process			18,047				15,166
Finished goods			21,277				24,502
Total		$	44,826			$	47,136

 

Property, Plant and Equipment, Net

 

Property, plant and equipment, net consisted of the following (dollars in thousands):

 

						December 31,				December 31,
	Useful Life					2014				2013
	(in years)
Development equipment		5				$	32,622			$	26,725
Demonstration equipment		2					27,888				25,934
Furniture and other equipment		5					20,540				18,413
Building and leasehold improvements	1	-	40				19,651				19,419
Computer software	3	-	5				18,429				16,085
Computer equipment		3					15,237				13,790
Total							134,367				120,366
Accumulated depreciation							(96,719	)			(84,434	)
Total						$	37,648			$	35,932

 

Accrued Expenses and Other 

 

Accrued expenses and other consisted of the following (in thousands):

 

		December 31,				December 31,
		2014				2013
Compensation and related expenses		$	9,853			$	16,025
Vacation			7,524				9,310
Other taxes			5,372				2,262
Commissions			4,966				5,179
Bonuses			3,851				6,789
Professional fees			2,780				2,812
Other			10,925				11,371
Total		$	45,271			$	53,748

  

 

7.

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 the 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 December 31, 2014 and 2013 are summarized below (in thousands):

 

		December 31, 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		$	267			$	267			$	—			$	—			$	30			$	30			$	—			$	—
Corporate debt securities			5,349				—				5,349				—				5,898				—				5,898				—
Short-term investments:
U.S. Treasury, government and agency debt securities			42,281				—				42,281				—				31,742				—				31,742				—
Corporate debt securities			37,479				—				37,479				—				19,765				—				19,765				—
Total financial assets		$	85,376				267				85,109			$	—			$	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.

 

The fair values of our money market funds, U.S. treasury, government and agency debt securities and corporate debt securities are based on quoted market prices as 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.

 

During 2013, we sold auction rate securities (“ARS”) that were classified as Level 3 financial assets.  These ARS had a par value of $4.4 million and the sales resulted in realized gains of $2.9 million, which were included within our Interest income and other, net line item on our consolidated statements of operations.

 

There were no transfers of assets between levels within the fair value hierarchy for the years ended December 31, 2014 and 2013, and there were no Level 3 assets held as of December 31, 2014 and 2013.

 

 

The following table summarizes the activity for the years ended December 31, 2014 and 2013 for our auction rate securities where fair value measurements are estimated utilizing Level 3 inputs (in thousands):

 

		Year Ended December 31,
		2014				2013
Beginning balance		$	-			$	3,119
Unrealized (gain) loss reclassified from/recorded in other comprehensive income			-				(2,299	)
Realized gain recorded in earnings			-				2,870
Sales			-				(3,690	)
Ending balance		$	—			$	—

 

There were no unrealized losses recorded in earnings for Level 3 assets still held at December 31, 2014 and 2013.

 

8.

Goodwill and Other Intangible Assets

 

The following table presents the 2013 and 2014 activity for our goodwill (in thousands):

 

Balance at January 1, 2013:		$	260,457
Purchase price allocation adjustment for Anue			(367	)
Purchase price allocation adjustment for BreakingPoint			(322	)
Acquisition of Net Optics			79,068
Balance at December 31, 2013			338,836
Purchase price allocation adjustment for Net Optics			(341	)
Other			378
Balance at December 31, 2014			338,873

 

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. 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, which were retrospectively adjusted to the acquisition date (i.e., December 5, 2013), 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 2 for additional information. 
  

During the fourth quarter of 2014, we identified a measurement period adjustment related to the Net Optics acquisition to finalize certain post-closing adjustments for the final amount of the tax reimbursements due to the sellers that were determined based upon the filing of certain pre-acquisition tax returns. This adjustment resulted in a decrease to goodwill of approximately $341,000 and is reflected in the December 31, 2014 goodwill balance in the above table. See Note 2 for additional information.
 

We have not had any historical goodwill impairment charges.

 

The following table presents our purchased intangible assets (in thousands) as of December 31, 2014:

 

		Weighted Average Useful Life				Gross				Accumulated Amortization				Net
		(in years)
Other intangible assets:
Technology			5.5			$	185,665			$	(106,953	)		$	78,712
Customer relationships			6.0				71,700				(40,938	)			30,762
Service agreements			6.4				30,100				(8,577	)			21,523
Trademark			5.1				11,300				(5,033	)			6,267
Non-compete agreements			4.0				8,000				(3,641	)			4,359
Other			4.2				4,883				(1,398	)			3,485
Total						$	311,648			$	(166,540	)		$	145,108

  

 

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

 

		Weighted Average Useful Life				Gross				Accumulated Amortization				Net
		(in years)
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
Trademark			5.1				11,300				(3,066	)			8,234
Non-compete agreements			4.1				9,000				(2,545	)			6,455
Other			3.7				4,211				(1,043	)			3,168
Total						$	316,788			$	(126,839	)		$	189,949

 

The estimated future amortization expense of purchased intangible assets as of December 31, 2014 is as follows (in thousands):

 

2015		$	42,280
2016			39,006
2017			31,896
2018			21,428
2019			7,041
Thereafter			3,457
Total		$	145,108

 

9.

Income Taxes

 

The components of income before income taxes were (in thousands):

 

		Year Ended December 31,
		2014				2013				2012
U.S.		$	(53,850	)		$	(5,501	)		$	20,418
Foreign			1,153				16,303				(1,051	)
Total		$	(52,697	)		$	10,802			$	19,367

 

The U.S. pre-tax income was significantly lower in 2014 when compared to 2013 due to a decline in revenues and an increase in operating expenses, including expenses related to restructuring activities and internal investigations, shareholder litigation and related matters. 

 

Income tax (benefit) expense consisted of the following (in thousands):

 

		Year Ended December 31,
		2014				2013				2012
Current:
Federal		$	(372	)		$	2,920			$	9,145
State			1,111				756				2,387
Foreign			2,538				1,920				4,735
Deferred:
Federal			(12,479	)			(9,286	)			(27,910	)
State			(1,916	)			(1,342	)			(10,932	)
Foreign			13				3,964				(3,518	)
Income tax benefit		$	(11,105	)		$	(1,068	)		$	(26,093	)

  

 

The net effective income tax rate differed from the federal statutory income tax rate as follows (dollars in thousands):

 

		2014				2013				2012
Federal statutory expense		$	(18,445	)		$	3,779			$	6,779
State taxes, net of federal benefit			(805	)			(836	)			(8,828	)
Research and development credits			(1,585	)			(5,128	)			-
Domestic production deduction			-				(499	)			(826	)
Foreign branch losses			(1,213	)			-				-
Stock-based compensation			1,700				1,750				1,738
Foreign rate differential			1,633				(2,935	)			(4,386	)
Acquisition related costs			-				-				991
Deemed Dividend			-				817				-
Inter-company royalty			3,168				3,932				-
Inter-company transfer			1,841				-				-
Valuation allowance			-				1,111				(22,578	)
Uncertain tax positions			1,497				(2,106	)			-
Other			1,104				(953	)			1,017
Income tax benefit			(11,105	)			(1,068	)			(26,093	)
Net effective income tax rate			21.1	%			(9.9	%)			(134.7	%)

 

During 2014, the Company’s lower effective tax rate of 21.1% when compared to the federal statutory income tax rate was mainly due to increases to unrecognized tax benefits, and intercompany activity such as royalties and transfers. During 2013, the Company’s lower effective tax rate of (9.9%) when compared to the federal statutory income tax rate was mainly due to the R&D credits generated during 2013, benefit recorded for the 2012 Federal R&D credit during the first quarter of 2013 as a result of the statutory extension of the credit during 2013, and the release of reserves related to uncertain tax benefits. The Company’s lower effective tax rate in 2012 of (134.7%) when compared to the federal statutory income tax rate was mainly the result of the Company releasing valuation allowances against its U.S. deferred tax assets and tax benefits received as a result of the Company’s operations in lower tax foreign jurisdictions.

 

The primary components of temporary differences that gave rise to deferred taxes were as follows (in thousands):

 

		December 31, 2014				December 31, 2013
Deferred tax assets:
Allowance for doubtful accounts		$	323			$	6
Research and development credit carryforward			13,791				18,375
Foreign tax credit carryforward			455				455
Deferred revenue			3,091				2,942
Stock-based compensation			9,712				9,698
Inventory adjustments			8,805				6,238
Net operating loss carryforward			6,202				5,585
Realized loss on investments			3,211				3,211
Accrued liabilities and other			4,575				4,897
			50,165				51,407
Valuation allowance			(4,358	)			(4,144	)
			45,807				47,263
Deferred tax liabilities:
Depreciation and amortization			(6,758	)			(546	)
Intercompany royalty			(13,081	)			(14,259	)
Net deferred tax assets		$	25,968			$	32,458

 

 

As of December 31, 2014 and 2013, current deferred tax assets totaled $15.5 million and $14.0 million, respectively and were included within the Prepaid Expenses and Other Current Assets line item in our consolidated balance sheets. As of December 31, 2014 and 2013, long-term deferred tax assets totaled $11.9 million and $19.8 million, respectively, and were included as part of the Other Assets line item in our consolidated balance sheets.

 

As of December 31, 2014 and 2013, long-term deferred tax liabilities totaled $1.4 million in both years and were included within the Other Liabilities line item in our consolidated balance sheets.

 

The realizability of deferred income tax assets is based on a more likely than not standard.  If it is determined that it is more likely than not that deferred income tax assets will not be realized, a valuation allowance must be established against the deferred income tax assets. As of December 31, 2014, the Company had a valuation allowance of $3.2 million for its U.S. capital loss carryovers and $1.2 million against its Australian net operating loss carryforwards.

 

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 positive and negative evidence in assessing the realizability of our deferred tax assets.

 

For the years ended December 31, 2014, 2013 and 2012, we recorded changes in our valuation allowance of approximately $214,000, $2.2 million, and ($34.8) million, respectively.

 

As of December 31, 2014, we have gross federal and state research and development credit carryforwards of $20.1 million and $18.0 million, respectively. The federal carryovers begin to expire in 2021, while the state carryovers have an indefinite carryover period.

 

At December 31, 2014, we have gross federal and state net operating loss (“NOLs”) carryforwards of $13.6 million and $10.3 million, respectively.  The federal NOLs expire beginning 2025, and the state NOLs begin to expire in 2024.  Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards related to acquired corporations based on a statutory rate of return (usually the “applicable federal funds rate” as defined in the Internal Revenue Code) and the value of the corporation at the time of a “change in ownership” as defined by Section 382.  We estimate that our 2014 limitation under Section 382 of the Internal Revenue Code is approximately $2.4 million.

