<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
STRATOS LIGHTWAVE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3674 36-4360035
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Classification Identification No.)
incorporation or organization) Code number)
</TABLE>
7444 WEST WILSON AVENUE
CHICAGO, ILLINOIS 60706
(708) 867-9600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
JAMES W. MCGINLEY
PRESIDENT
STRATOS LIGHTWAVE, INC.
7444 WEST WILSON AVENUE
CHICAGO, ILLINOIS 60706
(708) 867-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES W. ASHLEY, JR. MORTON A. PIERCE
DAVID M. SEGHETTI Dewey Ballantine LLP
Lord, Bissell & Brook 1301 Avenue of the Americas
115 South LaSalle Street New York, New York 10019
Chicago, Illinois 60603 (212) 259-8000
(312) 443-0700
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2)
<S> <C> <C> <C>
Common Stock, $.01 par value... shares $ . $184,000,000
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock, $.01 par value... $48,576
</TABLE>
(1) Includes shares which the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO
SECTION 8(a) MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
STRATOS LIGHTWAVE, INC.
COMMON STOCK
----------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
shares. No public market currently exists for our shares.
We have applied to list the shares on the Nasdaq National Market under the
symbol " ." We expect the public offering price to be between $ and
$ per share.
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE .
<TABLE>
PER SHARE TOTAL
------------------------- -------------------------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to Stratos Lightwave............................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as
set forth above to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 2000.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
ROBERT W. BAIRD & CO.
TUCKER ANTHONY CLEARY GULL
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL
SERVICES CORPORATION
, 2000
<PAGE>
[Insert Graphics]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................... 5
Risk Factors......................... 9
Our Separation From Methode
Electronics........................ 21
Use of Proceeds...................... 22
Dividend Policy...................... 22
Capitalization....................... 23
Dilution............................. 24
Selected Combined Financial Data..... 25
Unaudited Pro Forma Combined
Financial Statements............... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Business............................. 40
Management........................... 54
Arrangements Between Methode
Electronics and Stratos
Lightwave.......................... 63
Principal Stockholder................ 69
Description of Capital Stock......... 70
Shares Eligible for Future Sale...... 74
Underwriting......................... 75
Legal Matters........................ 77
Experts.............................. 77
Where You Can Find More Information.. 77
Index to Financial Statements........ F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized any person to provide you with information different from
that contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
Some of the statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business" and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in this prospectus
that are not historical facts. When used in this prospectus, the words
"anticipates," "believes," "continue," "could," "estimates," "expects,"
"intends," "may," "plans," "seeks," "should," or "will" or the negative of these
terms or similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including our plans, objectives, expectations and intentions and
other factors discussed under "Risk Factors."
Our financial records have been maintained on the basis of a fiscal year
ending on the Saturday closest to April 30, with fiscal quarters ending on the
Saturday closest to the end of each thirteen week period. For ease of
comparison, all references to period end dates in this prospectus have been
presented as though the period ended on the last day of the calendar month. The
third quarter of the fiscal year ended January 29, 2000.
In this prospectus, "Stratos Lightwave," "Stratos," the "company," "we,"
"us" and "our" each refers to Stratos Lightwave, Inc., "Methode Electronics" and
"Methode" refers to Methode Electronics, Inc. and "Stratos (UK)" refers to our
Stratos, Ltd. subsidiary in the United Kingdom.
Product names, trade names and trademarks appearing in this prospectus are
the property of their holders.
Until , 2000, all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE COMBINED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION IN THIS
PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT
OPTION.
OUR COMPANY
We develop, manufacture and sell optical subsystems and components for high
data rate networking, data storage and telecommunication applications. Our
optical subsystems, consisting of embedded transceivers and internal and
external removable transceivers, convert electronic signals into optical signals
and back into electronic signals, thereby facilitating the transmission of
information over optical communication networks. These optical subsystems are
designed for use in local area networks (LANs), storage area networks (SANs),
metropolitan area networks (MANs), wide area networks (WANs) and central office
networking in telecommunication markets. Our optical subsystems are compatible
with the transmission protocols used in these networks, including Gigabit
Ethernet, Fast Ethernet, Fibre Channel and Asynchronous Transfer Mode (ATM). We
also design, manufacture, and sell a full line of optical components and cable
assemblies for use in these networks. Our customers include key optical
communication original equipment manufacturers (OEMs), such as Alcatel, Cisco,
Lucent and Nortel.
Over the last several years, the number of communication networks and the
amount of data transmitted over networks has increased substantially due to the
rapid growth of data intensive applications. In addition, the proliferation of
data and storage networks over a geographically dispersed user base has
increased the amount of data transmitted over communication networks. This rapid
growth has exposed the transmission speed and physical space limitations of
legacy networks which traditionally have relied primarily on the transmission of
electronic signals. To address the expanding bandwidth and transmission distance
requirements, new communication equipment has been developed which incorporates
optical technology for high data rate networking, data storage and
telecommunication applications.
Optical communication OEMs increasingly rely on highly integrated subsystem
suppliers to rapidly develop major elements of their systems. These suppliers
allow OEMs to better focus on their core competencies in overall product
systems, specific differentiating product benefits, marketing and distribution.
In order to meet the rapidly evolving needs of OEMs, subsystem suppliers must
address a number of significant technical challenges, including the following:
- Attaining higher data rates over extended distances while complying with
Federal Communication Commission (FCC) standards requires advanced
optoelectronic technologies and more precise packaging and connections;
- Delivering products that address the demand for increasingly higher port
density and smaller packages requires greater component miniaturization,
more precise packaging and optical alignment;
- Responding to demands for shorter lead times requires that manufacturers
design products and scale production more rapidly;
- Producing increasingly integrated products requires a broad expertise in
optical technologies to achieve component compatibility; and
- Supporting a wide range of data rates, transmission distance requirements,
network protocols, optical interfaces and packaging options requires that
OEM suppliers offer a broad range of products.
5
<PAGE>
We believe that our integrated design and manufacturing capabilities provide
the following key benefits:
- HIGH PERFORMANCE. We design, manufacture and test our products to provide
industry leading optical line transmission performance with special
attention to standard compliance and interoperability. We believe that we
are uniquely positioned with our advanced engineering and manufacturing
capabilities and optical expertise to provide high performance optical
subsystems and components.
- INTEGRATED DESIGN AND MANUFACTURING. Our diverse in-house capabilities in
electronics, optical systems and electro-mechanical packaging enable us to
produce optical subsystems and components with faster times to market and
the latest in miniaturization technology. In addition, our integrated
design and manufacturing capabilities enable us to increase production
efficiencies and rapidly scale our production to deliver high volumes in a
cost effective manner.
- BROAD SUBSYSTEM AND COMPONENT PRODUCT LINE. Our broad line of optical
subsystems and components operate at varying data rates and are available
in a variety of interfaces, protocols, wavelengths, modes and transmission
distances, and have applications in the enterprise, MAN, WAN and
telecommunication markets.
- RELIABILITY. We design, manufacture and test in-house and take a
multi-tiered approach to assure the reliability of our optical subsystems.
During the design phase, our optical subsystems undergo rigorous
verification and qualification testing before designs are released to
production. We believe our control over testing throughout the design and
manufacturing process results in greater reliability and higher
performance in our products.
Our objective is to be a leading developer, manufacturer and seller of
high-performance optical subsystems and components to optical communication
OEMs. Key elements of our strategy include the following:
- Invest in the development of new technologies that lead to new products
with increased bandwidth capabilities, higher port density and greater
reliability;
- Target high-growth optical communication markets such as the enterprise,
MAN, WAN and telecommunication markets;
- Continue to expand our product offerings of optical transceivers to
encompass a broader spectrum of data rates and form factors;
- Continue to design and build increasingly integrated subsystems and
components;
- Utilize our extensive customer service and technical support throughout
the qualification and sale process to respond quickly to our customers and
align our product development efforts with our customers' evolving needs;
and
- Pursue acquisitions or investments which complement our current products,
enhance our technical capabilities, lower our manufacturing costs, expand
the breadth of our market, or otherwise offer growth opportunities.
CORPORATE INFORMATION
Our principal executive offices are located at 7444 West Wilson Avenue,
Chicago, Illinois 60706. Our telephone number is (708) 867-9600. As part of our
separation from Methode Electronics, we were incorporated in Delaware in April
2000.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Stratos Lightwave....... shares
Common stock to be outstanding after the
offering...................................... shares, or shares if the underwriters'
over-allotment option is exercised in full.
Common stock to be held by Methode immediately
after the offering............................ shares
Use of proceeds................................. We estimate that our net proceeds from this
offering will be approximately $ million.
We intend to use these net proceeds for general
corporate purposes and to pay $3.0 million of
additional purchase price in connection with our
previously completed Polycore Technologies
acquisition. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... " "
</TABLE>
The number of shares of our common stock to be outstanding after this
offering does not include shares of our common stock reserved for issuance
under our 2000 Stock Plan. We expect to grant options to purchase shares
of our common stock effective as of the date of this offering with an exercise
price equal to the public offering price. See "Management--Employee Benefit
Plans--Stratos 2000 Stock Plan."
OUR RELATIONSHIP WITH METHODE ELECTRONICS
Prior to this offering, we were a wholly-owned subsidiary of Methode
Electronics. After the completion of this offering, Methode will own
approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option in
full.
Methode has announced that it currently plans to divest its remaining equity
interest in us by means of a distribution to its stockholders in a transaction
intended to be tax-free to those stockholders. This transaction is sometimes
referred to in this prospectus as the spin-off. While Methode expects the
spin-off to occur six to twelve months after this offering, Methode is not
obligated to complete the divestiture of its remaining equity interest in us,
and the spin-off may not occur by the contemplated time or at all. Methode will
determine the timing, structure and all of the terms of its distribution of our
common stock.
Methode and our company will enter into various agreements which provide for
the separation of our business from Methode and govern our interim and ongoing
relationships. For a description of these agreements, see "Arrangements Between
Methode Electronics and Stratos Lightwave."
7
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
---------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ----------- --------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $9,608 $14,485 $20,966 $24,158 $46,458 $30,917 $48,553
Gross profit...................... 3,975 5,580 6,845 6,502 16,915 10,481 15,959
Income (loss) from operations..... 161 293 (882) (1,616) 5,582 2,687 3,007
Other income (expense), net....... -- -- -- 188 50 -- 1,287
Net income (loss)................. $ 96 $ 176 $ (507) $ (858) $ 3,502 $ 1,687 $ 2,694
</TABLE>
The as adjusted column gives effect to the receipt of the net proceeds from
the sale of shares of common stock offered by us at an offering price of $
per share, after deducting the underwriting discount and estimated offering
expenses payable by us, and the payment of $3.0 million as additional purchase
price with respect to our previously completed acquisition of Polycore
Technologies.
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF JANUARY 31, 2000
---------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 ACTUAL AS ADJUSTED
-------- -------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ -- $ -- $ -- $ -- $ 550 $ 608 $
Working capital.................... 3,155 5,544 6,658 7,894 14,110 15,562
Total assets....................... 7,833 11,812 14,286 16,702 31,506 53,198
Long-term obligations, less current
portion.......................... -- -- -- -- -- -- --
Stockholder's net investment....... 7,270 10,666 13,275 15,008 26,761 46,900
</TABLE>
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCURS, OUR BUSINESS COULD BE HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING US.
ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR THAT WE
CURRENTLY SEE AS IMMATERIAL, MAY ALSO HARM OUR BUSINESS.
RISKS RELATING TO OUR BUSINESS
OUR QUARTERLY OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE PERFORMANCE AND
ARE DIFFICULT TO FORECAST, AND OUR STOCK PRICE MAY FALL IF OUR QUARTERLY
PERFORMANCE DOES NOT MEET ANALYSTS' OR INVESTORS' EXPECTATIONS.
Our quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future, which makes it difficult for us
to predict our future operating results. We believe that period-to-period
comparisons of our operating results are not meaningful and should not be relied
upon as an indicator of our future performance. Some of the factors which could
cause our operating results to vary include:
- the timing of customer orders, particularly from our largest customers,
and our customers' ability to cancel, delay, or reschedule orders on short
notice;
- our ability to manufacture and ship our products on a timely basis;
- changes in our product mix;
- competitive pressures resulting in lower prices;
- the continued acceptance of optical communication networks;
- changes in industry standards for our markets;
- the introduction of new products or technologies by us or our competitors;
- demand for and market acceptance of our products and our customers'
products;
- our ability to manage our growth effectively; and
- the timing of our receipt of license fees and royalty payments relating to
our intellectual property or an inability to protect our intellectual
property rights.
In addition, most of our expenses, such as employee compensation and
depreciation on facilities and equipment, are relatively fixed in the near term
and our expense levels are based in part on our forecasted levels of future net
sales. As a result, any shortfall in revenue relative to our expectations could
cause significant changes in our operating results from quarter to quarter.
In one or more future quarters, our operating results will likely be below
the expectations of public market analysts and investors. If this occurs, the
price of our common stock would likely decline.
OUR SUCCESS DEPENDS ON THE GROWTH OF COMMUNICATION NETWORKS AND THEIR USE OF
OPTICAL COMMUNICATION TECHNOLOGIES.
Our optical subsystems and components are used primarily in enterprise,
metropolitan area, wide area and telecommunication networks. These markets are
rapidly evolving and it is difficult to predict their potential size or future
growth rate. In addition, there is uncertainty as to the extent to which optical
communication technologies will be used throughout these markets. Our success in
generating revenue in these markets will depend, among other things, on the
growth of these markets and their utilization of optical communication
technologies. If these markets grow more slowly than expected, or
9
<PAGE>
if the use of optical communication technologies in these markets does not
expand, our business would be significantly harmed.
WE MUST DEVELOP NEW PRODUCTS AND TECHNOLOGY AS WELL AS ENHANCEMENTS TO EXISTING
PRODUCTS AND TECHNOLOGY IN ORDER TO REMAIN COMPETITIVE. IF WE FAIL TO DO SO, OUR
REVENUES MAY DECLINE.
The market for our products and technology is characterized by rapid
technological change, new and improved product introductions, changes in
customer requirements and evolving industry standards. Our future success will
depend to a substantial extent on our ability to develop, introduce and support
new products and technology on a successful and timely basis. If we fail to
develop and deploy new products and technologies or enhancements of existing
products on a successful and timely basis or we experience delays in the
development, introduction or enhancement of such products and technologies, we
may lose market share to our competitors and our revenues may decline.
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
technological and market trends. We cannot assure you that we will be able to
identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely basis. Further, we cannot assure you
that our new products will gain market acceptance or that we will be able to
respond effectively to product announcements by competitors, technological
changes or emerging industry standards. Any failure to respond to technological
change would significantly harm our business.
OUR PRODUCTS MUST COMPLY WITH VARIOUS DOMESTIC AND INTERNATIONAL GOVERNMENTAL
REGULATIONS, AND IF THEY DO NOT MEET THESE REQUIREMENTS, OUR REVENUES WILL BE
IMPACTED.
In the United States, our products are incorporated into larger systems
which must comply with various regulations and standards defined by the Federal
Communications Commission (FCC) and Underwriters Laboratories. Internationally,
our products are incorporated into larger systems which must also comply with
standards established by local authorities in various countries which may vary
considerably. Our customers' inability to comply with existing or evolving
standards established by regulatory authorities or to obtain timely domestic or
foreign regulatory approvals or certificates could harm our business.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS OR ALTERNATIVE
TECHNOLOGIES IN OUR MARKETS, OUR BUSINESS WILL BE SIGNIFICANTLY HARMED.
Our products comprise only a part of an entire networking system and must
comply with evolving industry standards in order to gain market acceptance. In
many cases, we introduce a product before an industry standard has become widely
accepted. Because industry standards do not exist in some cases at the time we
are developing new products, we may develop products that do not comply with the
eventual industry standard. If this occurs, we would need to redesign our
products to comply with adopted industry standards. In addition, if alternative
technologies are adopted as an industry standard within our target markets, we
would have to dedicate significant time and resources to redesign our products
to meet this new industry standard. If we are required to resign our products,
we may incur significant expenses and losses due to lack of customer demand,
unusable purchased components for these products and the diversion of our
engineers from future product development efforts. If we are not successful in
re-designing our products or developing new products to meet new standards or
any other standard that may emerge, our business will be significantly harmed.
10
<PAGE>
WE ARE DEPENDENT ON MARKET ACCEPTANCE OF OUR OPTICAL SUBSYSTEMS AND COMPONENTS,
AND OUR REVENUES WILL DECLINE IF THE MARKET DOES NOT CONTINUE TO ACCEPT THESE
PRODUCTS.
We currently derive substantially all of our revenue from the sale of our
optical subsystems and components. We expect that revenue from these products
will continue to account for substantially all of our revenue for the
foreseeable future. Accordingly, acceptance of these products is critical to our
future success. If the market does not continue to accept either our optical
subsystems or components, our revenues will decline significantly. Factors that
may affect the market acceptance of our products include the performance
characteristics of our products, the continued use of the Gigabit Ethernet and
Fibre Channel protocols, the compliance of our products with evolving industry
standards, and the development of alternative technologies. Many of these
factors are beyond our control. In addition, in order to achieve market
acceptance, we must differentiate our products from those of our competitors. We
cannot assure you that we will be successful in making this differentiation or
achieving market acceptance of our products. Failure of our existing or future
products to maintain and achieve market acceptance will significantly impair our
revenues.
WE DERIVE A SIGNIFICANT PORTION OF OUR NET SALES FROM A FEW LARGE CUSTOMERS, AND
OUR NET SALES MAY DECLINE SIGNIFICANTLY IF ANY OF THESE CUSTOMERS CANCEL, REDUCE
OR DELAY PURCHASES OF OUR PRODUCTS.
Our success will depend on our continued ability to develop and manage
relationships with significant customers. For the 1999 fiscal year, our three
largest customers and their individual contract manufacturers accounted for 43%
of our net sales, with Nortel, Cisco and Alcatel accounting for 27%, 10% and 6%
of our net sales, respectively. For the nine months ended January 31, 2000, our
three largest customers accounted for 41% of our net sales, with Cisco, Nortel
and Alcatel accounting for 27%, 7% and 7% of our net sales, respectively. We
expect to continue to depend on sales to a small number of large customers for
the foreseeable future.
The markets in which we sell our products are dominated by a relatively
small number of systems manufacturers, thereby limiting the number of our
potential customers. As a result, our relationships with these customers are
critically important to our business. We cannot assure you that we will be able
to retain our largest customers, that we will be able to attract additional
customers or that our customers will be successful in selling their products
which incorporate our products. We have in the past experienced delays and
reductions in orders from some of our major customers. In addition, our
customers have in the past sought price concessions from us and will continue to
do so in the future. Further, some of our customers may in the future shift
their purchases of products from us to our competitors or to joint ventures
between these customers and our competitors. The loss of one or more of our
largest customers, any significant reduction or delay in sales to these
customers, our inability to successfully develop relationships with additional
customers or future price concessions that we may make could significantly harm
our business.
Our sales to other business units within Methode have also represented a
significant portion of our net sales. Sales to Methode represented 8.6% of our
revenues in fiscal 1999 and 8.5% of our revenues during the nine months ended
January 31, 2000. Although we are attempting to retain this business, Methode is
not obligated to continue to purchase products from us and we expect future
purchases to be made pursuant to individual purchase orders. We cannot assure
you that purchases of our products by Methode will not significantly decline.
OUR SALES CYCLE RUNS FROM OUR CUSTOMERS' INITIAL DESIGN TO PRODUCTION FOR
COMMERCIAL SALE. THIS CYCLE IS LONG AND UNPREDICTABLE AND MAY CAUSE OUR REVENUES
AND OPERATING RESULTS TO VARY.
We cannot predict the timing of our revenues accurately because of the
length of our sales cycles. As a result, if sales forecasts from specific
customers are not realized, we may be unable to compensate for the revenue
shortfall and our operating results could be harmed. The period of time between
our
11
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initial contact with a customer and the receipt of a purchase order may span up
to a year or more, and varies by product and customer. During this time,
customers may perform, or require us to perform, extensive evaluation and
qualification testing of our products. Generally, they consider a wide range of
issues before committing to purchase our products, including ability to
interoperate with other subsystems and components, product performance and
reliability. We may incur substantial sales and marketing expenses and expend
significant management effort while our potential customers are qualifying our
products. Moreover, we typically do not enter into long-term purchase agreements
with our customers. As a result, we may incur significant expenses to qualify
our products and even after incurring such costs, we ultimately may not sell any
or only small amounts of our products to these potential customers.
Consequently, if orders for our products do not occur as anticipated, our
operating results could be harmed.
OUR CUSTOMERS MAY CEASE PURCHASING OUR PRODUCTS AT ANY TIME AND MAY CANCEL OR
DEFER PURCHASES ON SHORT NOTICE, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We generally do not have long-term contracts with our customers. Sales are
typically made pursuant to individual purchase orders, often with extremely
short lead times, that may be canceled or deferred by customers on short notice
without significant penalty. These uncertainties complicate our ability to
accurately plan our manufacturing schedule. The loss of a significant customer
or the reduction, cancellation or delay of individual customer purchase orders,
could have a material adverse affect on our business, financial condition and
results of operation.
IF WE DO NOT DECREASE OUR MANUFACTURING COSTS OR INCREASE SALES OF HIGHER MARGIN
PRODUCTS AS THE AVERAGE UNIT PRICE OF OUR EXISTING PRODUCTS DECREASES, OUR
REVENUES AND GROSS MARGINS WILL DECLINE.
The average unit price of our products generally decrease as the products
mature in response to increased competition, the introduction of new products
and increased unit volumes. Substantially all of our products are designed and
manufactured in our own facilities. Accordingly, a significant portion of our
cost of sales is fixed over the near term. In order to remain competitive, we
must continually reduce our manufacturing costs through design and engineering
changes and increases in manufacturing efficiencies. We must also continue to
develop and introduce on a timely basis new products that incorporate features
that can be sold at higher average selling prices. Our inability to reduce
manufacturing costs or introduce new products could cause our revenues and gross
margins to decline, which would significantly harm our operating results.
OUR MARKETS ARE HIGHLY COMPETITIVE AND IF OUR CUSTOMERS CHOOSE TO PURCHASE OUR
COMPETITORS' PRODUCTS RATHER THAN OUR PRODUCTS, OUR REVENUES WILL DECLINE.
The markets for optical subsystems and components are highly competitive and
are expected to intensify in the future. For optical subsystems, we compete
primarily with Agilent Technologies, Inc., Finisar Corporation, Infineon
Technologies Corp., International Business Machines Corporation and Optical
Communications Products, Inc. For optical components, we compete primarily with
Infineon Technologies Corp, Lucent Technologies Inc., Molex, Inc. and Tyco
International, Ltd. and numerous other smaller companies. Many of these
companies have substantially greater financial, technical, marketing and
distribution resources and brand name recognition than we have. We expect that
more companies, including some of our customers, will enter the markets for our
products. Our competitors continue to introduce improved products with lower
prices, and we will need to do the same to remain competitive. We may not be
able to compete successfully against either current or future competitors. Our
competitors continue to introduce improved products with lower prices, and we
will have to do the same to remain competitive. In addition, some of our current
and potential customers may attempt to integrate their operations by producing
their own optical subsystems or components or acquiring one or more of our
competitors, thereby eliminating the need to purchase our products. Furthermore,
larger
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companies in other related industries may develop or acquire technologies and
apply their significant resources, including their distribution channels and
brand name recognition, to capture significant market share.
WE ARE DEPENDENT UPON SUPPLIERS FOR CERTAIN KEY COMPONENTS AND IF THESE
SUPPLIERS ARE UNABLE TO MEET OUR NEEDS, WE MAY EXPERIENCE DELAYS IN SHIPMENTS,
INCREASED COSTS AND CANCELLATION OF ORDERS FOR OUR PRODUCTS.
We purchase several key components incorporated into our products, such as
semiconductor devices, from a limited number of suppliers. We have experienced
shortages and delays in obtaining key components in the past and expect to
experience shortages and delays in the future. The inability to obtain
sufficient quantities of these components that meet our quality requirements may
interrupt and delay the manufacturing of our products or result in the
cancellation of orders for our products. In addition, these suppliers could
discontinue the manufacture or supply of these components at any time. We may
not be able to identify and integrate alternative sources of supply in a timely
fashion, or at all. Any transition to alternative suppliers may result in delays
in shipment and increased expenses and may limit our ability to deliver products
to our customers. Furthermore, if we are unable to identify an alternative
source of supply, we may have to redesign or modify our products, which may
cause delays in shipments, increased design and manufacturing costs and
increased prices for our products.
Although we enter into long-term agreements for the purchase of certain key
components from time to time, our purchases from limited source suppliers are
generally made on a purchase order basis. As a result, a supplier can
discontinue supplying components to us without penalty. If a supplier
discontinued supplying a key component, we may not be able to find alternative
suppliers on a timely basis, at a comparable cost, or at all, and our business
may be significantly harmed by the resulting product manufacturing and delivery
delays.
Lead times for materials and components vary significantly and depend on
factors such as specific supplier requirements, contract terms and current
market demand for particular components. In certain circumstances, we maintain
an inventory of limited source components to decrease the risk of a component
shortage. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. Any of these
occurrences would significantly harm our business.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS COULD BE HARMED.
We have significantly expanded our operations over the last several years
and expect to continue to increase the scope of our operations in the future.
This growth has placed, and will continue to place, a strain on our management
systems and operational resources. As demand for our products grows, we will
need to expand our design and manufacturing capabilities, as well as our sales,
marketing and technical support. We will also need to improve our financial and
managerial controls, reporting systems and procedures. The technical
complexities of our products and the rapidly evolving markets we serve will
require a high level of management effectiveness in managing the expansion of
our operations. Our key management personnel have limited experience in managing
this type of growth. If we are unable to manage our growth effectively, our
business could be harmed.
WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
RECRUIT, HIRE AND RETAIN SUFFICIENT QUALIFIED PERSONNEL.
Our products require sophisticated manufacturing, research and development,
marketing and sales, and technical support. Our success depends on our ability
to attract, train and retain qualified personnel in each of these areas. We
intend to increase the number of our employees who perform
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these functions. Competition for personnel in all of these areas is intense and
we may not be able to hire sufficient personnel to achieve our goals or support
the anticipated growth in our business. The market for the highly-trained
personnel we require is very competitive, due to the limited number of people
available with the necessary technical skills and understanding of our products
and technology. If we fail to attract and retain qualified personnel, our
business, operations and product development efforts would suffer.
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 products are complex and may contain defects, particularly when first
introduced or as new versions are released. Our customers integrate our
subsystems and components into systems and products that they develop themselves
or acquire from other vendors. As a result, when problems occur in equipment or
a system into which our products have been incorporated, it may be difficult to
identify the source of the problem. We provide warranties on all of our products
and may incur warranty or repair costs, be subject to liability claims for
damages related to product errors or experience delays as a result of these
errors in the future, which could be substantial. Moreover, the occurrence of
errors, whether caused by our products or technology or the products of another
vendor, may result in significant customer relations problems and injury to our
reputation and may impair the market acceptance of our products and technology.
WE ARE SUBJECT TO ENVIRONMENTAL LAWS AND OTHER LEGAL REQUIREMENTS THAT HAVE THE
POTENTIAL TO SUBJECT US TO SUBSTANTIAL LIABILITY AND INCREASE OUR COSTS OF DOING
BUSINESS.