 

Cumulative undistributed earnings of foreign subsidiaries for which no deferred income taxes have been provided approximated $83.9 million and $91.8 million at December 31, 2014 and 2013, respectively. No provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely outside of the U.S. Under current tax laws and regulations, if our cash, cash equivalents or investments associated with the subsidiaries’ undistributed earnings were distributed to the United States in the form of dividends or otherwise, it would be included in our U.S. taxable income and we would be subject to additional U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

 

At December 31, 2014, we had gross unrecognized tax benefits of $19.1 million. Of this total, $3.8 million (net of the federal benefit on state issues) would affect our effective tax rate if recognized.  We classify liabilities for unrecognized tax benefits for which we do not anticipate payment or receipt of cash within one year in noncurrent other liabilities.

 

We recognize interest and penalties related to uncertain tax positions in income tax expense.  During the years ended December 31, 2014, 2013, and 2012, we recognized approximately $13,000, $49,000, and $63,000, net of federal benefit, of interest within our statements of operations.  We had accrued interest, net of federal benefit, of approximately $179,000 and $172,000 as of December 31, 2014 and December 31, 2013 respectively.  We file income tax returns in the U.S. federal jurisdiction and in various state and foreign jurisdictions.  With few minor exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in material jurisdictions for the tax years ended prior to 2007. The U.S. Internal Revenue Service is currently examining our 2009 through 2012 federal income tax returns. We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.

 

 

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits is as follows (in thousands):

 

		2014				2013				2012
Unrecognized Tax Benefits - Beginning balance		$	16,766			$	14,454			$	13,232
Acquired unrecognized tax benefits			-				-				300
Gross increases – Tax positions taken in prior period			417				1,364				-
Gross decreases – Tax positions taken in prior period			(74	)			(264	)			-
Gross increases – Tax positions taken in current period			2,167				2,757				1,834
Lapse of statute of limitations			(142	)			(1,545	)			(912	)
Unrecognized Tax Benefits – ending balance		$	19,134			$	16,766			$	14,454

 

At December 31, 2014, we expect approximately $734,000 in reductions to our recorded liability for unrecognized tax benefits to occur over the next 12 months.

 

10.

Commitments and Contingencies

 

We lease our facilities under non-cancelable operating leases for varying periods through May 2023, excluding options to renew. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. The following are the future minimum commitments under these leases (in thousands):

 

Year Ending December 31,*
2015		$	10,689
2016			8,995
2017			6,995
2018			6,658
2019			6,207
Thereafter			12,831
Total		$	52,375

 

*Minimum payments have not been reduced by minimum sublease rentals of $1.0 million due in the future under non-cancelable subleases.

 

Rent expense for the years ended December 31, 2014, 2013 and 2012 was approximately $13.7 million, $9.9 million and $8.9 million, respectively.

 

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, Victor 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 March 24, 2014, following a proceeding to select a lead plaintiff in the matter, the court issued an 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.

 

On July 18, 2014, all named defendants moved to dismiss the amended complaint for failure to state a claim under the Federal Rules of Civil Procedure and the Private Securities Law Reform Act of 1995 (“PSLRA”). After briefing and a hearing on October 6, 2014, the court issued an order dismissing the amended complaint in its entirety without prejudice. The court gave the Oklahoma Group 30 days in which to file an amended complaint. The Oklahoma Group thereafter filed an amended complaint, and the named defendants have moved to dismiss that amended complaint. A hearing is scheduled before the court on the motions to dismiss on April 13, 2015.

 

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. No liability has been accrued in the financial statements related to this matter.

 

Shareholder Derivative Action

 

A consolidated shareholder derivative action, captioned In re Ixia Shareholder Derivative Litigation, is pending in the U.S. District Court for the Central District of California. This action is the consolidation of two lawsuits, namely: (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. Both were filed in the U.S. District Court for the Central District of California in May 2014.

 

Co-lead plaintiffs Erie County Employees’ Retirement System and Colleen Witmer filed a consolidated complaint on September 2, 2014. The consolidated 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 individual 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 and declaratory relief.

 

On October 15, 2014, the Company, on whose behalf the derivative action claims are purportedly brought, moved 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. The individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. Before any ruling by the court on those motions, the plaintiffs filed an amended consolidated complaint on January 26, 2015. On March 12, 2015, the Company filed a motion to dismiss the amended consolidated complaint on the same grounds as it had set forth with respect to the first consolidated complaint, and the individual defendants joined in that motion and also filed motions to dismiss the claims against them for failure to state a claim. A hearing on these motions is scheduled for June 8, 2015.

 

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. No liability has been accrued in the financial statements related to this matter.

 

 

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. The SEC also subsequently issued a subpoena to the Company seeking certain additional documents and has issued subpoenas to certain of the Company’s current and former employees seeking certain documents and their testimony. 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 continuing to cooperate fully with the SEC in this matter. The Company cannot predict the duration, scope or outcome of the SEC’s investigation.

 

Indemnifications

 

In the normal course of business, we provide certain indemnifications, commitments and guarantees of varying scope to customers, including against claims of intellectual property infringement made by third parties arising from the use of our products. We also have certain obligations to indemnify our officers, directors and employees for certain events or occurrences while the officer, director or employee is or was serving at our request in such capacity. The duration of these indemnifications, commitments and guarantees varies and in certain cases, is indefinite. Many of these indemnifications, commitments and guarantees do not provide for any limitation of the maximum potential future payments that we could be obligated to make. However, our director and officer insurance policy may enable us to recover a portion of any future payments related to our officer, director or employee indemnifications. Historically, costs related to these indemnifications, commitments and guarantees have not been significant. With the exception of the product warranty accrual associated with our initial standard warranty (see Note 1 for additional information), no liabilities have been recorded for these indemnifications, commitments and guarantees.

 

11.

Shareholders’ Equity

 

Stock Award Plans

 

Amended and Restated 1997 Equity and Incentive Plan

 

Our Amended and Restated 1997 Equity and Incentive Plan, as amended (the “1997 Plan”), provides for the issuance of share-based awards to our eligible employees and consultants. The share-based awards may include incentive stock options (“ISO”), non-statutory stock options, restricted stock units (“RSU”) or restricted stock awards. Options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding 10 years from the date of grant. The exercise price for options granted under the 1997 Plan may not be granted at less than 100% of the fair market value of our Common Stock on the date of grant (110% for ISOs granted to an employee who owns more than 10% of the voting shares of the outstanding stock). Options generally vest over a four-year period. In the event the holder ceases to be employed by us, all unvested options are forfeited and all vested options may be exercised within a period of up to 30 days after the optionee’s termination for cause, up to 90 days after termination other than for cause or as a result of death or disability, or up to 180 days after termination as a result of disability or death. The 1997 Plan terminated in May 2008 and as such, no shares are available for future grant. As of December 31, 2014, 66,557 awards remained outstanding under the 1997 Plan.

 

Second Amended and Restated Ixia 2008 Equity Incentive Plan

 

Our Second Amended and Restated Ixia 2008 Equity Incentive Plan, as amended (the “2008 Plan” or the “Plan”), provides for the issuance of share-based awards to our eligible employees, directors and consultants. The share-based awards may include ISOs, non-statutory stock options, stock appreciation rights, RSU or restricted stock awards. Options become exercisable over a vesting period as determined by the Board of Directors and expire over terms not exceeding 7 years from the date of grant. The exercise price for options granted under the 2008 Plan may not be granted at less than 100% of the fair market value of our Common Stock on the date of grant (110% for ISOs granted to an employee who owns more than 10% of the voting shares of the outstanding stock). Options generally vest over a four-year period. In the event the holder ceases to be employed by us, all unvested options are forfeited and all vested options may be exercised within a period of up to 90 days after termination other than (i) for termination for cause for which the vested options are forfeited on the termination date or (ii) as a result of death or disability for which vested options may be exercised for up to 180 days after termination. The 2008 Plan will terminate in May 2018, unless terminated sooner by the Board of Directors.

 

 

In June 2013, our shareholders approved the Second Amended and Restated Ixia 2008 Equity Incentive Plan, which resulted in amendments to our Amended and Restated Ixia 2008 Equity Incentive Plan, as amended, which include the following:

 

●

Increase in Share Reserve. Increased the total number of shares of our common stock available for future grants by 9.8 million shares for a total of 29.0 million shares of our common stock authorized and reserved over the term of the Plan, of which 10.8 million shares were available for future grant as of December 31, 2014.

 

●

Types of Awards. Added cash awards to the types of awards that may be granted under the Plan, including performance-based incentives that are intended to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).

 

●

Award Limits. Added (i) a limit on the total number of shares (i.e., 1,000,000) subject to options and share appreciation rights granted to an eligible participant in any calendar year, (ii) with respect to performance-based awards that are intended to comply with the exception under Section 162(m) of the Code, limits on the total number of shares (i.e., 1,000,000) subject to RSUs and restricted stock awards that an individual may earn over a 12-month period and on the total dollar amount (i.e., $2,000,000) subject to cash awards that an individual may earn over a 12-month period, and (iii) a limit (i.e., $500,000) on the total dollar value of equity and cash awards that may be granted to a non-employee director in any calendar year.

 

The Plan also provides for the following:

 

●

Shares Not Available for Awards. None of the following will be added to the shares available for awards under the Plan: (i) shares tendered by a participant or withheld by us in payment of the exercise price of an option, or to satisfy any tax withholding obligation with respect to options, and (ii) shares reacquired by us on the open market using cash proceeds from the exercise of options.

 

●

Acquisitions and Combinations. In connection with acquisitions and combinations by us, we may grant under the Plan awards in substitution or exchange for awards or rights to future awards previously granted by the acquired or combined company without reducing the shares available under the Plan. Any shares subject to but not issued under any such substitute awards would not become available for other awards granted under the Plan. Also, in the event that a company acquired by us or with which we combine has a pre-existing plan approved by its shareholders that was not adopted in contemplation of the acquisition or combination, available shares under that plan may be used for Plan awards without reducing the shares available under the Plan. Any such awards may only be made to persons who were not eligible to receive awards under the Plan prior to the acquisition or combination and may not be made after the date that awards could have been made under the terms of the pre-existing plan.

 

The following table summarizes stock option activity for the year ended December 31, 2014 (in thousands, except per share and contractual life data):

 

		Number				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life				Aggregate Intrinsic
		of Options				Per Share				(in years)				Value
Outstanding as of December 31, 2013			4,998			$	13.49				4.37			$	8,932
Granted			1,892				9.85
Exercised			(392	)			8.22
Forfeited/canceled			(1,102	)			15.42
Outstanding as of December 31, 2014			5,396				12.11				4.62				7,075
Vested and expected to vest as of December 31, 2014			5,194				12.17				4.56				6,761
Exercisable as of December 31, 2014			3,097			$	12.66				3.46			$	4,043

 

 

The weighted average grant-date fair value of options granted for the years ended December 31, 2014, 2013 and 2012 was $3.36, $6.92 and $5.89 per share, respectively. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $1.1 million, $12.5 million and $14.6 million, respectively. As of December 31, 2014, the remaining unrecognized compensation expense related to stock options is expected to be recognized over a weighted average period of 1.55 years.

 

The following table summarizes RSU activity for the year ended December 31, 2014 (in thousands, except per share data):

		Number of Awards				Weighted Average Grant Date Fair Value Per Share
Outstanding as of December 31, 2013			1,750			$	15.43
Awarded			1,097				10.04
Vested			(685	)			13.76
Forfeited/canceled			(239	)			14.85
Outstanding as of December 31, 2014			1,923			$	13.02

 

The fair value of RSUs vested during the year ended December 31, 2014 was $7.4 million. The weighted average remaining contractual life and expense recognition period of the outstanding RSUs as of December 31, 2014 was 1.43 years.

  

Employee Stock Purchase Plan

 

During 2010, our shareholders approved the 2010 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan permits eligible employees to purchase Common Stock, subject to limitations as set forth in the Purchase Plan, through payroll deductions which may not exceed the lesser of 20% of an employee’s compensation or $21,250 per annum.. The Purchase Plan is implemented in a series of consecutive, overlapping 24-month offering periods, with each offering period consisting of four six-month purchase periods. Offering periods begin on the first trading day on or after May 1 and November 1 of each year. During each 24-month offering period under the Purchase Plan, participants accumulate payroll deductions which on the last trading day of each six-month purchase period within the offering period are applied toward the purchase of shares of our Common Stock at a purchase price equal to 85% of the lower of (i) the fair market value of a share of our Common Stock as of the first trading day of the 24-month offering period and (ii) the fair market value of a share of Common Stock on the last trading day of the six-month purchase period. The first 24-month offering period under the Purchase Plan began on November 1, 2010 and ended on October 31, 2012. The Purchase Plan provides the potential for an automatic annual increase of up to 500,000 in the number of shares reserved for issuance under the Purchase Plan on May 1 of each year during the ten-year term of the plan. The Purchase Plan will terminate in March 2020, unless it is earlier terminated by the Board of Directors.

 

In June 2013, our shareholders approved a 2,000,000 share increase in the number of shares of our common stock authorized and reserved for issuance under our Purchase Plan. During May 2013, the number of shares authorized and reserved for issuance under the Purchase Plan was also increased by an additional 500,000 shares pursuant to the automatic annual increase provision of the Purchase Plan. 

 

During November 2014, the number of shares authorized and reserved for issuance under the Purchase Plan was increased by an additional 500,000 shares pursuant to the automatic annual increase provision of the Purchase Plan. 

 

We have reserved a total of 4,300,000 shares of Common Stock for issuance under the Purchase Plan, of which 1,978,784 shares are available for future issuance for the existing and future offering periods. For the years ended December 31, 2014, 2013 and 2012, approximately 685,000, 918,000 and 562,000 shares, respectively, were issued under the Purchase Plan.

  

 

Stock-Based Compensation Expense

 

The Black-Scholes option-pricing model is used to calculate the estimated fair value of share-based awards for options and RSUs on the respective dates of grant for accounting purposes using the following weighted average assumptions:

 

		Year Ended December 31,
		2014				2013				2012
Expected lives (in years)			4.0				3.6				4.1
Risk-free interest rates			1.2	%			0.6	%			0.6	%
Dividend yield			0.0	%			0.0	%			0.0	%
Expected volatility			46.7	%			48.9	%			51.8	%

 

The Black-Scholes option-pricing model is used to calculate the estimated fair value of share-based awards for our Purchase Plan for accounting purposes using the following weighted average assumptions:

 

		Year Ended December 31,
		2014				2013
Expected lives (in years)			1.20				1.25
Risk-free interest rates			0.2	%			0.9	%
Dividend yield			0.0	%			0.0	%
Expected volatility			32.9	%			48.4	%

 

Expected lives (in years) - The expected life was determined by estimating the expected option life, using historical data.

 

Risk-free interest rates - The risk-free interest rate for periods equal to the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

Dividend yield - We have never declared or paid cash dividends on our Common Stock and do not anticipate paying any dividends in the foreseeable future.

 

Volatility - The stock volatility is determined based on the weighted average historical weekly price changes of our common stock over the expected option term.

 

Our Stock based compensation by award type is as follows (in thousands):

 

		Year Ended December 31,
		2014				2013
Options		$	3,934			$	7,435
RSUs			9,328				8,985
Common shares issued under the Purchase Plan			3,257				4,342
Total Stock Based Compensation Expense		$	16,519			$	20,762

 

The aggregate balance of gross unrecognized stock-based compensation to be expensed in the years 2015 through 2018 related to all unvested share-based awards as of December 31, 2014 was $19.8 million. There was no capitalized stock-based compensation expense for any of the periods presented.

 

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 consolidated financial statements and, due to such forfeiture provisions, we have for accounting purposes deemed such equity awards to have been automatically forfeited in 2013 and subsequently re-granted in either 2013 or 2014, as applicable. As a result, we recorded a reversal of stock-based compensation expenses for the deemed cancellation of $4.0 million for the quarter ended June 30, 2013 and additional stock-based compensation expenses for the deemed 2013 re-grant of certain of such awards of $3.7 million for the year ended December 31, 2013.

 

On June 24, 2014, certain performance-based equity awards that, for accounting purposes, were deemed to have been automatically forfeited in 2013 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 expense for all of the deemed re-grants was approximately $908,000 for year ended December 31, 2014.

 

 

Accumulated Other Comprehensive Loss

 

 

The following table summarizes, as of each balance sheet date, the changes in our accumulated other comprehensive loss, 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, 2012		$	2,070			$	219			$	2,289
Other comprehensive income (loss) before reclassifications			702				(638	)			64
Amounts reclassified from accumulated other comprehensive loss (b)			(2,730	)			-				(2,730	)
Net current-period other comprehensive loss			(2,028	)			(638	)			(2,666	)
Ending balance, December 31, 2013		$	42			$	(419	)		$	(377	)
Other comprehensive loss before reclassifications			(22	)			(342	)			(364	)
Amounts reclassified from accumulated other comprehensive loss (b)			(52	)			-				(52	)
Net current-period other comprehensive loss			(74	)			(342	)			(416	)
Ending balance, December 31, 2014		$	(32	)			(761	)			(793	)

 

(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 consolidated statements of operations.

 

Other Comprehensive (Loss) Income

 

We sold available-for-sale securities in the year ended December 31, 2014 which resulted in a gross reclassification from accumulated other comprehensive (loss) income for realized gains of approximately $85,000, which was included within our Interest income and other, net line item on our consolidated statements of operations. This realized gain, along with the related tax impact for the year ended December 31, 2014 of approximately $33,000 was reclassified from Accumulated other comprehensive (loss) income.

 

Prior to the reclassification for the sale of available-for-sale securities, we had a net unrealized loss of approximately ($36,000) for the year ended December 31, 2014. The tax impact for the unrealized gain was an expense of approximately $14,000 for the year ended December 31, 2014.

 

We sold available-for-sale securities in the year ended December 31, 2013 which resulted in a gross reclassification from accumulated other comprehensive income for realized gains of $4.4 million, which was included within our Interest income and other, net line item on our consolidated statements of operations. This realized gain, along with the related tax impact for the year ended December 31, 2013 of $1.7 million was reclassified from Accumulated other comprehensive income.

 

Prior to the reclassification for the sale of available-for-sale securities, we had a net unrealized gain of $1.1 million for the year ended December 31, 2013. The tax impact for the unrealized gain was an expense of approximately $447,000 for the year ended December 31, 2013.

 

12.

Retirement Plan

 

We provide a 401(k) Retirement Plan (the “Plan”) to eligible employees who may authorize contributions up to IRS annual deferral limits to be invested in employee elected investment funds. As determined annually by the Board of Directors, we may contribute matching funds of 50% of the employee contributions up to $2,500. These matching contributions vest based on the employee’s years of service with us. For the years ended December 31, 2014, 2013 and 2012, we expensed and made contributions to the Plan in the amount of $1.6 million, $1.5 million and approximately $870,000, respectively.

 

 

13.

Earnings Per Share

 

The following table sets forth the computation of basic and diluted (loss) earnings per share for the periods indicated (in thousands, except per share data):  

 

		Year Ended December 31,
		2014				2013				2012
Basic Presentation
Numerator for basic (loss) earnings per share:
Net (loss) income		$	(41,592	)		$	11,870			$	45,460
Denominator for basic (loss) earnings per share:
Weighted average common shares outstanding			77,629				75,757				72,183
Basic (loss) earnings per share		$	(0.54	)		$	0.16			$	0.63
Diluted presentation:
Numerator for diluted (loss) earnings per share:
Net (loss) income		$	(41,592	)		$	11,870			$	45,460
Interest expense on convertible senior notes, net of tax							-				4,399
Net (loss) income used for diluted (loss) earnings per share		$	(41,592	)		$	11,870			$	49,859
Denominator for dilutive (loss) earnings per share:
Weighted average common shares outstanding			77,629				75,757				72,183
Effect of dilutive securities:
Stock options and other share-based awards			-				1,756				2,031
Convertible senior notes			-				-				10,291
Dilutive potential common shares			77,629				77,513				84,505
Diluted (loss) earnings per share		$	(0.54	)		$	0.15			$	0.59

 

The diluted loss per share computation for the year ended December 31, 2014 excluded (i) the weighted average number of shares underlying our outstanding convertible senior notes of 10.3 million shares, as they are considered anti-dilutive because the related interest expense on a per common share “if converted” basis exceeds basic (loss) earnings per share, and (ii) the weighted average number of shares underlying our employee stock options and other share-based awards of 4.7 million shares, which were anti-dilutive because the Company reported a net loss for the year ended December 31, 2014.

 

The diluted earnings per share computation for the year ended December 31, 2013, excluded (i) the weighted average number of shares underlying our outstanding convertible senior notes of 10.3 million shares, as they 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, which were anti-dilutive because, in general, the exercise price of these awards exceeded the average closing sales price per share of our common stock.

 

The diluted earnings per share computation for the year ended December 31, 2012, excluded the weighted average number of shares underlying our employee stock options and other share-based awards of 2.3 million shares, which were anti-dilutive because, in general, the exercise price of these awards exceeded the average closing sales price per share of our common stock.

 

 

14.

Quarterly Financial Summary (Unaudited)

 

		For the three months ended
		2014																2013
		Dec. 31				Sep. 30				Jun. 30				Mar. 31				Dec. 31(2)				Sep. 30				Jun. 30				Mar. 31
(in thousands)
Consolidated Statement of Operations Data:
Total revenues		$	127,206			$	113,997			$	109,522			$	113,733			$	120,629			$	113,164			$	112,004			$	121,459
Total cost of revenues (1)			36,080				34,647				35,691				37,483				36,300				30,997				30,829				30,926
Gross profit			91,126				79,350				73,831				76,250				84,329				82,167				81,175				90,533
Income (loss) before income taxes			68				(10,364	)			(20,282	)			(22,119	)			(4,842	)			4,225				4,387				7,032
Net income (loss)			286				(7,329	)			(15,077	)			(19,472	)			(3,069	)			4,102				3,017				7,820
Earnings (loss) per share:
Basic		$	0.00			$	(0.09	)		$	(0.19	)		$	(0.25	)		$	(0.04	)		$	0.05			$	0.04			$	0.10
Diluted		$	0.00			$	(0.09	)		$	(0.19	)		$	(0.25	)		$	(0.04	)		$	0.05			$	0.04			$	0.10

 

(1)

For the quarters ended December 31, 2014, September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, September 30, 2013, June 30, 2013, March 31, 2013, total cost of revenues include charges related to amortization of intangible assets of $6.4 million, $6.4 million, $7.9 million, $8.1 million, $6.7 million, $6.4 million, $6.4 million, $6.5 million, respectively.