Our properties and business operations are subject to a wide variety of
federal, state, and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances used in our
manufacturing processes. We cannot assure you that these legal requirements will
not impose on us the need for additional capital expenditures or other
requirements. If we fail to obtain required permits or otherwise fail to operate
within these or future legal requirements, we may be required to pay substantial
penalties, suspend our operations or make costly changes to our manufacturing
processes or facilities. Although we believe that we are in compliance and have
complied with all applicable legal requirements, we may also be required to
incur additional costs to comply with current or future legal requirements.
ECONOMIC, POLITICAL, REGULATORY AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS COULD SIGNIFICANTLY HARM OUR BUSINESS.
A portion of our sales are generated from customers located outside the
United States, principally in Europe. We also operate manufacturing facilities
in China and the United Kingdom. Sales to customers located outside of the
United States, excluding sales to Methode and its affiliates, were approximately
9.7% of our net sales in fiscal 1999 and 15.5% of our net sales during the nine
month period ended January 31, 2000. We expect these amounts to increase in the
future. Our international operations are subject to a number of risks and
uncertainties, including:
- difficulties in managing operations in different locations;
- changes in foreign currency rates;
- longer accounts receivable collection cycles
- difficulties associated with enforcing agreements through foreign legal
systems;
- seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe;
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- trade protection measures and import and export licensing requirements;
- changes in a specific country's or region's political or economic
conditions;
- potentially adverse tax consequences; and
- the potential difficulty in enforcing intellectual property rights in some
foreign countries.
These and other factors could adversely impact our existing international
operations or impair our ability to expand into international markets, and
therefore could significantly harm our business.
ACQUISITIONS WE UNDERTAKE COULD HARM OUR BUSINESS.
In the past two years, Methode acquired three businesses which are included
in our company and we expect to actively pursue opportunities to buy other
businesses or technologies that would complement our current products, expand
our markets or enhance our technical capabilities, or that may otherwise offer
growth opportunities. Any future acquisitions, among other things, may result in
the use of significant amounts of cash, the incurrence of debt, and amortization
expenses related to goodwill and other intangible assets. Our experience in
acquiring other businesses and technologies is limited. Acquisitions involve
numerous risks, any of which could harm our business, including:
- difficulties in integrating operations, products, technologies and
personnel;
- unanticipated costs or write-offs associated with the acquisition;
- diversion of management's attention from other business concerns;
- diversion of capital and other resources from our existing businesses;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
In April 1999, Methode acquired Polycore Technologies, Inc., which we
operate as our Stratos Communications Modules subsidiary. In December 1999,
Methode acquired the optoelectronics business of Spire Corporation, which we
operate as our Bandwidth Semiconductor subsidiary. The integration of these
businesses into our company is not complete. Since their acquisition by us,
these businesses have focused on the introduction of new products and the
expansion of their manufacturing capabilities and have not generated significant
revenues. In addition, these businesses have required significant amounts of
capital to support their development activities, and we expect to continue to
invest substantial amounts of capital in these businesses for the forseeable
future. If these businesses do not become profitable, our operating results
could be seriously harmed.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY SIGNIFICANTLY
IMPAIR OUR COMPETITIVE POSITION.
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. Although we have numerous issued
patents and pending patent applications, we cannot assure you that any patents
will issue as a result of our pending patent applications or, if issued, that
any patent claim allowed will be sufficiently broad to protect our technology.
In addition, we cannot assure you that any existing or future patents will not
be challenged, invalidated or circumvented, or that any right granted thereunder
would provide us with meaningful protection of our technology. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. We may be unable to
detect the unauthorized use of our intellectual property or to take appropriate
steps to enforce our intellectual property rights. Policing unauthorized use of
our products and technology is difficult. In addition, the laws of some foreign
countries do not
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protect our proprietary rights to the same extent as do the laws of the United
States. Our inability to adequately protect against unauthorized use of our
intellectual property could devalue our proprietary content and impair our
ability to compete effectively. Further, enforcing our intellectual property
rights could result in the expenditure of significant financial and managerial
resource and the success of such efforts cannot be predicted with certainty.
Litigation may be necessary in the future to enforce our intellectual property
rights. This litigation could be costly and its outcome cannot be predicted with
certainty. If we are unable to protect our intellectual property, our business
could be significantly harmed.
WE ARE CURRENTLY INVOLVED IN PENDING LITIGATION.
Methode is a plaintiff in two lawsuits relating to our intellectual property
rights. The first lawsuit was filed by Methode in April 1999 and is against
Agilent Technologies, Inc., Finisar Corporation and Hewlett-Packard Company,
Inc. The second lawsuit was filed by Methode in October 1999 and is against
Infineon Technologies Corp. and Optical Communications Products, Inc. In these
actions, Methode alleges, among other things, that optoelectronic products sold
by the defendants infringe upon certain Methode patents. The defendants in these
lawsuits have filed various affirmative defenses. In addition, Finisar has filed
a counterclaim. For a description of these lawsuits, see "Business--
Litigation."
As part of our separation from Methode, the Methode patents which are the
subject of these lawsuits and Methode' rights in this litigation will be
contributed to us and we will agree to indemnify Methode against all costs,
expenses and liabilities associated with these lawsuits. These lawsuits are in
the preliminary stage, and we cannot predict their outcome with certainty. If
one or more of the patents that are the subject of this litigation were found to
be invalid, we would lose future royalty payments from our current licensees of
such patents. We could also be required to pay significant monetary damages to
one or more of the defendants or be required to reimburse them for their legal
fees. If we lose our right to future royalty payments from our current licensees
or are required to pay significant money damages to one or more of the
defendants, our business would be significantly harmed.
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time,
third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies used in our business. Any claims, with or
without merit, could be time-consuming, result in costly litigation, and divert
the efforts of our technical and management personnel. If we are unsuccessful in
defending ourselves against these types of claims, we may be required to do one
or more of the following:
- stop selling our products that use or incorporate the challenged
intellectual property;
- attempt to obtain a license to sell or use the relevant technology or
substitute technology, which license may not be available on reasonable
terms or at all; or
- redesign those products that use the relevant technology.
In the event a claim against us was successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our business would be
significantly harmed.
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RISKS RELATING TO OUR SEPARATION FROM METHODE ELECTRONICS
WE HAVE NEVER OPERATED AS A STAND-ALONE COMPANY.
In preparation for this offering, certain assets and liabilities associated
with our business will be transferred to us by Methode as of May 1, 2000. Prior
to that date, Methode conducted our business through various divisions and
subsidiaries and has historically provided us with operational, financial and
other support. Following this offering, we will operate as a stand-alone company
and, accordingly, must develop and implement the financial, management,
information and reporting systems and controls necessary to support our
business. Furthermore, we will need to continually improve our systems and
controls as the size of our company increases. Although Methode has agreed to
provide us with various interim services, these arrangements will generally
terminate within one year of the proposed spin-off. See "Agreements between
Methode Electronics and Stratos Lightwave--Master Transition Services
Agreement." After the expiration of these arrangements, we may not be able to
replace these interim services on terms, including cost, as favorable as those
we will receive from Methode. We also cannot give any assurance that we will be
able to develop the necessary systems, resources and controls to operate as a
stand-alone company. Any failure to do so could significantly harm our business.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information we have included in this prospectus may
not reflect what our results of operation, financial position and cash flows
would have been had we been a stand-alone company during the periods presented.
Methode did not account for us as, and we were not operated as, a stand-alone
company during these periods. In addition, the historical financial information
included in this prospectus is not necessarily indicative of what our results of
operations, financial position and cash flows will be in the future. We have not
made adjustments to reflect many significant changes that will occur in our cost
structure, funding and operations as a result of our separation from Methode,
including changes in our management structure and employee benefit plans and the
increased costs associated with being a public, stand-alone company.
For additional information, see "Unaudited Pro Forma Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our historical combined financial statements and
related notes.
METHODE WILL CONTROL THE OUTCOME OF STOCKHOLDER VOTING AS LONG AS IT OWNS A
MAJORITY OF OUR COMMON STOCK AND MAY EXERCISE ITS VOTING POWER IN A MANNER
ADVERSE TO YOU.
After the completion of this offering, Methode will own approximately %
of our outstanding shares of common stock, or approximately % if the
underwriters exercise their over-allotment option in full. As long as Methode
owns a majority of our outstanding common stock, it will continue to be able to
elect our entire board of directors and generally be able to determine the
outcome of all corporate actions requiring stockholder approval. As a result,
Methode will be in a position to continue to control all matters affecting our
company, including:
- a change of control of our company, including a merger;
- the acquisition or disposition of assets by our company;
- future issuances of common stock or other securities of our company;
- the incurrence of debt by our company;
- amendments, modifications and waivers to the interim and ongoing
agreements we have entered into with Methode;
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- the payment of dividends on our common stock; and
- some determinations with respect to the treatment of items in our tax
returns which are consolidated or combined with Methode's tax returns.
Methode has indicated that it currently intends to divest its remaining
equity interest in our company six to twelve months after this offering,
although it is not obligated to do so. We cannot give any assurance that Methode
will complete a divestiture of its equity interest in our company in this time
frame or at all.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OF METHODE OR OWN SIGNIFICANT AMOUNTS OF METHODE'S STOCK.
We currently anticipate that two members of our board of directors will be
directors of Methode. Our directors who are also directors of Methode will have
obligations to both companies and may have conflicts of interest with respect to
matters potentially or actually involving or affecting us, such as acquisitions
and other corporate opportunities that may be suitable for both Methode and us.
In addition, after this offering and the proposed spin-off, a number of our
directors and executive officers will continue to own significant amounts of
Methode's stock and options on Methode's stock they acquired as directors or
employees of Methode. This ownership could create, or appear to create,
potential conflicts of interest when these directors and officers are faced with
decisions that could have different implications for Methode and us.
Our restated certificate of incorporation contains provisions which limit
the duty of Methode and its directors, officers and employees to advise us of
business or investment opportunities which may be of interest to our company.
These provisions may result in our company not becoming aware of certain
corporate opportunities which we may have an interest in pursuing. For a
description of these provisions, see "Description of Capital Stock--Corporate
Opportunities."
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH METHODE WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS.
We currently have and, after this offering and the proposed spin-off, will
continue to have, various interim and ongoing agreements with Methode. As a
result, conflicts of interest may arise between Methode and us in a number of
areas relating to our past and ongoing relationships, including:
- the nature, quality and pricing of the interim services Methode has agreed
to provide to us;
- litigation, labor, tax, employee benefits and other matters arising from
our separation from Methode;
- business opportunities that may be attractive to both Methode and us;
- major business combinations involving us; and
- sales or distributions by Methode of all or any portion of its ownership
interest in us.
We cannot assure you that we will be able to resolve any conflicts we may
have with Methode or, if we are able to do so, that the resolution will be as
favorable as if we were dealing with an unaffiliated party. The agreements we
have entered into with Methode may be amended by mutual agreement of the
parties. While we are controlled by Methode, it may be able to require us to
agree to amendments to these agreements that may be less favorable to us than
the current terms of such agreements. See "Arrangements between Methode
Electronics and Stratos Lightwave."
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WE HAVE AGREED TO CERTAIN CONTRACTUAL LIMITATIONS UNDER OUR SEPARATION
AGREEMENTS WITH METHODE TO PRESERVE METHODE'S ABILITY TO DISTRIBUTE ITS SHARES
IN OUR COMPANY ON A TAX-FREE BASIS WHICH COULD LIMIT THE CONDUCT OF OUR BUSINESS
AND OUR ABILITY TO PURSUE OUR BUSINESS OBJECTIVES.
In connection with this offering, we have entered into an agreement with
Methode that contains a number of restrictive covenants that will, among other
things, limit our ability to complete acquisitions and divestitures and issue
capital stock. The purpose of these provisions is to preserve Methode's ability
to distribute its shares in our company to its stockholders on a tax-free basis.
These covenants generally expire either at such time as Methode completes its
divestiture of our common stock or two years after the divestiture. These
restrictions could materially limit the way in which we conduct our business and
our ability to pursue our business objectives, and could have a material adverse
effect on our company. For more information about these restrictions, see
"Arrangements Between Methode Electronics and Stratos Lightwave--Initial Public
Offering and Distribution Agreement."
IF THE ANTICIPATED SPIN-OFF IS NOT TAX-FREE, WE COULD BE LIABLE TO METHODE FOR
THE RESULTING TAXES, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS.
Methode has indicated that, following this offering, it intends to divest
its remaining equity interest in us by means of a tax-free spin-off. We have
agreed to indemnify Methode in the event the spin-off is not tax-free to Methode
as a result of various actions taken by or with respect to us or our failure to
take various actions, all as set forth in our tax sharing agreement with
Methode. We may not be able to control some of the events that could trigger
this liability. In particular, any acquisition of us by a third party within two
years of the spin-off could result in the spin-off becoming a taxable
transaction and give rise to our obligation to indemnify Methode for any
resulting tax liability. If we were to become obligated to indemnify Methode for
this tax liability, our financial condition and business would be significantly
harmed.
RISKS RELATING TO THIS OFFERING
SINCE OUR COMMON STOCK HAS NOT TRADED PUBLICLY, THE PUBLIC OFFERING PRICE MAY
NOT BE INDICATIVE OF THE MARKET PRICE OF OUR COMMON STOCK AFTER THIS OFFERING,
AND THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE OR FLUCTUATE SIGNIFICANTLY.
Prior to this offering, there has not been a public market for our common
stock. The public offering price of our common stock was determined by
negotiations among representatives of the underwriters and us, and may not be
indicative of the market price of our common stock after this offering. For a
discussion of the factors to be considered in determining the public offering
price, see "Underwriting." We cannot assure you that an active public market
will develop or be sustained after this offering or that the market price of our
common stock will not decline below the public offering price.
The market price of our common stock could fluctuate significantly after the
offering. Factors that could affect our stock price include:
- economic and stock market conditions generally and specifically as they
may impact participants in the communication industry;
- earnings and other announcements by, and changes in market evaluations of,
participants in the optical communication industry;
- changes in financial estimates and recommendations by securities analysts
following our stock;
- announcements or implementation by us or our competitors of technical
innovations or new products;
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- strategic moves by us or our competitors, such as acquisitions; and
- actions by Methode prior to the proposed spin-off of our common stock.