  

(2)	During the quarter ended December 31, 2013, we completed the acquisition of Net Optics for approximately $187.4 million.

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
10.1.9		Eighth Amendment and Consent to the Credit Agreement, dated as of December 12, 2014, by and 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
10.9*		Compensation of Named Executive Officers as of December 31, 2014
10.21*		Employment Separation Agreement effective as of June 30, 2014 between the Company and Thomas B. Miller
10.23		Corrective Amendment to Credit Agreement effective as of March 20, 2015 between the Company and Silicon Valley Bank, as Administrative Agent
21.1		Subsidiaries of the Registrant
23.1		Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm
23.2		Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm
31.1		Certification of Chief Executive Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer of Ixia pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certifications of Chief Executive Officer and 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
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Document

 

---

 

*	Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.

 

 

113

 

Exhibit 10.1.9

 

EIGHTH AMENDMENT TO CREDIT AGREEMENT AND CONSENT

 

THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT AND CONSENT (this “Amendment”), effective as of December 12, 2014 (the “Effective Date”), is by and among IXIA, a California corporation (the “Borrower”), the Guarantors party hereto, the Lenders party hereto and BANK OF AMERICA, N.A., as administrative agent (in such capacity, the “Administrative Agent”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement (as hereinafter defined).

 

W I T N E S S E T H

 

WHEREAS, the Borrower, the Subsidiaries of the Borrower from time to time party thereto (the “Guarantors”), certain banks and financial institutions from time to time party thereto (the “Lenders”) and Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer, are parties to that certain Credit Agreement dated as of December 21, 2012 (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”);

 

WHEREAS, the Borrower has entered into that certain Indenture, dated as of December 7, 2010, between Borrower and Wells Fargo Bank, National Association, as trustee, pursuant to which the Borrower has issued certain unsecured 3.00% Convertible Senior Notes due 2015, which notes are due on December 15, 2015 (the “Existing Convertible Notes”);

 

WHEREAS, the Loan Parties have requested that the Required Lenders (a) permit the Company to deliver, pursuant to the provisions of an exchange agreement or agreements to be entered into between certain holders (or their representatives) of Existing Convertible Notes (the “Holders”) new unsecured convertible senior notes of the Borrower (the “New Convertible Notes”) in exchange for Existing Convertible Notes (the “Exchanged Convertible Notes”) to be issued pursuant to a new Indenture to be entered into between the Borrower and Wells Fargo Bank, National Association (or such other financial institution as may be selected the Borrower), as trustee (the “New Convertible Note Trustee”), which New Convertible Notes will (i) be in principal amounts that are equal to the principal amounts of the Exchanged Convertible Notes (ii) have (A) an interest (i.e., coupon) rate that is higher than the interest rate on the Exchanged Convertible Notes, (B) a maturity date that is subsequent to the maturity date of the Exchanged Convertible Notes and (C) such other terms as may be agreed between the Borrower and the Holders or between the Borrower and the New Convertible Note Trustee, as applicable (the “Convertible Note Exchange”) and (b) amend certain provisions of the Credit Agreement; and

 

WHEREAS, the Lenders party hereto, constituting the Required Lenders, are willing to consent to the Convertible Note Exchange and amend the Credit Agreement, in each case, in accordance with and subject to the terms and conditions set forth herein.

 

NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

 

 

ARTICLE I
AMENDMENT

 

1.1     Amendments to Section 1.01.

 

(a)     The following definitions appearing in Section 1.01 of the Credit Agreement are hereby amended and restated in their entirety as follows:

 

“Convertible Notes” means the 3.00% unsecured convertible notes of the Borrower due December 15, 2015 in an aggregate principal amount of $200,000,000 issued and sold pursuant to the Convertible Note Documents, as such convertible notes may be exchanged as contemplated by the Eighth Amendment.

 

“Convertible Note Documents” means the Indenture, dated as of December 7, 2010, between Borrower and Wells Fargo Bank, National Association, the Convertible Notes and all other agreements, instruments and other documents pursuant to which the Convertible Notes have been or will be issued or otherwise setting forth the terms of the Convertible Notes, as such documents may be amended, restated, supplemented or replaced as contemplated by the Eighth Amendment.

 

“Maturity Date” means January 31, 2015.

 

(b)     The following definition is hereby added to Section 1.01 of the Credit Agreement in alphabetical order as follows:

 

“Eighth Amendment” shall mean that certain Eighth Amendment to Credit Agreement and Consent, dated December 12, 2014.

 

(c)     The definition of “Springing Maturity Date” is hereby deleted from Section 1.01 of the Credit Agreement.

 

1.2     Amendment to Section 6.17. Section 6.17 of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

 

6.17     [Reserved].

 

1.3     Amendment to Section 7.06(b). Section 7.06(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

 

(b)     [reserved];

 

ARTICLE II
CONSENT

 

2.1     Consent to the Convertible Note Exchange. Subject to the terms and conditions set forth herein and upon the effectiveness of this Amendment, the Administrative Agent and the Lenders party hereto, constituting the Required Lenders, hereby consent to the Convertible Note Exchange notwithstanding anything in Section 7.15 of the Credit Agreement or in any other Loan Document to the contrary. The consent set forth in this Section 2.1 shall be effective only to the extent specifically set forth herein and shall not: (a) be construed as a waiver of any breach, Default or Event of Default nor as a waiver of any breach, Default or Event of Default of which the Lenders have not been informed by the Loan Parties, (b) affect the right of the Lenders to demand compliance by the Loan Parties with all terms and conditions of the Loan Documents, except as specifically modified or waived by this Amendment, (c) be deemed a waiver of any action or future action on the part of the Loan Parties requiring the Lenders’ or the Required Lenders’ consent or approval under the Loan Documents, or (d) be deemed or construed to be a waiver or release of, or a limitation upon, the Administrative Agent’s or the Lenders’ exercise of any rights or remedies under the Credit Agreement or any other Loan Document, whether arising as a consequence of any Default or Event of Default which may now exist or otherwise, all such rights and remedies are hereby being expressly reserved.

 

 

ARTICLE III
CONDITIONS TO LENDERS’ OBLIGATIONS

 

3.1     Closing Conditions. This Amendment shall become effective as of the Effective Date upon satisfaction (or waiver) of the following conditions:

 

(a)     Executed Amendment. The Administrative Agent shall have received a copy of this Amendment duly executed by each of the Loan Parties, the Lenders constituting the Required Lenders and the Administrative Agent.

 

(b)     Default. Other than as previously disclosed to and acknowledged by the Administrative Agent, no Default or Event of Default shall exist.

 

(c)     Fees and Expenses. The Administrative Agent shall have received from the Borrower such fees and expenses that are payable by Borrower in connection with the consummation of the transactions contemplated hereby.

 

(d)     Miscellaneous. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall be reasonably satisfactory in form and substance to the Administrative Agent and its counsel.

 

ARTICLE IV
MISCELLANEOUS

 

4.1     Amended Terms. On and after the Effective Date, all references to the Credit Agreement in each of the Loan Documents shall hereafter mean the Credit Agreement as amended by this Amendment. Except as specifically amended hereby or otherwise agreed, the Credit Agreement is hereby ratified and confirmed and shall remain in full force and effect according to its terms.

 

4.2     Representations and Warranties of Loan Parties. Each of the Loan Parties represents and warrants, as of the Effective Date, as follows:

 

(a)     It has taken all necessary action to authorize the execution, delivery and performance of this Amendment.

 

(b)     This Amendment has been duly executed and delivered by such Person and constitutes such Person’s legal, valid and binding obligation, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity).

 

 

(c)     No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment.

 

(d)     The representations and warranties set forth in Article V of the Credit Agreement shall (i) with respect to representations and warranties that contain a materiality qualification, be true and correct (subject to the materiality qualifications set forth therein) and (ii) with respect to representations and warranties that do not contain a materiality qualification, be true and correct in all material respects, and except that for purposes of this Section 4.2(d), the representations and warranties contained in Sections 5.05(a) and (b) of the Credit Agreement shall be deemed to refer to the most recent statements furnished pursuant to Sections 6.01(a) and (b) of the Credit Agreement, respectively.

 

(e)     After giving effect to this Amendment, no event has occurred and is continuing which constitutes a Default or an Event of Default, in either case, of which the Lenders have not been informed.

 

(f)     The Collateral Documents continue to create a valid security interest in, and Lien upon, the Collateral, in favor of the Administrative Agent, for the benefit of the Lenders, which security interests and Liens are perfected in accordance with the terms of the Collateral Documents and prior to all Liens other than Permitted Liens.

 

(g)     The Loans and other amounts payable by Borrower pursuant to the Credit Agreement are not reduced or modified by this Amendment and are not subject to any offsets, defenses or counterclaims.

 

4.3     Reaffirmation of Obligations. Each Loan Party hereby ratifies each Loan Document to which it is a party and acknowledges and reaffirms (a) that it is bound by all terms of each Loan Document applicable to it and (b) that it is responsible for the observance and full performance of its respective Obligations.

 

4.4     Loan Document. This Amendment shall constitute a Loan Document under the terms of the Credit Agreement.

 

4.5     Expenses. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of the Administrative Agent’s legal counsel.

 

4.6     Further Assurances. The Loan Parties agree to promptly take such action, upon the request of the Administrative Agent, as is necessary to carry out the intent of this Amendment.

 

 

4.7     Entirety. This Amendment and the other Loan Documents embody the entire agreement among the parties hereto and supersede all prior agreements and understandings, oral or written, if any, relating to the subject matter hereof.

 

4.8     Counterparts; Telecopy. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment or any other document required to be delivered hereunder, by fax transmission or e-mail transmission (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Agreement. Without limiting the foregoing, upon the request of any party, such fax transmission or e-mail transmission shall be promptly followed by such manually executed counterpart.

 

4.9     No Actions, Claims, Etc. As of the date hereof, each of the Loan Parties hereby acknowledges and confirms that it has no knowledge of any actions, causes of action, claims, demands, damages and liabilities of whatever kind or nature, in law or in equity, against the Administrative Agent, the Lenders, or the Administrative Agent’s or the Lenders’ respective officers, employees, representatives, agents, counsel or directors arising from any action by such Persons, or failure of such Persons to act under the Credit Agreement on or prior to the date hereof.

 

4.10     GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

 

4.11     Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

 

4.12     Consent to Jurisdiction; Service of Process; Waiver of Jury Trial. The jurisdiction, service of process and waiver of jury trial provisions set forth in Sections 11.14 and 11.15 of the Credit Agreement are hereby incorporated by reference, mutatis mutandis.

 

[SIGNATURES ON THE FOLLOWING PAGES]

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on the date first above written.

 

BORROWER:	IXIA,
	a California corporation
	By:	/s/ Ronald W. Buckly
	Name:	Ronald W. Buckly
	Title:	Senior Vice President, Corporate Affairs      and General Counsel

                          

GUARANTORS:               

 

	CATAPULT COMMUNICATIONS CORPORATION
	By:	/s/ Ronald W. Buckly
	Name: Title:	Ronald W. Buckly  Vice President, Legal
	VERIWAVE, INC.
	By:	/s/ Ronald W. Buckly
	Name: Title:	Ronald W. Buckly  Vice President, Legal
	ANUE SYSTEMS, INC.
	By:	/s/ Ronald W. Buckly
	Name: Title:	Ronald W. Buckly  Senior Vice President, Legal
	BREAKINGPOINT SYSTEMS, INC.
	By:	/s/ Ronald W. Buckly
	Name: Title:	Ronald W. Buckly  Senior Vice President, Legal
	NET OPTICS, INC.
	By:	/s/ Ronald W. Buckly
	Name: Title:	Ronald W. Buckly  Vice President and Secretary

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

NET OPTICS IL, LLC By:          /s/ Ronald W. Buckly         Name: Ronald W. Buckly Title:   Secretary

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

ADMINISTRATIVE AGENT:	BANK OF AMERICA, N.A., in its capacity as Administrative Agent
	By:     /s/ Mollie S. Canup                     Name: Mollie S. Canup Title:   Vice President

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

LENDERS:	BANK OF AMERICA, N.A., in its capacity as Lender
	By:     /s/ Robert L. Wallace, Jr.                     Name:  Robert L. Wallace, Jr.                         Title:     SVP

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

U.S. BANK NATIONAL ASSOCIATION, as a Lender     By:     /s/ Christopher D. Zumberge                Name:   Christopher D. Zumberge                   Title:     Senior Vice President

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

SILICON VALLEY BANK, as a Lender     By:     /s/ Raj Morey                          Name:  Raj Morey                             Title:    Vice President

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

HSBC BANK USA, NATIONAL ASSOCIATION, as a Lender     By:                                                                                        Name: ____________________________________ Title: _____________________________________

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

BARCLAYS BANK PLC, as a Lender     By:     /s/ Christine Aharonian                  Name:   Christine Aharonian                     Title:     Vice President

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

STIFEL BANK AND TRUST, as a Lender     By:     /s/ Benjamin L. Dodd                     Name:   Benjamin L. Dodd                        Title:     Senior Vice President

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

 

DEUTSCHE BANK TRUST COMPANY AMERICAS, as a Lender     By:                                                                                         Name: ___________________________________ Title: ____________________________________

 

 

[Signature Page to Eighth Amendment to Credit Agreement and Consent]

 

Exhibit 10.9

 

Ixia
Compensation of Named Executive Officers as of December 31, 2014

 

The executive officers of Ixia (the “Company”) who were named in the Summary Compensation Table in the Proxy Statement for the Company’s 2014 Annual Meeting of Shareholders and who were serving as executive officers of the Company on December 31, 2014 are referred to herein as the “Named Executive Officers.” The Named Executive Officers are generally “at will” employees and do not have written or oral employment agreements with the Company except as otherwise noted below. Set forth below is certain information regarding the compensation of the Named Executive Officers as of December 31, 2014.

 

Annual Base Salary

 

The annual base salaries for the Named Executive Officers as of December 31, 2014 were as follows:

 

Named Executive Officer		Annual Base Salary as of December 31, 2014
Errol Ginsberg			$445,000
Chief Innovation Officer(1)
Alan Grahame			350,000
Former Senior Vice President, Worldwide Sales(2)
Ronald W. Buckly			350,200
Senior Vice President, Corporate Affairs(3)
Raymond de Graaf			305,000
Senior Vice President, Operations(4)

 

---

(1)	The Company also typically pays the monthly lease payments and fuel expenses for a car that is used by Mr. Ginsberg for both business and personal use.

 

(2)	Alan Grahame resigned as an officer and employee of the Company effective February 16, 2015.

 

(3)

On December 31, 2014, Mr. Buckly resigned as General Counsel and Corporate Secretary of the Company. He continues to serve as the Company’s Senior Vice President, Corporate Affairs pursuant to the terms and conditions of an Employment Retention Agreement dated as of December 23, 2014. The Employment Retention Agreement is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on December 23, 2014.

 

(4)	On December 31, 2014, Mr. de Graaf held the position of Vice President, Operations. He was promoted to the position of Senior Vice President, Operations on February 14, 2015.

 

 

 

Bonus

 

As of December 31, 2014, Messrs. Ginsberg, Grahame, Buckly and de Graaf were eligible to participate in the Company’s 2014 Senior Officer Bonus Plan which is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission on October 8, 2014.

 

Equity Incentives

 

As of December 31, 2014, the Named Executive Officers were eligible to participate in the Company’s equity-based incentive compensation plans for its executive officers, including the Company’s:

 

	(i)		Amended and Restated 1997 Equity Incentive Plan (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-117969) filed with the Commission on August 5, 2004), to the extent equity awards were granted prior to the expiration of the plan in 2007;
	(ii)		Second Amended and Restated Ixia 2008 Equity Incentive Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 0-31523) filed with the Commission on June 25, 2013); and
	(iii)		2010 Employee Stock Purchase Plan, as amended (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-8 (Reg. No. 333-176237) filed with the Commission on August 11, 2011).

 

* * *

 

 

Exhibit 10.21

  

 

EMPLOYMENT SEPARATION AGREEMENT

 

THIS EMPLOYMENT SEPARATION AGREEMENT (the “Agreement”), which includes Exhibits A, B and C hereto which are incorporated herein by this reference, is entered into by and between Ixia, a California corporation (“Ixia”), and Thomas B. Miller (“Former Employee”), and shall become effective when executed by both parties hereto (the “Effective Date”).

 

RECITALS

 

A.     Former Employee ceased to be an officer of Ixia on March 3, 2014 (the “Termination Date”) and an employee of Ixia on June 3, 2014 (the “Separation from Service Date”).

 

B.     Former Employee desires to receive severance benefits under Ixia’s Officer Severance Plan dated September 1, 2000, as amended (the “Severance Plan”), which benefits are stated in the Severance Plan to be contingent upon, among other things, Former Employee’s entering into this Agreement and undertaking the obligations set forth herein.

 

C.     Ixia and Former Employee desire to set forth their respective rights and obligations with respect to Former Employee’s separation from Ixia and to finally and forever settle and resolve all matters concerning Former Employee’s past services to Ixia.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants and conditions set forth herein, the receipt and sufficiency of which are hereby acknowledged, Ixia and Former Employee hereby agree as follows:

 

1.	DEFINITIONS

 

As used herein, the following terms shall have the meanings set forth below:

 

1.1     “Includes;” “Including.” Except where followed directly by the word “only,” the terms “includes” or “including” shall mean “includes, but is not limited to,” and “including, but not limited to,” respectively.

 

1.2      “Severance Covered Period.” The term “Severance Covered Period” shall mean a period of time commencing upon the effective date of this Agreement and ending on the date on which the last installment of the Severance Allowance is due and payable pursuant to Section 6.2 of this Agreement.

 

 

1.3     Other Capitalized Terms. Capitalized terms (other than those specifically defined herein) shall have the same meanings ascribed to them in the Severance Plan.

 

2.	MUTUAL REPRESENTATIONS, WARRANTIES AND COVENANTS

 

Each party hereto represents, warrants and covenants (with respect to itself/himself only) to the other party hereto that, to its/his respective best knowledge and belief as of the date of each party’s respective signature below:

 

2.1     Full Power and Authority. It/he has full power and authority to execute, enter into and perform its/his obligations under this Agreement; this Agreement, after execution by both parties hereto, will be a legal, valid and binding obligation of such party enforceable against it/him in accordance with its terms; it/he will not act or omit to act in any way which would materially interfere with or prohibit the performance of any of its/his obligations hereunder, and no approval or consent other than as has been obtained of any other party is necessary in connection with the execution and performance of this Agreement.

 

2.2     Effect of Agreement. The execution, delivery and performance of this Agreement and the consummation of the transactions hereby contemplated:

 

(a)     will not interfere or conflict with, result in a breach of, constitute a default under or violation of any of the terms, provisions, covenants or conditions of any contract, agreement or understanding, whether written or oral, to which it/he is a party (including, in the case of Ixia, its bylaws and articles of incorporation each as amended to date) or to which it/he is bound;

 

(b)     will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental agency or court having jurisdiction over such party; and

 

(c)     has not heretofore been assigned, transferred or granted to another party, or purported to assign, transfer or grant to another party, any rights, obligations, claims, entitlements, matters, demands or causes of actions relating to the matters covered herein.

 

3.	CONFIDENTIALITY OBLIGATIONS DO NOT TERMINATE

 

Former Employee acknowledges that any confidentiality, proprietary rights or nondisclosure agreement(s) in favor of Ixia which he may have entered into from time to time in connection with his employment (collectively, the “Nondisclosure Agreement”) with Ixia is understood to be intended to survive, and does survive, any termination of such employment, and accordingly nothing in this Agreement shall be construed as terminating, limiting or otherwise affecting any such Nondisclosure Agreement or Former Employee’s obligations thereunder. Without limiting the generality of the foregoing, no time period set forth in this Agreement shall be construed as shortening or limiting the term of any such Nondisclosure Agreement, which term shall continue as set forth therein.

 

 

4.

BENEFITS

 

4.1     Health Care Insurance Continuation. Ixia (at its expense) will continue, for a period of 18 months following the Separation from Service Date, health care coverage for Former Employee and his family members who are “qualified beneficiaries” (as such term is defined in the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”)) under Ixia’s group health plan(s) generally available during such period to employees participating in such plan(s) and at levels and with coverage no greater than those provided to such Former Employee as of the Separation from Service Date. Thereafter, Former Employee (at his expense) may elect coverage under a conversion health plan available under Ixia’s group health plan(s) from the Company’s health insurance carrier if and to the extent he is entitled to do so as a matter of right under federal or state law.

 

4.2     Other Benefit Plans. Except as otherwise expressly provided in this Section 4 or as required by applicable law, Former Employee shall have no right to continue his participation in any Ixia benefit plan following such employee’s termination.

 

5.	STOCK OPTIONS AND OTHER RIGHTS

 

Exhibit A hereto sets forth any and all outstanding stock options, restricted stock units and other rights to purchase capital stock or other securities of Ixia (including but not limited to stock purchase agreements, but excluding rights under Ixia’s Employee Stock Purchase Plan) which have been previously issued to Former Employee and which are outstanding as of the date hereof. Nothing in this Agreement shall alter or affect any of such outstanding stock options, restricted stock units or other rights, Former Employee’s rights or responsibilities with respect thereto, including but not limited to Former Employee’s rights to exercise any of his options or rights following the Separation from Service Date, or Ixia’s rights with respect thereto.