In addition, the securities of many companies have experienced extreme price
and volume fluctuations in recent years, often unrelated to the companies'
operating performance. Specifically, market prices for securities of technology
related companies have frequently reached elevated levels, often following their
initial public offerings. These levels may not be sustainable and may not bear
any relationship to these companies' operating performances.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE OPEN MARKET COULD CAUSE
OUR STOCK PRICE TO DECLINE.
After this offering, we will have shares of common stock
outstanding. This includes the shares of common stock we are selling
in this offering, which may be resold in the public market immediately after
this offering. The remaining shares, representing approximately %
of our total outstanding shares of common stock following this offering, will be
owned by Methode. If Methode distributes these shares to the holders of its
Class A and Class B common stock through the proposed spin-off, they would be
eligible for immediate resale in the public market, other than shares held by
our affiliates. We are unable to predict whether significant amounts of our
common stock will be sold in the open market in anticipation of, or following,
this spin-off. Methode has the sole discretion to determine the timing,
structure and the terms of the spin-off, all of which may affect the trading
levels of our common stock. In addition, if Methode does not proceed with the
spin-off, it will have the right to require us to register its shares of our
common stock under the U.S. federal securities laws for sale into the public
market. Any sales of substantial amounts of our common stock in the open market,
or the perception that such sales might occur, whether as a result of the
spin-off or otherwise, could cause the market price for our common stock to
decline. See "Shares Eligible for Future Sale."
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Our restated certificate of incorporation and bylaws and Delaware law
contain provisions that could make it more difficult for a third party to
acquire us without the consent of our board of directors. These provisions
include a classified board of directors and limitations on actions by our
stockholders by written consent. In addition, our board of directors has the
right to issue preferred stock without stockholder approval, which could be used
to dilute the stock ownership of a potential hostile acquiror. Delaware law also
imposes some restrictions on mergers and business combinations between us and
any holder of 15% or more of our outstanding common stock. These provisions
apply even if the offer may be considered beneficial by some stockholders. For a
more detailed discussion of these provisions, see "Description of Capital
Stock--Anti-Takeover Effects of Our Charter, Bylaws and Delaware Law."
OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING.
Our management will have broad discretion in determining how to spend the
net proceeds from this offering. The failure of management to apply such funds
effectively could have a material adverse effect on our business, operating
results or financial condition.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The public offering price of our common stock is higher than the pro forma
net tangible book value per share of the outstanding common stock immediately
after the offering. If you purchase our common stock in this offering, you will
incur immediate dilution of approximately $ per share in the net tangible
book value per share of our common stock. See "Dilution."
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OUR SEPARATION FROM METHODE ELECTRONICS
On February 23, 2000, Methode announced plans to create a separate company
comprised of its optical products businesses. Accordingly, we were incorporated
in Delaware in April 2000 as a wholly-owned subsidiary of Methode. Prior to the
separation, Methode conducted our business through various divisions and
subsidiaries. The separation of our businesses from Methode will be
substantially completed prior to the offering.
SEPARATION AND TRANSITIONAL ARRANGEMENTS
Methode and our company will enter into various agreements providing for the
separation of our business from Methode, including a master separation
agreement. These agreements generally provide for, among other things, the
transfer from Methode to us of assets and the assumption by us of liabilities
relating to our business. We also have entered into agreements governing various
interim and ongoing relationships between us.
The agreements relating to our separation from Methode were made in the
context of a parent-subsidiary relationship and were negotiated in the overall
context of our separation from Methode. For more information regarding the
separation arrangements, see "Arrangements between Methode Electronics and
Stratos Lightwave."
DISTRIBUTION BY METHODE ELECTRONICS OF OUR COMMON STOCK
After the completion of this offering, Methode will own approximately
% of the outstanding shares of our common stock, or approximately %
if the underwriters exercise their over-allotment option in full. As long as
Methode owns a majority of our outstanding common stock, it will be able to
elect our entire board of directors and generally be able to determine the
outcome of all corporate actions requiring stockholder approval.
Methode has announced that it currently plans to divest its remaining equity
interest in us by means of a distribution to Methode's stockholders in a
transaction intended to be tax-free to those stockholders. Methode currently
expects the proposed spin-off to occur six to twelve months after this offering.
However, Methode is not obligated to complete its divestiture of its remaining
equity interest in us, and the spin-off may not occur by the contemplated time
or at all.
Methode will determine the timing, structure and all of the terms of its
distribution of our common stock. Methode's final determination to proceed will
require a declaration of the spin-off by the Methode board of directors. Such a
declaration is not expected to be made until certain conditions, many of which
are outside the control of Methode, are satisfied, including:
- receipt by Methode of a ruling from the Internal Revenue Service as to the
tax-free nature of the spin-off; and
- the absence of any future change in market or economic conditions or in
Methode or our business and financial condition that causes the Methode
board of directors to conclude that the spin-off is not in the best
interest of Methode's stockholders.
21
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be
approximately $ million based on an assumed initial public offering price
of $ per share and after deducting the estimated underwriting discount and
offering expenses. If the underwriters exercise their over-allotment option in
full, the net proceeds are estimated to be approximately $ million.
We intend to use the net proceeds of this offering for general corporate
purposes, including working capital, capital expenditures and research and
development, and for payment of $3.0 million of additional purchase price in
connection with our prior acquisition of Polycore Technologies, Inc. In
addition, we may use a portion of the net proceeds of this offering to acquire
or invest in complementary technologies or businesses. We are not currently a
party to any agreements or understandings with respect to any future
acquisitions or investments. Pending the foregoing uses, we intend to invest the
net proceeds from this offering in short-term, interest bearing, investment
grade marketable securities.
The principal purposes of our separation from Methode and this offering are
to increase our capitalization and to provide us with direct access to public
equity markets. We cannot currently identify all of the specific uses for a
substantial portion of the net proceeds from this offering. Accordingly, our
management will have broad discretion in applying the net proceeds from this
offering.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all future earnings to fund the growth and
development of our business. We do not anticipate paying any cash dividends in
the foreseeable future.
22
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of January 31,
2000 and our capitalization on an as adjusted basis to reflect our receipt of
the net proceeds from the sale of shares of common stock in this offering
at an assumed public offering price of $ per share, after deducting the
estimated underwriting discount and offering expenses payable by us.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 2000
------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock....................................... $ -- $ --
Common stock.......................................... --
Additional paid-in capital............................ --
Methode net investment................................ 46,900
------- -------
Total stockholders' equity.......................... 46,900
------- -------
Total capitalization.............................. $46,900 $
======= =======
</TABLE>
The number of shares of our common stock to be outstanding after this
offering does not include shares of our common stock reserved for issuance
under our Stratos 2000 Stock Plan. We expect to grant options to purchase
shares of our common stock effective as of the date of this offering with an
exercise price equal to the public offering price.
See "Selected Financial Data," "Unaudited Pro Forma Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Management--Employee Benefit Plans--Stratos 2000 Stock
Plan" and the combined financial statements and related notes included in this
prospectus.
23
<PAGE>
DILUTION
The net tangible book value of our common stock as of January 31, 2000 was
approximately $ million, or $ per share. After giving effect to the sale
of our common stock in this offering, at an assumed public offering price of
$ per share, assuming that the underwriters' over-allotment option is not
exercised, and after deducting the estimated underwriting discount and estimated
offering expenses payable by us, the net tangible book value of our common stock
would have been $ million, or $ per share.
Net tangible book value per share represents the amount of our total assets,
excluding net intangible assets, less our total liabilities, divided by the
number of shares of common stock outstanding prior to the offering. This
offering will result in an increase in the net tangible book value per share of
$ to Methode and dilution in net book value per share of $ to new
investors who purchased in the offering. Dilution per share to new investors is
determined by subtracting net tangible book value per share after the offering
from the assumed public offering price of $ per share. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Net tangible book value per share as of January 31,
2000.................................................... $
Increase attributable to sale of common stock in the
offering................................................
-------
Net tangible book value per share after this offering.......
-------
Dilution per share to new investors......................... $
=======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the net
tangible book value per share after the offering would be $ per share, the
increase in net tangible book value per share to existing stockholders would be
$ per share and the dilution in net tangible book value to new investors
would be $ per share.
The following table summarizes as of January 31, 2000, the differences
between the total consideration paid and the average price per share paid by
Methode and the new investors with respect to the number of shares of common
stock purchased from us based on an assumed public offering price of $ per
share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Methode Electronics..............
New investors....................
---- ---- ---- ---- ----
Total............................
==== ==== ==== ==== ====
</TABLE>
24
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS)
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our combined financial statements and the related notes included
elsewhere in this prospectus.
The combined statement of operations data set forth below for the fiscal
years ended April 30, 1997, 1998 and 1999 and the nine months ended January 31,
2000 and the combined balance sheet data as of April 30, 1998 and 1999 and
January 31, 2000 are derived from, and are qualified by reference to, our
audited combined financial statements included elsewhere in this prospectus. The
combined balance sheet data as of April 30, 1997 are derived from combined
audited financial statements not included in this prospectus. The combined
statement of operations data set forth below for the fiscal years ended
April 30, 1995 and 1996 and the combined balance sheet data as of April 30, 1995
and 1996 are derived from unaudited combined financial statements not included
in this prospectus. The combined statement of operations data set forth below
for the nine months ended January 31, 1999 is derived from unaudited combined
financial statements included in this prospectus.
The as adjusted column gives effect to the receipt of the net proceeds from
the sale of shares of common stock offered by us at an offering price of $
per share, after deducting the underwriting discount and estimated offering
expenses payable by us, and the payment of $3.0 million in additional purchase
price with respect to our acquisition of Polycore Technologies.
The combined financial statements include all normal recurring adjustments
that we consider necessary for a fair presentation of our financial position and
results of operations. The combined results of operations for the nine months
ended January 31, 2000 are not necessarily indicative of the results that may be
expected for the full fiscal year ending April 30, 2000, or any other future
periods. The following financial information does not reflect what our combined
financial position and combined results of operations would have been had we
operated as a separate, stand-alone entity for the periods presented. Our net
sales presented below differ from the net sales of our business previously
reported by Methode primarily because intercompany sales to Methode are
accounted for as third-party transactions in the financial statements below, but
have been eliminated in information previously reported by Methode.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
---------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $9,608 $14,485 $20,966 $24,158 $46,458 $30,917 $48,553
Costs of sales................. 5,633 8,905 14,121 17,656 29,543 20,436 32,594
------ ------- ------- ------- ------- ------- -------
Gross profit................... 3,975 5,580 6,845 6,502 16,915 10,481 15,959
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development..... 1,085 1,441 2,294 2,353 3,301 2,317 4,690
Sales and marketing.......... 958 1,438 2,085 2,344 3,335 2,299 3,538
General and administrative... 1,771 2,408 3,348 3,421 4,697 3,178 4,724
------ ------- ------- ------- ------- ------- -------
Total operating expenses... 3,814 5,287 7,727 8,118 11,333 7,794 12,952
------ ------- ------- ------- ------- ------- -------
Income (loss) from
operations................... 161 293 (882) (1,616) 5,582 2,687 3,007
Other income (expense), net.... -- -- -- 188 50 -- 1,287
------ ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................ 161 293 (882) (1,428) 5,632 2,687 4,294
Income taxes (benefit)......... 65 117 (375) (570) 2,130 1,000 1,600
------ ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 96 $ 176 $ (507) $ (858) $ 3,502 $ 1,687 $ 2,694
====== ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF JANUARY 31, 2000
---------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 ACTUAL AS ADJUSTED
-------- -------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ -- $ -- $ -- $ -- $ 550 $ 608 $
Working capital.................... 3,155 5,544 6,658 7,894 14,110 15,562
Total assets....................... 7,833 11,812 14,286 16,702 31,506 53,198
Long-term obligations, less current
portion.......................... -- -- -- -- -- -- --
Stockholder's net investment....... 7,270 10,666 13,275 15,008 26,761 46,900
</TABLE>
26
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
On December 30, 1999 Methode purchased substantially all the assets of the
Optoelectronics division of Spire Corporation, referred to as Bandwidth
Semiconductor. The acquisition is being accounted for by the purchase method of
accounting. See Note 2 to our combined financial statements included elsewhere
in the prospectus for a description of the acquisition.
On April 15, 1999, Methode purchased substantially all of the assets of
Polycore Technologies, Inc., now referred to as Stratos Communication Modules.
The acquisition is being accounted for by the purchase method of accounting. See
Note 2 to our combined financial statements included elsewhere in the prospectus
for a description of the acquisition.
The unaudited pro forma combined statements of operations for the nine
months ended January 31, 2000 and the fiscal year ended April 30, 1999 were
prepared as if these acquisitions were made on May 1, 1998 using the unaudited
statement of operations of Bandwidth Semiconductor and Stratos Communication
Modules for the year ended January 31, 1999 and of Bandwidth Semiconductor for
the eight months ended October 31, 1999, and our audited combined statement of
operations for the fiscal year ended April 30, 1999 and the nine months ended
January 31, 2000. This unaudited combined statement of operations for the nine
months ended January 31, 2000 includes the results of operations of Stratos
Communication Modules for the nine months ended January 31, 2000 and Bandwidth
Semiconductor for the month ended January 31, 2000.
The unaudited pro forma combined financial information does not purport to
present our combined results of operations had the acquisitions actually
occurred on the date indicated; nor does it purport to be indicative of results
that will be attained in the future.
The pro forma financial information should be read in conjunction with our
historical combined financial statements and the related notes for the nine
months ended January 31, 2000 included elsewhere in the prospectus.
27
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BANDWIDTH STRATOS
STRATOS SEMICONDUCTOR PRO FORMA
NINE MONTHS EIGHT MONTHS NINE MONTHS
ENDED ENDED ENDED
JANUARY 31, OCTOBER 31, PRO FORMA JANUARY 31,
2000 1999 ADJUSTMENTS 2000
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net sales.................................... $48,553 $2,885 $51,438
Cost of sales................................ 32,594 2,586 $ 129 (a) 35,309
------ ----- ----- ------
Gross profit................................. 15,959 299 (129) 16,129
Operating expenses:
Research and development................... 4,690 55 4,745
Sales and marketing........................ 3,538 3,538
General and administrative................. 4,724 1,063 248 (b)
89 (c) 6,124
------ ----- ----- ------
Total operating expenses................. 12,952 1,118 337 14,407
------ ----- ----- ------
Income (loss) from operations................ 3,007 (819) (466) 1,722
Other income (expense), net.................. 1,287 8 1,295
------ ----- ----- ------
Income (loss) before income taxes............ 4,294 (811) (466) 3,017
Income taxes (benefit)....................... 1,600 -- (498)(d) 1,102
------ ----- ----- ------
Net income (loss)........................ $2,694 $(811) $ 32 $1,915
====== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
STRATOS STRATOS
STRATOS COMMUNICATION BANDWIDTH PRO FORMA
FISCAL YEAR MODULES SEMICONDUCTOR FISCAL YEAR
ENDED YEAR ENDED YEAR ENDED PRO FORMA ENDED
APRIL 30, JANUARY 31, JANUARY 31, FISCAL APRIL 30,
1999 1999 1999 ADJUSTMENTS 1999
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS
DATA:
Net sales........................ $46,458 $ 808 $5,863 $(106)(e) $53,023
Cost of sales.................... 29,543 275 5,730 (26)(e)
194 (a) 35,716
------ ----- ----- ----- ------
Gross profit..................... 16,915 533 133 (274) 17,307
Operating expenses:
Research and development....... 3,301 47 178 3,526
Sales and marketing............ 3,335 3,335
General and administrative..... 4,697 868 1,536 399 (f)
119 (c) 7,619
------ ----- ----- ----- ------
Total operating expenses..... 11,333 915 1,714 518 14,480
------ ----- ----- ----- ------
Income (loss) from operations.... 5,582 (382) (1,581) (792) 2,827
Other income (expense), net...... 50 450 -- (450) 50
------ ----- ----- ----- ------
Income (loss) before income
taxes.......................... 5,632 68 (1,581) (1,242) 2,877
Income taxes (benefit)........... 2,130 27 (1,101)(d) 1,056
------ ----- ----- ----- ------
Net income (loss)............ $3,502 $ 41 ($1,581) $(141) $1,821
====== ===== ===== ===== ======
</TABLE>
28
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JANUARY 31, 2000 AND FISCAL YEAR ENDED APRIL 30, 1999
The pro forma adjustments to the unaudited pro forma combined statement of
operations for the nine months ended January 31, 2000 and the fiscal year ended
April 30, 1999 include adjustments for Bandwidth Semiconductor and Stratos
Communication Modules to reflect the elimination of certain customer
arrangements at Stratos Communication Modules which were not part of the
acquired assets and liabilities as well as adjustments related to both companies
to account for the allocation of the purchase price and the pro forma
combination of the companies.
(a) Represents additional depreciation on the fixed assets of Bandwidth
Semiconductor written up to fair value at the date of acquisition.
(b) Represents the amortization of the excess of purchase price over net assets
acquired of Bandwidth Semiconductor.
(c) Represents the amortization of additional purchase price related to the
contingent payment to the former shareholders of Polycore Technologies,
Inc., payable in the event of an initial public offering of the Company. See
Note 2 to our combined financial statements included elsewhere in the
prospectus for a description of the acquisition.
(d) Represents the tax benefit at statutory rates applied to the loss
attributable to Bandwidth Semiconductor and the total of the pro forma
adjustments.
(e) Represents non-recurring revenue, other income and cost of services provided
related to a research project which was not included in the acquired net
assets and liabilities.
(f) Represents the amortization of the excess of purchase price over net assets
acquired of Stratos Communication Modules and Bandwidth Semiconductor.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE COMBINED FINANCIAL STATEMENTS
AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We develop, manufacture and sell optical subsystems and components for high
data rate networking, data storage and telecommunication applications. These
optical subsystems are designed for use in LANs, SANs, MANs, WANs and central
office networking in the telecommunication markets. Our optical subsystems are
compatible with the advanced transmission protocols used in these networks,
including Gigabit Ethernet, Fast Ethernet, Fibre Channel and ATM. We also
design, manufacture and sell a full line of optical components and cable
assemblies for use in enterprise, metropolitan area, wide area and
telecommunication networks.
On February 23, 2000, Methode announced plans to create a separate company
comprised of its optical products businesses. Accordingly, we were incorporated
in Delaware in April 2000 as a wholly-owned subsidiary of Methode. Prior to the
separation, Methode conducted our business through various divisions and
subsidiaries. The transfer of the assets and liabilities comprising our business
will be completed on or about May 1, 2000.
After the completion of this offering, Methode will own approximately %
of the outstanding shares of our common stock, or approximately % if the
underwriters exercise their over-allotment option in full. Methode currently
intends to divest its remaining equity interest in us six to twelve months after
this offering by distributing all of its shares of our common stock to the
holders of Methode Class A and Class B common stock, although it is not
obligated to do so.
Our net sales are derived principally from the sale of optical subsystems
and components to optical communication OEMs. Sales are generally recognized
upon product shipment. Returns are recognized immediately upon receipt and
allowances are recorded as soon as they are determined to be due. Our net sales
have fluctuated from period to period based on the size and timing of customer
orders, particularly from our largest customers, and based on any canceled,
delayed or rescheduled orders in the relevant period.
We market and sell our products domestically and internationally through our
direct sales force, local resellers and manufacturers' representatives.
Specifically, we have established relationships with resellers and
manufacturers' representatives in Australia, Europe, India, Israel and the
Pacific Rim. For the nine months ended January 31, 2000, sales to customers in
the United States accounted for approximately 78.0% of our net sales. We expect
sales to customers in the United States to continue to account for the majority
of our future net sales, although we expect sales to foreign customers to
increase in the future.
For the fiscal year ended April 30, 1999, our three largest customers
together with their individual contract manufacturers accounted for 43% of our
net sales, with Nortel, Cisco and Alcatel accounting for 27%, 10% and 6% of our
net sales, respectively. For the nine months ended January 31, 2000, our three
largest customers accounted for 41% of our net sales, with Cisco, Nortel and
Alcatel accounting for 27%, 7% and 7% of our net sales, respectively. We expect
to continue to depend on sales to a small number of large customers for the
foreseeable future.
The average unit prices of our products generally decrease as the products
mature in response to factors such as increased competition, the introduction of
new products and increased unit volumes. We
30
<PAGE>
anticipate that average selling prices will continue to decline in future
periods although the timing and degree of the declines cannot be predicted with
any certainty. We must continue to develop and introduce on a timely basis new
products that incorporate features that can be sold at higher average selling
prices.
Our cost of sales consists of materials, salaries and related expenses for
manufacturing personnel and manufacturing overhead. We purchase several key
components used in the manufacture of our products from a limited number of
suppliers. We have periodically experienced shortages and delivery delays for
these materials. In certain circumstances, we maintain an inventory of limited
source components to decrease the risk of shortage. If we overestimate our
requirements, we may have excess inventory of these components. Substantially
all of our products are designed and manufactured in our own facilities.
Accordingly, a portion of our cost of sales is fixed over the near term. In
order to remain competitive, we must continually reduce our manufacturing costs
through design and engineering innovations and increases in manufacturing
efficiencies. There can be no assurance that we will be able to reduce our
manufacturing costs or introduce new products to offset anticipated decreases in
the average selling prices of our products.
Research and development expenses consist primarily of salaries and related
expenses for design engineers, scientists and other technical personnel,
depreciation of test and prototyping equipment, and tooling. Research and
development expenses also consist of materials and overhead costs related to
major product development projects. We charge all research and development
expenses to operations as incurred. We believe that continued investment in
research and development is critical to our long-term business success and we
intend to increase investment in research and development programs in future
periods for the purpose of enhancing or reducing the cost of current optical
subsystems and components, and developing new optical subsystems and components.
Sales and marketing expenses consist primarily of personnel costs, including
sales commissions and product marketing and promotion costs. Historically,
expenses have included allocations from Methode Electronics of expenses for the
salaries and related expenses for sales and marketing personnel. We expect to
make significant expenditures for sales and marketing services for the
foreseeable future.
General and administrative expenses consist primarily of personnel costs for
our administrative and financial groups, as well as legal, accounting and other
professional fees. General and administrative expenses also consist of the
amortization of goodwill resulting from the excess of the purchase price over
net assets of the acquired companies, which is amortized on a straight-line
basis over twenty-five years. Historically, expenses have included allocations
from Methode for the salaries and related expenses for administrative, finance
and human resources personnel, professional fees, information technology, and
other corporate expenses. In support of our continued growth and our operations
as an independent public company, we expect to make significant expenditures for
general and administrative services for the foreseeable future.
Other income consists of fees and royalties from the grant of licenses for
certain of our intellectual property rights to third parties. Fees and royalties
from these licenses are generally either one-time fixed payments or are based on
the sales price of products that incorporate the licensed rights, the timing and
amounts of which is beyond our control. Accordingly, the amount of other income
received in any given period is expected to vary significantly.
We have entered into a master transitional service agreement related to
interim and ongoing relationships with Methode. This agreement is reciprocal and
provides for transitional services and mutual support in the areas of
accounting, treasury, information technology, human resources, sales and
marketing, legal, real estate and other corporate services and infrastructure
costs. Specified charges for transitional services are generally at cost plus
20%. The transition period varies depending on the services but is generally for
one year after the spin-off. We believe that purchasing these services from,
31
<PAGE>
and providing them to, Methode provides both Methode and us with an efficient
means of obtaining these services during the transition period.
In December 1998, Methode acquired all of the outstanding shares of Stratos
(UK) for $1.7 million in cash. This transaction was treated as a purchase for
accounting purposes. Stratos (UK's) operations are located in Haverhill,
England. Stratos (UK) designs, develops and manufactures optical components for
harsh environments, such as military applications. We operate this business as
our Stratos (UK) subsidiary.
In February 1999, Methode acquired a sixty percent ownership interest in MP
Optical Communications LLC. In September 1999, MP Optical Communications LLC
formed the Chinese corporation MP Optical Communication (Shenzhen) Co., Ltd. (MP
Optical China). We are committed to contribute a total of $1,700,000 in capital
to MP Optical China by October 2001. To date, we have contributed $300,000 in
capital to MP Optical China. The MP Optical China facility is located in
Shenzhen, China where its operations involve the development and production of
optical connectors.
In April 1999, Methode acquired substantially all of the assets of Polycore
Technologies, Inc. for approximately $795,500 in cash plus additional contingent
consideration. We have agreed to pay $3.0 million within thirty days of the
completion of this offering as additional purchase price. This transaction was
treated as a purchase for accounting purposes. This business, located in Palm
Bay, Florida, designs, develops and manufactures optical subsystems for Local
Area Networks. We operate this business as our Stratos Communication Modules
subsidiary.
In December 1999, Methode acquired substantially all of the assets of the
Optoelectronics division of Spire Corporation for $13.0 million in cash. This
transaction was treated as a purchase for accounting purposes. This business,
located in Bedford, Massachusetts, conducts research and development and
produces compound semiconductor devices. We operate this business as our
Bandwidth Semiconductor subsidiary.
BASIS OF PRESENTATION
Our combined financial statements have been carved out from the consolidated
financial statements of Methode using the historical results of operations and
cash flows and historical basis of the assets and liabilities of our business.
The combined financial statements also include allocations to us of Methode's
corporate expenses, including centralized accounting, treasury, information
technology, human resources, sales and marketing, legal, real estate and other
corporate services and infrastructure costs. We and Methode both consider the
expense allocations to be reasonable reflections of the utilization of the
services provided to us or the benefits received by us.
The combined financial information in this prospectus is not indicative of
our financial position, results of operation or cash flows in the future, nor is
it necessarily indicative of what our financial position, results of operations
or cash flows would have been were we a separate, stand-alone entity for the
periods presented. The financial information presented in this prospectus does
not reflect additional expenses which we may incur as a result of being a
stand-alone, public company.
32
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales......................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Costs of sales.................... 67.4 73.1 63.6 66.1 67.1
----- ----- ----- ----- -----
Gross profit...................... 32.6 26.9 36.4 33.9 32.9
----- ----- ----- ----- -----
Operating expenses:
Research and development........ 10.9 9.7 7.1 7.5 9.7
Sales and marketing............. 9.9 9.7 7.2 7.4 7.3
General and administrative...... 16.0 14.2 10.1 10.3 9.7
----- ----- ----- ----- -----
Total operating expenses...... 36.8 33.6 24.4 25.2 26.7
----- ----- ----- ----- -----
Income (loss) from operations..... (4.2) (6.7) 12.0 8.7 6.2
Other income (expense), net....... -- 0.8 0.1 -- 2.6
----- ----- ----- ----- -----
Income (loss) before income
taxes........................... (4.2) (5.9) 12.1 8.7 8.8
Income taxes (benefit)............ (1.8) (2.4) 4.6 3.2 3.3
----- ----- ----- ----- -----
Net income (loss)................. (2.4)% (3.5)% 7.5 % 5.5 % 5.5 %
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
NET SALES. Net sales increased to $48.6 million in the nine months ended
January 31, 2000 from $30.9 million in the nine months ended January 31, 1999.
Of this $17.7 million increase, $14.8 million is from an increase in net sales
of optical subsystems and $2.9 million is from an increase in net sales of
optical components. This increase in net sales was primarily due to an increase
in net sales of our line of internal removable transceivers.