 

6.	PAYMENTS TO FORMER EMPLOYEE

 

6.1     Employee Compensation. Ixia has paid, and Former Employee acknowledges and agrees that Ixia has paid, to him any and all salary and accrued but unpaid vacation and sick pay owed by Ixia to Former Employee up to and including the Separation from Service Date other than any compensation owed to him under the Severance Plan.

 

6.2     Severance Allowance. In consideration for the release by Former Employee set forth herein (including the release of any and all claims Former Employee has or may have under the Age Discrimination in Employment Act (“ADEA”) and Older Workers Benefit Protection Act (“OWBPA”)) and Former Employee’s performance of his obligations under this Agreement, Former Employee is entitled to receive, and Ixia shall pay to Former Employee, a Severance Allowance in the aggregate gross amount of $838,708, which Severance Allowance shall become due and payable in 12 equal monthly installments of $69,892.33 each, less all applicable withholding taxes, beginning as of the 31st day following the Termination Date, in accordance with the terms and conditions of the Severance Plan, with the first actual payment being made as soon as administratively practicable following the Effective Date in the lump sum aggregate amount of any such installments that, in accordance with the foregoing, have become due and payable prior to the Effective Date, and the continuation thereafter of the remaining monthly installments of the Severance Allowance for the duration of the 12 month period following the Termination Date.

 

 

7.	CONFIDENTIAL INFORMATION AND TRADE SECRETS

 

7.1     Former Employee hereby recognizes, acknowledges and agrees that Ixia is the owner of proprietary rights in certain confidential sales and marketing information, programs, tactics, systems, methods, processes, compilations of technical and non-technical information, records and other business, financial, sales, marketing and other information and things of value. To the extent that any or all of the foregoing constitute valuable trade secrets and/or confidential and/or privileged information of Ixia, Former Employee hereby further agrees as follows:

 

(a)     That, except with prior written authorization from Ixia’s CEO, for purposes related to Ixia’s best interests, he will not directly or indirectly duplicate, remove, transfer, disclose or utilize, nor knowingly allow any other person to duplicate, remove, transfer, disclose or utilize, any property, assets, trade secrets or other things of value, including, but not limited to, records, techniques, procedures, systems, methods, market research, new product plans and ideas, distribution arrangements, advertising and promotional materials, forms, patterns, lists of past, present or prospective customers, and data prepared for, stored in, processed by or obtained from, an automated information system belonging to or in the possession of Ixia which are not intended for and have not been the subject of public disclosure. Former Employee agrees to safeguard all Ixia trade secrets in his possession or known to him at all times so that they are not exposed to, or taken by, unauthorized persons and to exercise his reasonable efforts to assure their safekeeping. This subsection shall not apply to information that as of the date hereof is, or as of the date of such duplication, removal, transfer, disclosure or utilization (or the knowing allowing thereof) by Former Employee has (i) become generally known to the public or competitors of Ixia (other than as a result of a breach of this Agreement); (ii) been lawfully obtained by Former Employee from any third party who has lawfully obtained such information without breaching any obligation of confidentiality; or (iii) been published or generally disclosed to the public by Ixia. Former Employee shall bear the burden of showing that any of the foregoing exclusions applies to any information or materials.

 

(b)     That all improvements, discoveries, systems, techniques, ideas, processes, programs and other things of value made or conceived in whole or in part by Former Employee with respect to any aspects of Ixia’s current or anticipated business while an employee of Ixia are and remain the sole and exclusive property of Ixia, and Former Employee has disclosed all such things of value to Ixia and will cooperate with Ixia to insure that the ownership by Ixia of such property is protected. All of such property of Ixia in Former Employee’s possession or control, including, but not limited to, all personal notes, documents and reproductions thereof, relating to the business and the trade secrets or confidential or privileged information of Ixia has already been, or shall be immediately, delivered to Ixia.

 

 

7.2     Former Employee further acknowledges that as the result of his prior service as an officer and employee of Ixia, he has had access to, and is in possession of, information and documents protected by the attorney-client privilege and by the attorney work product doctrine. Former Employee understands that the privilege to hold such information and documents confidential is Ixia’s, not his personally, and that he will not disclose the information or documents to any person or entity without the express prior written consent of the CEO or Board of Ixia unless he is required to do so by law.

 

7.3     Former Employee’s obligations set forth in this Section 7 shall be in addition to, and not instead of, Former Employee’s obligations under any written Nondisclosure Agreement.

 

8.	ENFORCEMENT OF SECTION 7

 

Former Employee hereby acknowledges and agrees that the services rendered by him to Ixia in the course of his prior employment were of a special and unique character, and that breach by him of any provision of the covenants set forth in Section 7 of this Agreement will cause Ixia irreparable injury and damages. Former Employee expressly agrees that Ixia shall be entitled, in addition to all other remedies available to it whether at law or in equity, to injunctive or other equitable relief to secure their enforcement.

 

9.	PROHIBITION AGAINST DISPARAGEMENT

 

9.1     Former Employee agrees that for a period of two years following the Effective Date any communication, whether oral or written, occurring on or off the premises of Ixia, made by him or on his behalf to any person or entity (including, without limitation, any Ixia employee, customer, vendor, supplier, any competitor, any media entity and any person associated with any media) which in any way relates to Ixia (or any of its subsidiaries) or to Ixia’s or any of its subsidiaries’ directors, officers, management or employees: (a) will be truthful; and (b) will not, directly or indirectly, criticize, disparage, or in any manner undermine the reputation or business practices of Ixia or its directors, officers, management or employees.

 

9.2     The only exceptions to Section 9.1 shall be: (a) truthful statements privately made to (i) the CEO of Ixia, (ii) any member of Ixia’s Board, (iii) Ixia’s auditors, (iv) inside or outside counsel of Ixia, (v) Former Employee’s counsel or (vi) Former Employee’s spouse; (b) truthful statements lawfully compelled and made under oath in connection with a court or government administrative proceeding; and (c) truthful statements made to specified persons upon and in compliance with prior written authorization from Ixia’s CEO or Board to Former Employee directing him to respond to inquiries from such specified persons.

 

 

10.	COOPERATION

 

Former Employee agrees that for a period of five years commencing with the Effective Date he will cooperate fully and reasonably with Ixia in connection with any future or currently pending matter, proceeding, litigation or threatened litigation: (1) directly or indirectly involving Ixia (which, for purposes of this section, shall include Ixia and each of its current and future subsidiaries, successors or permitted assigns); or (2) directly or indirectly involving any director, officer or employee of Ixia (with regard to matters relating to such person(s) acting in such capacities with regard to Ixia business). Such cooperation shall include making himself available upon reasonable notice at reasonable times and places for consultation and to testify truthfully (at Ixia’s expense for reasonable, pre-approved out-of-pocket travel costs plus a daily fee equal to one-twentieth of his monthly severance compensation under Section 6.2 hereof for each full or partial day during which Former Employee makes himself so available) in any action as reasonably requested by the CEO or the Board of Directors. Former Employee further agrees to immediately notify Ixia’s CEO in writing in the event that he receives any legal process or other communication purporting to require or request him to produce testimony, documents, information or things in any manner related to Ixia, its directors, officers or employees, and that he will not produce testimony, documents, information or other things with regard to any pending or threatened lawsuit or proceeding regarding Ixia without giving Ixia prior written notice of the same and reasonable time to protect its interests with respect thereto. Former Employee further promises that when so directed by the CEO or the Board of Directors, he will make himself available to attend any such legal proceeding and will truthfully respond to any questions in any manner concerning or relating to Ixia and will produce all documents and things in his possession or under his control which in any manner concern or relate to Ixia. Former Employee covenants and agrees that he will immediately notify Ixia’s CEO in writing in the event that he breaches any of the provisions of Sections 7, 9 or 10 hereof.

 

11.	SOLE ENTITLEMENT

 

Former Employee acknowledges and agrees that his sole entitlement to compensation, payments of any kind, monetary and nonmonetary benefits and perquisites with respect to his prior Ixia relationship (as an officer and employee) is as set forth in the Severance Plan, this Agreement, the Company’s bonus plans for officers as in effect from time to time, stock option and warrant agreements, COBRA, and such other written agreements and securities between Ixia and Former Employee as may exist or as may be set forth on Exhibit B hereto.

 

12.	RELEASE OF CLAIMS

 

12.1     General. Former Employee does hereby and forever release and discharge Ixia and the predecessor corporation of Ixia as well as the successors, current, prior or future shareholders of record, officers, directors, heirs, predecessors, assigns, agents, employees, attorneys, insurers and representatives of each of them, past, present or future, from any and all cause or causes of action, actions, judgments, liens, indebtedness, damages, losses, claims, liabilities and demands of any kind or character whatsoever, whether known or unknown, suspected to exist or not suspected to exist, anticipated or not anticipated, whether or not heretofore brought before any state or federal agency, court or other governmental entity which are existing on or arising prior to the date of this Agreement and which, directly or indirectly, in whole or in part, relate or are attributable to, connected with, or incidental to the previous employment of Former Employee by Ixia, the separation of that employment, and any dealings between the parties concerning Former Employee’s employment existing prior to the date of execution of this Agreement, excepting only those obligations expressly recited herein or to be performed hereunder. Nothing contained in this Section 12 shall affect any rights, claims or causes of action which Former Employee may have (1) with respect to his outstanding stock options, warrants or other stock subscription rights to purchase Ixia Common Stock or other securities under the terms and conditions thereof; (2) as a shareholder of Ixia; (3) to indemnification by Ixia, to the extent required under the provisions of Ixia’s Amended and Restated Articles of Incorporation, as amended, Ixia’s Bylaws, as amended, the California General Corporation Law, insurance or contracts, including without limitation the Indemnity Agreement dated as of September 1, 2000 between Ixia and Former Employer, with respect to matters relating to Former Employee’s prior service as a director, an officer, employee and agent of Ixia or its subsidiaries; (4) with respect to his eligibility for severance payments under the Severance Plan or any other written agreement listed on Exhibit B hereto; and (5) to make claims against or seek indemnification or contribution from anyone not released by the first sentence of this Section 12 with respect to any matter or anyone released by the first sentence of this Section 12 with respect to any matter not released thereby; or (6) with respect to Ixia’s performance of this Agreement. Further, Former Employee waives specifically any and all rights or claims Former Employee has or may have under the ADEA and/or the OWBPA, and acknowledges that such waiver is given voluntarily in exchange for certain consideration included in the severance benefits being paid pursuant to this Agreement.