COST OF SALES. Cost of sales increased to $32.6 million in the nine months
ended January 31, 2000 from $20.4 million in the nine months ended January 31,
1999. This increase was due primarily to an increase in the production of our
internal removable transceivers and an increase in reserves to provide for the
impact of material obsolescence due to rapid technological change. Gross profit
as a percentage of net sales, or gross margin, decreased to 32.9% in the nine
months ended January 31, 2000 from 33.9% in the nine months ended January 31,
1999. The decrease in gross margin was the result of additional start-up and
other non-recurring expenses incurred during the nine months ended January 31,
2000 related to our new Stratos Communication Modules and Bandwidth
Semiconductor subsidiaries. This decrease was partially offset by a positive
shift in product mix between higher margin optical subsystems and lower margin
optical components.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$4.7 million in the nine months ended January 31, 2000 from $2.3 million in the
nine months ended January 31, 1999. This increase was due primarily to
additional personnel and equipment dedicated to research and development, to the
establishment of new and expanded research and development facilities in
Chicago, Illinois, Palm Bay, Florida and Bedford, Massachusetts, and to material
and overhead costs related to major product development projects.
SALES AND MARKETING. Sales and marketing expenses increased to $3.5 million
in the nine months ended January 31, 2000 from $2.3 million in the nine months
ended January 31, 1999. This increase
33
<PAGE>
was due both to an increase in the number of sales and marketing personnel and
to an increase in commissions and bonuses associated with the increase in net
sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.7 million in the nine months ended January 31, 2000 from $3.2 million in
the nine months ended January 31, 1999. This increase was primarily the result
of increased corporate allocations on expanded facilities and increased legal
costs associated with enforcing intellectual property rights, as well as
amortization of goodwill resulting from our three acquisitions.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consisted entirely
of license fees received during the nine months ended January 31, 2000. License
fees in the nine months ended January 31, 2000 included three license fees
totaling $1.3 million. No license fees or royalties were received in the nine
months ended January 31, 1999. Royalties consist of both fixed schedule payments
and contingent payments based on sales volumes of licensed products.
INCOME TAXES (BENEFIT). The provision for income taxes increased to $1.6
million in the nine months ended January 31, 2000 based on an effective tax rate
of 37.3% from $1.0 million in the nine months ended January 31, 1999 based on an
effective rate of 37.2%. No separate tax returns have been filed for our
business because historically our operating results have been fully consolidated
with the results of Methode for tax purposes.
FISCAL YEARS ENDED APRIL 30, 1999 AND 1998
NET SALES. Net sales increased to $46.5 million in the fiscal year ended
April 30, 1999 from $24.2 million in the fiscal year ended April 30, 1998. This
$22.3 million increase is the result of a $23.2 million increase in net sales of
optical subsystems, offset by a $900,000 decrease in net sales of optical
components. This increase in net sales of optical subsystems was primarily due
to an increase in net sales of our line of embedded transceivers. The decrease
in net sales of our optical components was due primarily to price and volume
erosion.
COST OF SALES. Cost of sales increased to $29.5 million in the fiscal year
ended April 30, 1999 from $17.7 million in the fiscal year ended April 30, 1998.
This increase was due primarily to an increase in the production of our embedded
transceivers. Gross margin increased to 36.4% in the fiscal year ended
April 30, 1999 from 26.9% in the fiscal year ended April 30, 1998. This increase
in gross margin was due primarily to a positive shift in product mix between
higher margin optical subsystems and lower margin optical components.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$3.3 million in the fiscal year ended April 30, 1999 from $2.4 million in the
fiscal year ended April 30, 1998. This increase was due primarily to increases
in the number of personnel, facilities and equipment dedicated to research and
development and to material and overhead costs related to major product
development projects.
SALES AND MARKETING. Sales and marketing expenses increased to $3.3 million
in the fiscal year ended April 30, 1999 from $2.3 million in the fiscal year
ended April 30, 1998. This increase was due to an increase in the number of
sales and marketing personnel, to an increase in commissions, bonuses and other
incentives associated with the increase in net sales, and to increased costs for
new marketing promotions.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $4.7 million in the fiscal year ended April 30, 1999 from $3.4 million in the
fiscal year ended April 30, 1998. This increase was primarily the result of
corporate allocations tied to an increase in net sales.
34
<PAGE>
OTHER INCOME (EXPENSE), NET. Other income (expense), net consisted entirely
of license fees received during the period. License fees decreased to $50,000 in
the fiscal year ended April 30, 1999 from $188,000 in the fiscal year ended
April 30, 1998. Royalties consist of both fixed schedule payments and contingent
payments based on sales volumes of licensed products.
INCOME TAXES (BENEFIT). The provision for income taxes increased to $2.1
million in the fiscal year ended April 30, 1999 from a benefit of $570,000 in
the fiscal year ended April 30, 1998.
FISCAL YEARS ENDED APRIL 30, 1998 AND 1997
NET SALES. Net sales increased to $24.2 million in the fiscal year ended
April 30, 1998 from $21.0 million in the fiscal year ended April 30, 1997. This
$3.2 million increase is the result of a $5.7 million increase in net sales of
optical subsystems offset by a $2.5 million decrease in net sales of optical
components. The increase in net sales of optical subsystems was primarily due to
the introduction of a new internal removable transceiver. The decrease in net
sales of optical components was due primarily to price erosion.
COST OF SALES. Cost of sales increased to $17.7 million in the fiscal year
ended April 30, 1998 from $14.1 million in the fiscal year ended April 30, 1997.
This increase was due primarily to the introduction of a new internal removable
transceiver. Gross margin decreased to 26.9% in the fiscal year ended April 30,
1998 from 32.6% in the fiscal year ended April 30, 1997. This decrease was due
primarily to significant declines in the sales price of one product line of
optical components, but was partially offset by a positive shift in product mix
between higher margin optical subsystems and lower margin optical components.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$2.4 million in the fiscal year ended April 30, 1998 from $2.3 million in the
fiscal year ended April 30, 1997. This increase was due primarily to an increase
in the number of personnel, facilities and equipment dedicated to research and
development.
SALES AND MARKETING. Sales and marketing expenses increased to $2.3 million
in the fiscal year ended April 30, 1998 from $2.1 million in the fiscal year
ended April 30, 1997. This increase was due both to an increase in the number of
sales and marketing personnel and to an increase in commissions and bonuses
associated with the increase in net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $3.4 million in the fiscal year ended April 30, 1998 from $3.3 million in the
fiscal year ended April 30, 1997. This increase was primarily the result of
corporate allocations tied to an increase in net sales.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consisted entirely
of license fees received during the period. License fees totaled $188,000 in the
fiscal year ended April 30, 1998. Royalties consist of both fixed schedule
payments and contingent payments based on sales volumes of licensed products. No
license fees were received in the fiscal year ended April 30, 1997.
INCOME TAXES (BENEFIT). The benefit for income taxes increased to $570,000
in the fiscal year ended April 30, 1998 from $375,000 in the fiscal year ended
April 30, 1997.
35
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly results of operations data
for each of the seven quarters ended January 31, 2000 and such results expressed
as a percentage of net sales. You should read the following tables in
conjunction with the combined financial statements and related notes in this
prospectus. In our opinion, this information reflects all normal non-recurring
adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles for
interim financial information. The results for any quarter are not necessarily
indicative of results that may be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1998 1998 1999 1999 1999 1999 2000
--------- ------------ ------------ ---------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $9,179 $11,558 $10,180 $15,541 $14,567 $16,023 $17,963
Costs of sales.................. 6,123 7,626 6,687 9,107 9,049 11,325 12,220
------ ------- ------- ------- ------- ------- -------
Gross profit.................... 3,056 3,932 3,493 6,434 5,518 4,698 5,743
------ ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 657 776 884 984 1,466 1,399 1,825
Sales and marketing........... 663 867 769 1,036 1,091 1,278 1,169
General and administrative.... 921 1,226 1,031 1,519 1,367 1,641 1,716
------ ------- ------- ------- ------- ------- -------
Total operating expenses.... 2,241 2,869 2,684 3,539 3,924 4,318 4,710
------ ------- ------- ------- ------- ------- -------
Income (loss) from operations... 815 1,063 809 2,895 1,594 380 1,033
Other income (expense), net..... -- -- -- 50 800 323 164
------ ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 815 1,063 809 2,945 2,394 703 1,197
Income taxes (benefit).......... 300 400 300 1,130 913 283 404
------ ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 515 $ 663 $ 509 $ 1,815 $ 1,481 $ 420 $ 793
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1998 1998 1999 1999 1999 1999 2000
--------- ------------ ------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... 100.0% 100.0 % 100.0 % 100.0 % 100.0% 100.0 % 100.0 %
Costs of sales.................. 66.7 66.0 65.7 58.6 62.1 70.7 68.0
------ ------ ------ ------ ------ ------ ------
Gross profit.................... 33.3 34.0 34.3 41.4 37.9 29.3 32.0
------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development...... 7.2 6.7 8.7 6.3 10.1 8.7 10.2
Sales and marketing........... 7.2 7.5 7.6 6.7 7.5 8.0 6.5
General and administrative.... 10.0 10.6 10.1 9.8 9.4 10.2 9.6
------ ------ ------ ------ ------ ------ ------
Total operating expenses.... 24.4 24.8 26.4 22.8 27.0 26.9 26.3
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations... 8.9 9.2 7.9 18.6 10.9 2.4 5.7
Other income (expense), net..... 0.0 0.0 0.0 0.3 5.5 2.0 0.9
------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes......................... 8.9 9.2 7.9 18.9 16.4 4.4 6.6
Income taxes (benefit).......... 3.3 3.5 2.9 7.2 6.3 1.8 2.2
------ ------ ------ ------ ------ ------ ------
Net income (loss)............... 5.6% 5.7 % 5.0 % 11.7 % 10.2% 2.6 % 4.4 %
====== ====== ====== ====== ====== ====== ======
</TABLE>
Net sales generally increased over the last seven quarters as a result of
increased unit sales to an expanding customer base offset in part by declining
unit prices. Our net sales are impacted by seasonality in the ordering patterns
of major customers. Net sales in the first quarter of our fiscal year
36
<PAGE>
and in the last month of the calendar year tend to reflect the lower
manufacturing activities of our major customers during those periods.
Gross margins fluctuated over the seven quarter period as a result of
variations in product mix and expenses associated with ramping up production
capacity for newly introduced products and for technical enhancements to our
existing products. For example, a significant increase in sales volume of a new
line of embedded transceivers for the quarters ended April 30, 1999 and
July 31, 1999 raised gross margins due to higher pricing on the product in its
early stages. Gross margins benefitted from a substantial increase in shipments
of our new internal removable transceivers, offset by price and volume erosion
caused by competition on embedded transceivers during the quarters ended
October 31, 1999 and January 31, 2000. During the same period, we initiated an
inventory reserve to protect against potential product obsolescence due to the
rapid technology changes in our markets.
Research and development expenses generally increased on an absolute basis
over the past seven quarters reflecting increasing investments in research and
development programs for the purpose of enhancing current products, reducing the
costs of current products and developing new products.
Sales and marketing expenses generally increased on an absolute basis over
the past seven quarters reflecting increasing commissions and costs related to
customer support, travel, trade-shows, advertising and promotions and outside
services. In the quarters ended January 31, 1999 and 2000, sales and marketing
expenses declined on an absolute basis due to seasonality.
General and administrative expenses generally increased on an absolute basis
over the past seven quarters reflecting corporate allocations tied to an
increase in net sales, as well as costs incurred by us in defense of our patent
portfolio.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Most of our expenses, such as employee compensation and depreciation on
facilities and equipment, are relatively fixed in the near term. In addition,
our expense levels are based in part on our forecast of future net sales. As a
result, any shortfall in net sales relative to our expectations could cause
significant changes in our operating results from quarter to quarter. Our
quarterly and annual operating results have fluctuated in the past and are
likely to fluctuate in the future due a variety of factors not all of which are
within our control. We will incur additional expenses once we are operated as a
stand alone public company. Due to the foregoing factors, you should not rely on
our quarterly net sales and operating results to predict our future performance.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Methode has been our source of funds for financing our
operations and other financial requirements. Under the Master Separation
Agreement between Methode and us, Methode has agreed to fund our working capital
needs with capital contributions and/or interest bearing loans through the
closing of this offering. Following this offering, Methode will no longer be
obligated to provide us with any additional funds.
Net cash provided by operating activities was $4.9 million for the nine
months ended January 31, 2000. Net cash used in operating activities was
$136,000 in the fiscal year ended April 30, 1999 and $1.1 million in the fiscal
year ended April 30, 1998. Net cash provided by operating activities was
$127,000 in the fiscal year ended April 30, 1997. Cash used in operating
activities in the fiscal years ended April 30, 1998 and 1999 resulted primarily
from increases in accounts receivable and inventories, which more than offset
net income adjusted for non-cash charges for depreciation and amortization. Cash
provided by operating activities in the first nine months of fiscal 2000
resulted primarily from growth in net income and reductions in accounts
receivable which were offset in part by increases in inventories.
37
<PAGE>
Net cash used in investing activities was $20.9 million in the nine months
ended January 31, 2000, $7.1 million in the fiscal year ended April 30, 1999,
$1.7 million in the fiscal year ended April 30, 1998 and $2.5 million in the
fiscal year ended April 30, 1997. Net cash used in investing activities during
these periods consisted primarily of acquisitions and purchases of equipment and
facilities. We expended $1.7 million for the acquisition of Stratos (UK) in
December 1998, $795,500 for the acquisition of Polycore Technologies, Inc. in
April 1999 and $13.0 million for the acquisition of the Optoelectronics division
of Spire Corporation in December 1999. We are committed to pay $3.0 million in
additional purchase price for our Polycore Technologies acquisition within
thirty days following the completion of this offering. We intend to use a
portion of the net proceeds of this offering to make this additional payment.
We had no material commitments for capital expenses as of January 31, 2000,
but we expect such expenditures to total $13.0 million in fiscal 2001 primarily
for equipment, furniture and leasehold and facility improvements. Our future
capital requirements will depend on a number of factors, including our future
net sales and the timing and rate of expansion of our business. We believe that
the net proceeds of this offering together with the cash flow expected to be
generated from our future operations will be sufficient to meet our cash needs
for working capital and capital expenditures for the next months. However, we
cannot assure you that our projections with respect to our operating expenses
and capital expenditure requirements are accurate. Therefore, we may require
additional funds to support our working capital and operating expenses or for
other purposes sooner than expected. Additional financing may not be available
when needed, or if available, financing may not be on terms favorable to us or
our stockholders. If financing is not available when required or is not
available on acceptable terms, we may be unable to develop or enhance our
business. In addition, we may be unable to take advantage of business
opportunities or respond to competitive pressures. Any of these events could
significantly harm our business, financial condition and results of operations.
YEAR 2000 COMPLIANCE
Many computer systems and software programs were written to accept only two
digit entry codes for the year when storing dates. Entry codes are now required
to accept four digit entries to distinguish between the year 1900 and the year
2000. While most computer systems and software programs have been upgraded, some
still may need to be upgraded or replaced to solve this problem and avoid
incorrect or lost data. We have upgraded and modified our computer systems to
address year 2000 disruptions.
We have not experienced any material problems related to the inability to
recognize dates beginning with the year 2000 in any of our products or internal
systems. None of our customers or suppliers have reported to us any year 2000
related disruptions in the functioning of their computer systems or products.
Likewise, none of our customers have reported to us any complaints related to
any alleged non-compliance of any of our products. We intend to continue to
monitor our year 2000 compliance and the year 2000 compliance of our suppliers
and customers.
Although it is now past January 1, 2000, we, our customers or our suppliers
may encounter year 2000 disruptions which have not yet been detected. The
failure of other products used by our customers may adversely affect the
performance of our products. If we, our customers or our suppliers experience
year 2000 disruptions in the future, our business could be interrupted and we
may experience a material loss of sales. In addition, our customers or other
third parties may seek indemnification from us for damages related to year 2000
disruptions caused by our products.
38
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We do not believe this statement
will have a significant impact on our financial statements.
Effective May 1, 1999, we adopted the American Institute of Certified Public
Accountants Statement of Position (SOP), No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. This statement did not have a significant impact
on our financial results.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS), No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for our fiscal
year ending April 30, 2001. We believe that this statement will not have a
significant impact on our financial results.
39
<PAGE>
BUSINESS
We develop, manufacture and sell optical subsystems and components for high
data rate networking, data storage and telecommunication applications. Our
optical subsystems, consisting of embedded transceivers and internal and
external removable transceivers, convert electronic signals into optical signals
and back to electronic signals, thereby facilitating the transmission of
information over optical communication networks. These optical subsystems are
designed for use in LANs, SANs, MANs, WANs, and central office networking in the
telecommunication markets. Our optical subsystems are compatible with the
advanced transmission protocols used in these networks, including Gigabit
Ethernet, Fast Ethernet, Fibre Channel and ATM. We also design, manufacture and
sell a full line of optical components and cable assemblies for use in
enterprise network markets, as well as MAN, WAN and telecommunication markets.
We believe that our integrated design and manufacturing capabilities enable us
to produce high-performance optical subsystems and components with shortened
product design cycles and enhanced price and performance characteristics.
INDUSTRY BACKGROUND
INCREASING DEMAND FOR HIGHER BANDWIDTH
Over the last several years, the number of communication networks and the
amount of data transmitted over networks has increased substantially due to the
rapid growth of data intensive applications, such as Internet access,
e-commerce, e-mail, video conferencing, multimedia file transfers and the
movement of large blocks of stored data across networks. In addition, the
proliferation of data and storage networks for business over a geographically
dispersed user base has increased the amount of data transmitted over
communication networks. This rapid growth has exposed the transmission speed and
physical space limitations of legacy networks which traditionally have relied
primarily on the transmission of electronic signals.
USE OF OPTICAL TECHNOLOGY IN COMMUNICATION NETWORKS
To address expanding bandwidth and transmission distance requirements, new
communication equipment has been developed which incorporates optical technology
for high data rate networking, data storage and telecommunication applications.
Optical technology uses light instead of electricity to transmit information. An
optical network is comprised of a series of network devices, such as hubs,
switches, servers and storage elements, which are interconnected with fiber
optic cabling.
Optical transceivers are the ports on network equipment that convert
electronic signals into optical signals and back into electronic signals,
thereby facilitating the transmission of information over optical communication
networks. At the sending end, an optical transceiver converts electronic-based
information streams into light-based information streams for launch into the
optical communication network. A focused light source, either a light emitting
diode or a laser, within the optical transceiver is used to illuminate the fiber
core with a series of coded pulses of light that represent the information to be
transmitted. At the receiving end, an optical transceiver converts the
light-based information stream back into an electronic-based stream.
GROWTH OF OPTICAL TECHNOLOGY IN THE ENTERPRISE MARKET
GIGABIT ETHERNET AND FAST ETHERNET IN LOCAL AREA NETWORKS. LANs
interconnect computer users within an organization and allow users to share
computer resources. Early LANs, which had relatively limited performance
requirements, short connection distances and low transmission speeds, were
generally interconnected using copper cabling. Most present day LANs use the
Ethernet transmission protocol, which operates at 10 megabits per second (Mbps).
As performance requirements, transmission distance and bandwidth requirements of
network users have increased, transmission protocols have evolved to 100 Mbps
Fast Ethernet, and Gigabit Ethernet technology, which operates at 1,000 Mbps or
40
<PAGE>
1 gigabit per second (Gbps). ElectroniCast, a marketing research firm, estimates
that sales of Gigabit speed transceivers (both Gigabit Ethernet and Fibre
Channel) will increase from $280 million in 1999 to over $1.4 billion in 2004,
representing a compound annual growth rate of 39%. According to ElectroniCast,
the number of Gigabit Ethernet ports shipped is projected to grow from
1.3 million in 1999 to 12.3 million in 2004, representing a compound annual
growth rate of 56%. The majority of these Gigabit Ethernet ports will rely on
optical subsystems for their connection to the network.
The increasing bandwidth needs of network users have prompted manufacturers
to begin developing networking systems with per-port transmission speeds of 10
Gbps. The scalability and migration capacity built into the Gigabit Ethernet
protocol allows OEMs developing these systems to leverage their experience with
this standard to transition to the higher data rate. This next generation of
high data rate networking systems will require even higher performance optical
subsystems and components.
FIBRE CHANNEL IN STORAGE AREA NETWORKS. Data storage technology is evolving
rapidly. Most present day storage networks use a standard interface protocol
known as the small computer systems interface (SCSI), which allows storage
devices and servers to communicate at speeds limited to 40 or 80 Megabytes per
second over a maximum transmission distance of no greater than 25 meters and to
support the connection of a maximum of 15 devices. Although these distances and
speeds were sufficient for early storage applications, SCSI has become a
limiting technology for newer SANs, which require networking at high speeds over
long distances and scalability to interconnect large numbers of users.
To address the limitations of SCSI-based storage systems, the Fibre Channel
standard was developed in the early 1990s. Fibre Channel allows up to 126
devices to communicate with each other at rates up to 1.0625 Gbps over distances
up to 10 kilometers, while maintaining backward compatibility with the installed
base of SCSI-based storage systems. The next generation of SAN products,
currently in the early stages of commercial deployment, will operate at speeds
of 2.125 Gbps. Fibre Channel also is scalable and expected to support systems
with data rates of 8 Gbps and higher. Fibre Channel-based SANs enable enhanced
network applications such as storage backup, and better overall storage
management achievable through centralized storage resources. International Data
Corporation, a marketing research firm, projects that the market for Fibre
Channel server/host connections will grow from $2.2 billion in 1998 to over
$19.6 billion in 2002, representing a compound annual growth rate of 73%. In
addition, emf Associates, a marketing research firm, forecasts that the number
of Fibre Channel ports shipped will grow from 2.2 million in 1998 to over 46.7
million in 2002, representing a compound annual growth rate of 115%. Most of
these ports will rely on optical subsystems to transmit and receive data.
INCREASING PENETRATION OF OPTICAL TECHNOLOGY IN MANS, WANS AND
TELECOMMUNICATION NETWORKS
METROPOLITAN AND WIDE AREA NETWORKS. The increased transmission
capabilities of optical technology have allowed for the geographic extension of
LANs and SANs through the use of extended networks, such as MANs and WANs. These
networks enable enterprises to interconnect network systems throughout a
corporate campus or wide geographic area rather than within a single building.
Interconnections between network systems are performed by switches and routers
that use optical subsystems to effect the necessary conversions between
electronic and optical systems. In addition, optical components are used at each
interface to join optical fibers in cable-to-cable and cable-to-optical
subsystem connections. These networks enable business enterprises to use their
networks for enhanced applications, such as real-time backup data storage at
distances of up to 120 kilometers for disaster protection. In addition, these
networks offer organizations a cost-effective way to address increased bandwidth
requirements. We believe that the growth in MANs and WANs will result in an
increased demand for high-performance optical subsystems and components.
41
<PAGE>
TELECOMMUNICATION NETWORKS. Optical technology also is being used in high
data rate telecommunication applications, including the intra-office connection
of clusters of telecommunication switches based on the synchronous optical
network (SONET) and ATM protocols. SONET switches and ATM access switches are
often used in telecommunication networks to switch regional traffic and route
long distance traffic. In these core networks, multiple switches are often
grouped together within a service provider's central office network. The
interconnections between these systems are often provided by optical subsystems
and components. We believe that telecommunication equipment providers will
require a broader utilization of optical subsystems and components within the
central office network.
DEMANDS ON SUPPLIERS OF OPTICAL SUBSYSTEMS AND COMPONENTS
The ability to send high data rate optical signals over longer distances
depends not only on optical transceiver technology, but also on the precision of
the optical connections within the network. The demand for increasing bandwidth
places continued emphasis on the need for high quality optical connectivity in
certain critical applications such as in telecommunications networks, where the
transmission of higher data rates over long distances has pushed the limits of
signal integrity. Optical connections within the network contribute to signal
loss and even small differences in signal loss due to the quality of individual
connections can substantially reduce the distance over which optical signals can
reliably be sent.
The market demands on optical communication OEMs to produce networking
systems with ever increasing data rates over long distances have driven the need
for advanced optical subsystems and components that provide the critical
interconnections between devices within these high data rate network systems. We
believe the design and manufacture of high quality, cost-effective optical
subsystems and components for optical communication networks that meet the
rapidly evolving needs of optical communication OEMs present a number of
significant technical challenges, including the following:
- Attaining the higher data rates over extended distances demanded by OEMs
while complying with FCC standards for EMI emissions, requires advanced
optoelectronic technologies and more precise packaging and connections;
- Delivering products that address the demand for increasingly higher port
density and smaller packages requires greater component miniaturization
expertise and more precise packaging and optical alignment capabilities;
- Responding to demands for shorter lead times requires that manufacturers
design products and scale production more rapidly to deliver high volumes
of quality products in response to customers' demands for shorter lead
times on product orders and shorter periods to reach production volumes on
new optical interconnect products;
- Producing increasingly integrated products requires a broad expertise in
optical technologies to achieve component compatibility; and
- Supporting a wide range of data rates, transmission distance requirements,
network protocols, optical interfaces and packaging options requires that
OEM suppliers offer a broad range of products.
Optical communication OEMs are accelerating new product design times. As a
result, OEMs increasingly rely on highly integrated subsystem suppliers to
rapidly develop major elements of their systems. These suppliers allow optical
communication OEMs to better focus on their core competencies in overall product
design, specific differentiating product benefits, marketing and distribution.
We expect this trend to continue, with optical communication OEMs outsourcing an
increasing percentage of their non-core functions to contract manufacturers and
integrated subsystem suppliers.
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THE STRATOS SOLUTION
We develop, manufacture and sell optical subsystems and components for high
data rate networking, data storage and telecommunication applications. These
optical subsystems are designed for use in LANs, SANs, MANs, WANs, and central
office networking in the telecommunication markets. Our optical subsystems are
compatible with the transmission protocols used in these networks, including
Gigabit Ethernet, Fast Ethernet, Fibre Channel and ATM. We also design,
manufacture and sell a full line of optical components and cable assemblies for
use in enterprise networks, as well as MAN, WAN and telecommunication markets.
We believe that our integrated design and manufacturing capabilities enable us
to produce a broad range of high-performance optical subsystems and components
with shortened product design cycles.
Our solution includes the following key benefits:
HIGH-PERFORMANCE. We design, manufacture and test our products to provide
industry leading optical line transmission performance with specific attention
to standard compliance and interoperability. For instance, our gigabit speed
optical transceivers are engineered using advanced mechanical packaging
technologies, which we believe allows us to deliver some of the industry's
lowest radiated EMI solutions. We also employ a number of sophisticated
manufacturing processes, including micron tolerance molding, precision fixturing
and state-of-the-art metrology capabilities, which result in low signal loss and
return loss. We believe that we are uniquely positioned to provide this level of
high-performance in our optical subsystems and components.
INTEGRATED DESIGN AND MANUFACTURING. Our in-house design, engineering and
manufacturing personnel have extensive experience in electronics, optical
systems and electro-mechanical packaging. Our diverse technical capabilities,
including internal tooling, design production, stereolithography, molding and
automated surface-mount assembly, enable us to produce high-performance optical
subsystems and components with shortened product design cycles and faster times
to market. Our advanced technical capabilities in miniaturization and
integration allow us to design products with higher port density and smaller
packaging and, when necessary, allow us to rapidly scale our production to
deliver high volumes of these products.