 

 

12.2     Waiver of Unknown Claims. Former Employee acknowledges that he is aware that he may hereafter discover claims or facts different from or in addition to those he now knows or believes to be true with respect to the matters herein released, and he agrees that this release shall be and remain in effect in all respects a complete general release as to the matters released and all claims relative thereto which may exist or may heretofore have existed, notwithstanding any such different or additional facts. Former Employee acknowledges that he has been informed of Section 1542 of the Civil Code of the State of California, and does hereby expressly waive and relinquish all rights and benefits which he has or may have under said Section, which reads as follows:

 

“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”

 

12.3     Covenant Not to Sue on Matters Released. Former Employee covenants that he will not make, assert or maintain against any person or entity that Former Employee has released in this Agreement, any claim, demand, action, cause of action, suit or proceeding arising out of or in connection with the matters herein released, including but not limited to any claim or right under the ADEA, the OWBPA, or any other federal or state statute or regulation. Former Employee represents and warrants that he has not assigned or transferred, purported to assign or transfer, and will not assign or transfer, any matter or claim herein released. Former Employee represents and warrants that he knows of no other person or entity which claims an interest in the matters or claims herein released. Former Employee agrees to, and shall at all times, indemnify and hold harmless each person and entity that Former Employee has released in this Agreement against any claim, demand, damage, debt, liability, account, action or cause of action, or cost or expense, including attorneys’ fees, resulting or arising from any breach of the representations, warranties and covenants made herein.

 

 

13.	ASSIGNMENT

 

Former Employee represents and warrants that he has not heretofore assigned, transferred or granted or purported to assign, transfer or grant any claims, entitlement, matters, demands or causes of action herein released, disclaimed, discharged or terminated, and agrees to indemnify and hold harmless Ixia from and against any and all costs, expense, loss or liability incurred by Ixia as a consequence of any such assignment, transfer or grant.

 

14.	FORMER EMPLOYEE REPRESENTATIONS

 

Notwithstanding that this Agreement is being entered into subsequent to the Termination Date, except as listed by Former Employee on Exhibit C, from the period beginning on the Termination Date to the Effective Date, Former Employee represents and warrants that he has not acted or omitted to act in any respect which directly or indirectly would have constituted a violation of Sections 7, 9 or 10 herein had this Agreement then been in effect.

 

15.	MISCELLANEOUS

 

15.1     Notices. All notices and demands referred to or required herein or pursuant hereto shall be in writing, shall specifically reference this Agreement and shall be deemed to be duly sent and given upon actual delivery to and receipt by the relevant party (which notice, in the case of Ixia, must be from an officer of Ixia) or five days after deposit in the U.S. mail by certified or registered mail, return receipt requested, with postage prepaid, addressed as follows (if, however, a party has given the other party due notice of another address for the sending of notices, then future notices shall be sent to such new address):

 

(a)     If to Ixia:                                                       Ixia
26601 West Agoura Road
Calabasas, California 91302
Attn: Chief Executive Officer

 

          With a copy to:                                           Bryan Cave LLP
120 Broadway, Suite 300
Santa Monica, CA 90401
Attn: Katherine F. Ashton

 

(b)     If to Former Employee:                              Thomas B. Miller
24909 Paseo del Rancho
Calabasas, CA 91302

 

15.2     Legal Advice and Construction of Agreement. Both Ixia and Former Employee have received (or have voluntarily and knowingly elected not to receive) independent legal advice with respect to the advisability of entering into this Agreement and with respect to all matters covered by this Agreement and neither has been entitled to rely upon or has in fact relied upon the legal or other advice of the other party or such other party’s counsel (or employees) in entering into this Agreement.

 

 

15.3     Parties’ Understanding. Ixia and Former Employee state that each has carefully read this Agreement, that it has been fully explained to it/him by its/his attorney (or that it/he has voluntarily and knowingly elected not to receive such explanation), that it/he fully understands its final and binding effect, that the only promises made to it/him to sign the Agreement are those stated herein, and that it/he is signing this Agreement voluntarily.

 

15.4     Recitals and Section Headings. Each term of this Agreement is contractual and not merely a recital. All recitals are incorporated by reference into this Agreement. Captions and section headings are used herein for convenience only, are not part of this Agreement and shall not be used in interpreting or construing it.

 

15.5     Entire Agreement. This Agreement constitutes a single integrated contract expressing the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions with respect to the subject matter hereof. Notwithstanding the foregoing, the parties understand and agree that any Nondisclosure Agreement and all other written agreements between Former Employee and Ixia are separate from this Agreement and, subject to the terms and conditions of each such agreement, shall survive the execution of this Agreement, and nothing contained in this Agreement shall be construed as affecting the rights or obligations of either party set forth in such agreements.

 

15.6     Severability. In the event any provision of this Agreement or the application thereof to any circumstance shall be determined by arbitration pursuant to Section 15.10 of this Agreement or held by a court of competent jurisdiction to be invalid, illegal or unenforceable, or to be excessively broad as to time, duration, geographical scope, activity, subject or otherwise, it shall be construed to be limited or reduced so as to be enforceable to the maximum extent allowed by applicable law as it shall then be in force, and if such construction shall not be feasible, then such provision shall be deemed to be deleted herefrom in any action before that court, and all other provisions of this Agreement shall remain in full force and effect.

 

15.7     Amendment and Waiver. This Agreement and each provision hereof may be amended, modified, supplemented or waived only by a written document specifically identifying this Agreement and signed by each party hereto. Except as expressly provided in this Agreement, no course of dealing between the parties hereto and no delay in exercising any right, power or remedy conferred hereby or now or hereafter existing at law, in equity, by statute or otherwise, shall operate as a waiver of, or otherwise prejudice, any such rights, power or remedy.

 

15.8     Cumulative Remedies. None of the rights, powers or remedies conferred herein shall be mutually exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred herein or now or hereafter available at law, in equity, by statute or otherwise.

 

 

15.9     Specific Performance. Each party hereto may obtain specific performance to enforce its/his rights hereunder and each party acknowledges that failure to fulfill its/his obligations to the other party hereto would result in irreparable harm.

 

15.10     Arbitration. Except for the right of either party to apply to a court of competent jurisdiction for a Temporary Restraining Order to preserve the status quo or prevent irreparable harm, any dispute or controversy between Ixia and Former Employee under this Agreement involving its interpretation or the obligations of a party hereto shall be determined by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association, in the County of Los Angeles, State of California.

 

Arbitration may be conducted by one impartial arbitrator by mutual agreement. In the event that the parties are unable to agree on a single arbitrator within 30 days of first demand for arbitration, the arbitration shall proceed before a panel of three arbitrators, one of whom shall be selected by Ixia and one of whom shall be selected by Former Employee, and the third of whom shall be selected by the two arbitrators selected. All arbitrators are to be selected from a panel provided by the American Arbitration Association. The arbitrators shall have the authority to permit discovery, to the extent deemed appropriate by the arbitrators, upon request of a party. The arbitrators shall have no power or authority to add to or, except as otherwise provided by Section 15.6 hereof, to detract from the agreements of the parties, and the prevailing party shall recover costs and attorneys’ fees incurred in arbitration. The arbitrators shall have the authority to grant injunctive relief in a form substantially similar to that which would otherwise be granted by a court of law. The arbitrators shall have no authority to award punitive or consequential damages. The resulting arbitration award may be enforced, or injunctive relief may be sought, in any court of competent jurisdiction. Any action arising out of or relating to this Agreement may be filed only in the Superior Court of the County of Los Angeles, California or the United States District Court for the Central District of California.

 

15.11     California Law and Location. This Agreement was negotiated, executed and delivered within the State of California, and the rights and obligations of the parties hereto shall be construed and enforced in accordance with and governed by the internal (and not the conflict of laws) laws of the State of California applicable to the construction and enforcement of contracts between parties resident in California which are entered into and fully performed in California. Any action or proceeding arising out of, relating to or concerning this Agreement that is not subject to the arbitration provisions set forth in Section 15.10 above shall be filed in the state courts of the County of Los Angeles, State of California or in a United States District Court in the Central District of California and in no other location. The parties hereby waive the right to object to such location on the basis of venue.

 

15.12     Attorneys’ Fees. In the event a lawsuit is instituted by either party concerning a dispute under this Agreement, the prevailing party in such lawsuit shall be entitled to recover from the losing party all reasonable attorneys’ fees, costs of suit and expenses (including the reasonable fees, costs and expenses of appeals), in addition to whatever damages or other relief the injured party is otherwise entitled to under law or equity in connection with such dispute.

 

 

15.13     Force Majeure. Neither Ixia nor Former Employee shall be deemed in default if its/his performance of obligations hereunder is delayed or become impossible or impracticable by reason of any act of God, war, fire, earthquake, strike, civil commotion, epidemic, or any other cause beyond such party’s reasonable control.

 

15.14     Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument.

 

15.15     Successors and Assigns. Neither party may assign this Agreement or any of its rights or obligations hereunder (including, without limitation, rights and duties of performance) to any third party or entity, and this Agreement may not be involuntarily assigned or assigned by operation of law, without the prior written consent of the non-assigning party, which consent may be given or withheld by such non-assigning party in the sole exercise of its discretion, except that Ixia may assign this Agreement to a corporation acquiring: (1) 50% or more of Ixia’s capital stock in a merger or acquisition; or (2) all or substantially all of the assets of Ixia in a single transaction; and except that Former Employee may transfer or assign his rights under this Agreement voluntarily, involuntarily or by operation of law upon or as a result of his death to his heirs, estate and/or personal representative(s). Any prohibited assignment shall be null and void, and any attempted assignment of this Agreement in violation of this section shall constitute a material breach of this Agreement and cause for its termination by and at the election of the other party hereto by notice. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and each person or entity released pursuant to Section 12 hereof and, except as otherwise provided herein, their respective legal successors and permitted assigns.

 

15.16     Payment Procedure. Except as otherwise explicitly provided herein or in the Severance Plan, all payments by Ixia to Former Employee or by Former Employee to Ixia due hereunder may be by, at the paying party’s election, cash, wire transfer or check. Except as explicitly provided herein or in the Severance Plan, neither party may reduce any payment or obligation due hereunder by any amount owed or believed owed to the other party under any other agreement, whether oral or written, now in effect or hereafter entered into.

 

15.17     Survival. The definitions, representations and warranties herein as well as obligations set forth in Sections 7 and 9-15 shall survive any termination of this Agreement for any reason whatsoever.

 

15.18     No Admission. Neither the entry into this Agreement nor the giving of consideration hereunder shall constitute an admission of any wrongdoing by Ixia or Former Employee.

 

15.19     Limitation of Damages. Except as expressly set forth herein, in any action or proceeding arising out of, relating to or concerning this Agreement, including any claim of breach of contract, liability shall be limited to compensatory damages proximately caused by the breach and neither party shall, under any circumstances, be liable to the other party for consequential, incidental, indirect or special damages, including but not limited to lost profits or income, even if such party has been apprised of the likelihood of such damages occurring.

 

 

15.20     Pronouns. As used herein, the words “he,” “him,” “his” and “himself” shall be deemed to refer to the feminine as the identity of the person referred to and the context may require.

 

15.21     Chief Executive Officer. All references in this Agreement to Ixia’s CEO shall be deemed to include any duly appointed Acting CEO of Ixia.

 

15.22     Effectiveness. This Agreement shall become effective upon execution by the later of the parties hereto to execute this Agreement.

 

15.23     Net Optics Acquisition Deal Toy. Ixia and Former Employee agree that, when and if available, Former Employee shall be entitled to a “deal toy” commemorating the completion of the Net Optics, Inc. acquisition.  Such deal toy shall be substantially similar to the deal toys distributed to other Ixia employees and vendors that participated in the transaction.

 

16.	21 DAY REVIEW PERIOD; RIGHT TO REVOKE

 

Former Employee acknowledges that he was advised in writing to consult with an attorney prior to executing this Agreement and represents and warrants to Ixia that he has done so, and further acknowledges that he has been given a period of 21 days within which to consider the terms and provisions of this Agreement with his attorney. If Former Employee has executed and delivered to Ixia this Agreement prior to the expiration of such 21-day period, then in doing so, Former Employee acknowledges that he has unconditionally and irrevocably waived his right to that unexpired portion of such 21-day period. In addition, Former Employee shall have the right to revoke this Agreement for a period of seven days following the date on which this Agreement is signed by sending written notification of such revocation directly to each of Ixia and Ronald W. Buckly at the addresses specified in Section 15.1, supra, via hand delivery.

 

IXIA       By: /s/ Errol Ginsberg                                      Print Name:  Errol Ginsberg                                Print Title:  Acting Chief Executive Officer      Date:  June 30, 2014

Thomas B. Miller       Signature:  /s/ Thomas B. Miller                                       Date:  June 2, 2014

 

 

EXHIBIT A

 

OUTSTANDING STOCK PURCHASE RIGHTS

 

Type of Security

Grant Date

Number of Shares Exercisable/ Subject to Issuance

Exercise Price Per Share

Expiration Date(1)

NSO

03/12/2010

65,000

$8.88

08/28/2014

NSO

03/12/2010

50,826

8.88

08/28/2014

NSO

02/08/2011

41,437

18.09

08/28/2014

NSO

02/08/2011

31,049

18.09

08/28/2014

NSO

02/02/2012

16,499

12.74

08/28/2014

NSO(2)

02/02/2012

0

12.74

08/28/2014

NSO

12/13/2012

6,250

15.47

08/28/2014

NSO

02/07/2013

1,875

20.94

08/28/2014

RSU

02/08/2011

1,150

N/A

N/A

RSU(2)

02/02/2012

0

N/A

N/A

RSU

02/02/2012

1,375

N/A

N/A

RSU

12/13/2012

837

N/A

N/A

RSU

02/07/2013

313

N/A

N/A

RSU(3)

02/07/2013

0

N/A

N/A

____________________

 

(1)	Reflects the last day to exercise NSOs pursuant to the Company’s Second Amended and Restated 2008 Equity Incentive Plan (i.e., 90 days after termination of employment).

 

(2)	These represent performance-based equity grants that are not earned as of the Separation from Service Date (measurement period for these performance-based grants is related to the Company’s 2012 and 2013 financial results).

 

(3)	This represents performance-based RSUs that are not earned as of the Separation from Service Date (measurement period for this performance-based grant is related to the Company’s 2013 and 2014 financial results).

 

 

EXHIBIT B

 

LIST OF OTHER AGREEMENTS (Pursuant to §§12 and 13)

 

 

 

N/A

 

 

EXHIBIT C

 

EXCEPTIONS (Pursuant to §15)

 

 

N/A

 

Exhibit 10.23

 

CORRECTIVE AMENDMENT TO CREDIT AGREEMENT

 

THIS CORRECTIVE AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), effective as of March 20, 2015, is by and among IXIA, a California corporation (the “Borrower”), and SILICON VALLEY BANK, as administrative agent (in such capacity, the “Administrative Agent”). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement (as defined below).

 

W I T N E S S E T H

 

WHEREAS, the Borrower, the Subsidiaries of the Borrower from time to time party thereto (the “Guarantors”), certain banks and financial institutions from time to time party thereto (the “Lenders”) and Silicon Valley Bank, as Administrative Agent, Swingline Lender and L/C Issuer, are parties to that certain Amended and Restated Credit Agreement dated as of March 2, 2015 (as amended, modified, extended, restated, replaced, or supplemented from time to time, the “Credit Agreement”); and

 

WHEREAS, the Borrower and the Administrative Agent desire to amend the Credit Agreement in accordance with the authority given them in Section 11.01 of the Credit Agreement to amend, modify or supplement the Credit Agreement or any of the other Loan Documents to cure any ambiguity, omission, mistake, defect or inconsistency.

 

NOW, THEREFORE, in consideration of the agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:

 

ARTICLE I
AMENDMENT TO CREDIT AGREEMENT

 

1.1     Amendment to Section 1.01 (Defined Terms). The definition of “Consolidated Funded Indebtedness” set forth in Section 1.01 of the Credit Agreement is hereby amended and restated in its entirety to read as follows (with added language highlighted for ease of visibility only):

 

“Consolidated Funded Indebtedness” means, as of any date of determination, for the Borrower and its Subsidiaries on a Consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments; (b) all purchase money Indebtedness; (c) the maximum amount available to be drawn under issued and outstanding letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments; (d) all obligations in respect of the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business); (e) all Attributable Indebtedness; (f) all obligations to purchase, redeem, retire, defease or otherwise make any payment prior to the Maturity Date in respect of any Equity Interests or any warrant, right or option to acquire such Equity Interest, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (g) without duplication, all Guarantees with respect to outstanding Indebtedness of the types specified in clauses (a) through (f) above of Persons other than the Borrower or any Subsidiary; (h) all Indebtedness of the types referred to in clauses (a) through (g) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Borrower or such Subsidiary; and minus (i) all Restricted Cash; provided, that, solely for the purposes of calculating each of (1) the Consolidated Senior Funded Indebtedness, and (2) the Consolidated Total Leverage Ratio in the determination of the Applicable Rate, clause (i) shall not be deducted from the sum of clauses (a) through (h) above.”

  

 

ARTICLE II
MISCELLANEOUS

 

2.1     Amended Terms. On and after the date hereof, all references to the Credit Agreement in each of the Loan Documents shall hereafter mean the Credit Agreement as amended by this Amendment. Except as specifically amended hereby or otherwise agreed, the Credit Agreement is hereby ratified and confirmed and shall remain in full force and effect according to its terms.

 

2.2     Counterparts; Telecopy. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment or any other document required to be delivered hereunder, by fax transmission or e-mail transmission (e.g. “pdf” or “tif”) shall be effective as delivery of a manually executed counterpart of this Agreement. Without limiting the foregoing, upon the request of any party, such fax transmission or e-mail transmission shall be promptly followed by such manually executed counterpart.

 

2.3     GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.

 

2.4     Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

 

 

 

[SIGNATURES ON THE FOLLOWING PAGE]

  

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed on the date first above written.

 

BORROWER:	IXIA,
	a California corporation
	By:		/s/ Brent Novak
	Name:		Brent Novak
	Title:		C.F.O.
ADMINISTRATIVE AGENT:	SILICON VALLEY BANK,
	in its capacity as Administrative Agent
	By:		/s/ Tom Harris
	Name:		Tom Harris
	Title:		Managing Director

       

 

[Signature Page to Corrective Amendment to IXIA Credit Agreement]

 

Exhibit 21.1

 

Subsidiaries of the Registrant

 

		State or Other Jurisdiction of
Name of Subsidiary *		Incorporation or Organization
Net Optics, Inc.		California
Anue Systems, Inc.		Delaware
BreakingPoint Systems, Inc.		Delaware
Catapult Communications Corporation		Nevada
Catapult Communications Corporation Subsidiaries:
Ixia Technologies International Limited		Ireland
Ixia Communications Kabushiki Kaisha		Japan
Ixia Technologies International Limited Subsidiaries:
Ixia Australia Pty. Ltd.		Australia
Ixia Communications Canada Limited		Canada
Ixia Technologies Europe Limited		United Kingdom
Ixia Hong Kong Limited		China
Ixia Technologies (Shanghai) Company Limited		China
Ixia Korea, Ltd.		Korea
IxiaCom Technologies Sdn. Bhd.		Malaysia
Ixia Israel Ltd.		Israel
Ixia Technologies Private Limited		India
Ixia Pte. Ltd.		Singapore
S.C. Ixia SRL		Romania
VeriWave, Inc.		Delaware

 

 

 

*

The subsidiaries of the Registrant do not do business under any name other than as listed above.

  

 

Exhibit 23.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

We consent to the incorporation by reference in Registration Statement Nos. 333-48814, 333-66382, 333-107818, 333-117969, 333-151764, 333-162322, 333-167628, 333-176237, 333-184727, 333-188689, 333-189701 and 333-200385 on Form S-8 of our reports dated March 30, 2015, relating to the consolidated financial statements of Ixia and subsidiaries (which report expresses an unqualified opinion), and the effectiveness of Ixia and subsidiaries’ internal control over financial reporting (which report expresses an adverse opinion on the effectiveness of Ixia and subsidiaries’ internal control over financial reporting because of material weaknesses), appearing in this Annual Report on Form 10-K of Ixia for the year ended December 31, 2014.

 

 

/s/ Deloitte & Touche, LLP

 

Los Angeles, California

March 30, 2015

 

 

 

Exhibit 23.2

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 333-48814, 333-66382, 333-107818, 333-117969, 333-151764, 333-162322, 333-167628, 333-176237 and 333-184727) of Ixia of our report dated April 4, 2013 relating to the financial statements, which appears in this Form 10-K.

 

 

 

/s/ PricewaterhouseCoopers LLP

Los Angeles, California

March 30, 2015

 

 

 

Exhibit 31.1

Certification of 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

 

I, Bethany Mayer, certify that:

 

1.

I have reviewed this Annual Report on Form 10-K of Ixia;

 

2.

Based on my knowledge, this report 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 such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: March 30, 2015	/s/ BETHANY MAYER
	Bethany Mayer President and Chief Executive Officer

 

 

Exhibit 31.2

Certification of 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

 

I, Brent Novak, certify that:

 

1.

I have reviewed this Annual Report on Form 10-K of Ixia;

 

2.

Based on my knowledge, this report 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 such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: March 30, 2015	/s/ Brent Novak
	Brent Novak Chief Financial Officer

 

 

Exhibit 32.1

 

Certifications of Chief Executive Officer and 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

 

 

 

In connection with the Annual Report of Ixia (the “Company”) on Form 10-K for the period ended December 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Bethany Mayer, President and Chief Executive Officer of the Company, and Brent Novak, Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

 

 

Date:	March 30, 2015		/s/BETHANY MAYER
			Bethany Mayer President and Chief Executive Officer
Date:	March 30, 2015		/s/BRENT NOVAK
			Brent Novak Chief Financial Officer