BROAD SUBSYSTEM AND COMPONENT PRODUCT LINE. Our broad line of optical
subsystems and components are available in a variety of fiber optic interfaces,
or form factors, support a wide range of data rates, protocols, wavelengths,
modes and transmission distances, and have applications in the enterprise, MAN,
WAN and telecommunication markets. We offer industry standard SC and higher
density LC versions of all of our optical subsystems. We believe our gigabit
speed optical subsystem product line is broader than any of our competitors'
product offerings and that our comprehensive product line is well suited to meet
our customers' varying requirements for optical subsystems and components.
RELIABILITY. We design, manufacture and test in-house and take a
multi-tiered approach to assure the reliability of our optical subsystems.
During the design phase, our optical subsystems undergo rigorous verification
and qualification testing before designs are released to production. Extensive
design validation testing coupled with on-going accelerated life testing ensures
the consistent reliability of our optical subsystems throughout their life
cycles. All of our optical subsystems also undergo thermal stress screening
before being shipped to customers. Our design and manufacturing operations are
closely integrated and employ the same state-of-the-art automated testing
procedures to ensure performance is maintained from design through production.
We also track field quality performance to identify significant trends and
opportunities for product improvements. We believe our control over testing
throughout the design and manufacturing process results in greater reliability
and higher performance for our products and provides our customers more
flexibility in designing their systems.
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THE STRATOS STRATEGY
Our objective is to be a leading developer, manufacturer and seller of
high-performance optical subsystems and components to optical communication
OEMs. Key elements of our strategy include the following:
DEVELOP EMERGING TECHNOLOGIES. We have a long history of successful
innovations in optical technologies. We were the first to supply a gigabit rate
transceiver in an industry standard 1x9 package/ pin configuration in 1995 and
one of the first to supply a VCSEL-based optical transceiver in 1997. In
December 1999, we were the first to introduce a 2 Gbps small form factor optical
transceiver for Fibre Channel applications. Our advances in micron tolerance
precision molding have allowed us to introduce the use of low cost polymers in
place of more expensive ceramics in fiber ferrules. We believe our experience in
electronics, optical systems and electro-mechanical packaging and our active
participation in industry organizations which establish the standards for next
generation technologies have made us a leader in the development and manufacture
of optical products. We intend to continue to invest in the development of new
and enhanced technologies that result in new products with improved performance
features, such as higher data rate, higher port density and greater reliability.
For instance, we recently made a substantial investment in the development of
advanced compound semiconductor devices which we believe will be a critical
component in developing the next generation of optical transceivers.
TARGET HIGH-GROWTH OPTICAL COMMUNICATION MARKETS. Our business is focused
on the enterprise, MAN, WAN and telecommunication markets, which are
characterized by rapid growth, continually evolving technologies, and
differentiated applications with unique design criteria. As demand for greater
bandwidth and transmission distances increases, optical communication OEMs must
develop higher data rate and higher capacity equipment. Our product development
efforts are focused on developing new technologies for these high-growth
markets. Our ability to bring products to market faster and achieve higher
quality at high volume production levels enables us to better meet the needs of
optical communication OEMs in these high growth markets.
EXPAND OUR PRODUCT PORTFOLIO TO PROVIDE COMPREHENSIVE SOLUTIONS. Our goal
is to provide a broad portfolio of products that address all of the optical
subsystem and component needs of our OEM customers. We currently have one of the
industry's broadest offerings of optical transceivers representing the full
spectrum of data rates and form factors and we are committed to the ongoing
development and expansion of our portfolio of high-performance optical
subsystems and components. We have recently added a full-line of lower speed
optical transceivers to complement our gigabit speed products and are currently
expanding our product line to include SONET compliant optical transceivers for
telecommunication applications, and higher density subsystems and components
designed for backplane and other space-restricted applications. In addition, we
are developing new higher data rate optical transceivers which will be
compatible with the 10 Gbps Ethernet and next generation Fibre Channel
communication networks now under development by our customers.
DESIGN AND BUILD INCREASINGLY INTEGRATED SUBSYSTEMS AND COMPONENTS. We
intend to leverage our existing design and manufacturing expertise in optical
technologies to manufacture value-added integrated optical subsystems and
components. We believe there is a growing demand from optical communication OEMs
for more highly integrated optical subsystems and components. Integration
provides many benefits to our customers, including cost reductions as well as
performance and reliability improvements. In addition, our integrated subsystems
and components allow our customers to design systems with greater port density.
STRENGTHEN AND EXPAND CUSTOMER RELATIONSHIPS. We have established strong
customer relationships with key optical communication OEMs, including Alcatel,
Cisco, Lucent and Nortel. Our field and product design engineers work closely
with these and other customers from the initial product design stage through the
manufacturing process. We also provide extensive customer service and technical
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support throughout the qualification and sale process. This ongoing level of
interaction enables us to respond quickly to our customers and align our product
development efforts with their needs. In addition, we believe our research and
development, design and manufacturing capabilities will allow us to deliver the
next generation of optical subsystems and components, further solidifying our
strong customer relationships. We intend to strengthen our current customer
relationships by continuing to deliver a high level of value-added service and
technical support and leveraging our reputation for high quality products and
service to establish relationships with new customers. We also intend to
capitalize on our customers' satisfaction with one of our products and our
service-oriented approach to market our other products.
PURSUE COMPLEMENTARY ACQUISITIONS. We have acquired three businesses in the
past two years and expect to actively pursue opportunities to acquire or invest
in other businesses or technologies that would complement our current products,
enhance our technical capabilities, lower our manufacturing costs, expand our
markets, or that may otherwise offer growth opportunities. In December 1999,
Methode acquired the Optoelectronics division of Spire Corporation to enhance
our compound semiconductor capabilities. We operate this business as our
Bandwidth Semiconductor subsidiary.
PRODUCTS
We design, manufacture and sell a broad line of high-performance, optical
subsystems and components. Our products are designed for the various fiber optic
interfaces on the market today, including the SC and LC interfaces. The SC fiber
optic interface is one of the most common interfaces used in optical network
applications. This interface was designed to be used over the entire range of
optical network applications. The LC fiber optic interface is one-half the size
of the SC interface and was designed to meet the higher port density
requirements of space restricted applications. The LC interface is an
evolutionary version of the SC interface that shares proven connector
technology.
OPTICAL SUBSYSTEMS
Our optical subsystems consist of a broad range of optical transceivers,
which include embedded transceivers and internal and external removable
transceivers. Our optical subsystems convert electronic signals into optical
signals and back into electronic signals, thereby facilitating the transmission
of information over optical communication networks. Our optical transceivers
serve as high data rate interconnects between network devices, such as hubs,
switches, servers and storage elements. Our broad line of optical transceivers
are available in a variety of fiber optic interfaces, or form factors, and
support a wide range of data rates, protocols, wavelengths, modes and
transmission distances. We believe these features give our customers broader
design options for their network systems.
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The following table summarizes the capabilities of our optical subsystems:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
FIBER OPTIC INTERFACE/FORM FACTOR DATA RATE/PROTOCOL WAVELENGTH(NM) /MODE/DISTANCE
- -----------------------------------------------------------------------------------------------------------
EMBEDDED TRANSCEIVERS
- -----------------------------------------------------------------------------------------------------------
SC Embedded-Standard Form Factor 1.25 Gbps-Gigabit Ethernet 850nm Multimode-500 meters
"1x9 - Conventional Format" 1.0625 Gbps-Fibre Channel 1310nm Single mode-20 kilometers
622 Mbps-ATM OC-12
- -----------------------------------------------------------------------------------------------------------
LC Embedded-Small Form Factor 2.125 Gbps-2xFibre Channel 850nm Multimode-500 meters
"Small Form Factor (SFF)" 1.25 Gbps-Gigabit Ethernet 1310nm Single mode-20 kilometers
1.0625 Gbps-Fibre Channel
- -----------------------------------------------------------------------------------------------------------
LC Embedded-RJ Size 155 Mbps-ATM OC-3 820nm Multimode-2 kilometers
"Single Port RJ-Format" 100 Mbps-Fast Ethernet 1300nm Single mode-20 kilometers
10 Mbps-Ethernet
- -----------------------------------------------------------------------------------------------------------
4 Port LC Embedded-RJ Size 155 Mbps-ATM OC-3 820nm Multimode-2 kilometers
"4 Port RJ-Format" 100 Mbps-Fast Ethernet 1300nm Single mode-20 kilometers
10 Mbps-Ethernet
- -----------------------------------------------------------------------------------------------------------
INTERNAL REMOVABLE TRANSCEIVERS
- -----------------------------------------------------------------------------------------------------------
SC Removable-Standard Form Factor 2.125 Gbps-2xFibre Channel 850nm Multimode-500 meters
"GBIC (Gigabit Interface 1.25 Gbps-Gigabit Ethernet 1310nm Single mode-20 kilometers
Converter)" 1.0625 Gbps-Fibre Channel
622 Mbps-ATM OC-12
155 Mbps-ATM OC-3
- -----------------------------------------------------------------------------------------------------------
LC Removable-Small Form Factor
"Small Form Factor Pluggable (SFP)"
(Under development)
- -----------------------------------------------------------------------------------------------------------
EXTERNAL REMOVABLE TRANSCEIVERS
- -----------------------------------------------------------------------------------------------------------
SC Removable-External Form Factor 2.125 Gbps-2xFibre Channel 850nm Multimode-500 meters
"Media Interface Adapter" 1.25 Gbps-Gigabit Ethernet 1310nm Single mode-20 kilometers
1.0625 Gbps-Fibre Channel
- -----------------------------------------------------------------------------------------------------------
LC Removable-External Form Factor
(Under development)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
EMBEDDED TRANSCEIVERS. Embedded transceivers are designed to be directly
soldered to a printed circuit board. Our embedded 850nm transceivers feature
VCSELs that perform more reliably over time and over extreme temperatures than
previously used edge emitting laser devices. We believe our transceivers deliver
some of the lowest radiated EMI levels in the industry, assisting our customers
in achieving required FCC certification. Our highly miniaturized optical
RJ-format transceivers use the identical shell and external port dimensions as
the most common copper-wired network interface, allowing manufacturers to use
the same cabinetry, port labels and panel cutouts of previous electronic-signal
based designs.
INTERNAL REMOVABLE TRANSCEIVERS. Internal removable transceivers, also
known as gigabit interface converters (GBICs), are configured in a protective
module designed to plug into a connector and guide rail system that has been
soldered to a printed circuit board. This allows for the easy removal of the
transceiver from the system, giving network designers greater configuration
flexibility and replacement options. Removable transceivers are designed to be
"hot pluggable," meaning they can be replaced while the system is operational.
This feature is particularly advantageous in network applications where
maintaining uninterrupted service is critical. Removable transceivers are
typically more expensive than
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embedded transceivers due to the need for greater protective housing, durability
of connector contacts that must reliably withstand multiple insertions,
additional circuitry and the additional cost of the connector and guide rail
system. Our GBIC products feature higher quality VCSELs and alternating current
(AC) coupling, deliver some of the lowest EMI levels in the industry and are
assembled in a precision mechanical package for higher performance and
reliability.
EXTERNAL REMOVABLE TRANSCEIVERS. External removable transceivers, also
known as media interface adapters (MIAs), are similar to GBICs, except the
transceiver module remains outside of the system. This configuration is used to
convert electronic signals from a short-distance copper-wire based transceiver
to optical signals. This product is typically used to extend the flexibility of
copper-wire based storage networking equipment.
OPTICAL COMPONENTS
Our optical components include an extensive range of fiber optic connectors,
cable assemblies and related accessories.
FIBER OPTIC CONNECTORS. Our connector products include a variety of form
factors for single and multi-fiber applications. In addition to standard SC
connectors and legacy standard connectors, we offer small form factor LC and
MT-RJ connectors that meet the needs of our customers to connect higher numbers
of interface ports in the same or smaller space. Our MP-Registered Trademark-
multi-fiber connector system permits the interconnection of up to 12 fibers in
the same physical dimensions as a standard single fiber SC connection. We
believe that our LC products meet our customers' demand for interconnect
density, interchangeability, simplicity and reliability. Our LC connectors also
complement our small form factor transceivers that incorporate the LC
interconnectivity solution. Common applications of our optical connectors
include enterprise, broadband and telecommunication applications.
HIGH DENSITY BACKPLANE CONNECTORS. Fiber optic backplane connectors are
increasingly replacing electronic interconnections inside many high-performance
systems, solving many of the heat, distance and EMI problems associated with
standard electronic based wiring. Our QUANTUM QX fiber optic backplane
connectivity system offers very high-density connectivity in backplane
applications such as those used in high speed data networking and
telecommunications switching equipment.
HARSH ENVIRONMENT CONNECTORS. We offer a comprehensive line of
high-performance connectors for harsh environment applications. These connectors
use a patented expanded beam technology that increases the size of the optical
signal target by nearly 15 times, neutralizing most of the effects of shock,
vibration, particle contamination and misalignment. Our harsh connector products
are designed primarily for use in tactical military, petrochemical and field
broadcast applications.
CABLE ASSEMBLIES. We manufacture a variety of customized cable assemblies
for use where greater performance such as generally lower and more predictable
insertion loss, reflectance and mechanical characteristics are required. Common
applications include intra-system interconnecting patch cords for OEMs of high
capacity networking systems and telecommunications switches as well as
inter-connecting cable terminations for high and intermediate data rate
applications.
CUSTOM VALUE-ADDED PRODUCTS. We manufacture custom integrated optical
connector assemblies where our specialized capabilities can be used to provide
our customers with value-added products. These capabilities include
optoelectronic device connectorization, hermetic fiber feed-through assembly,
precision cleaving, array fiber to chip assembly, and assembly, splicing and
termination of massively parallel fiber array ferrule connectors.
OTHER ACCESSORIES. Our standard and multi-fiber adapters are physically
configured to translate between cabling systems and devices with incompatible
interconnection geometries. Our test loop-backs monitor on-line performance and
fault location. Other accessories include our MethNet-TM- family of high
density, ready-to-install fiber management cassettes, manifolds and cabinets.
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TECHNOLOGY
The design, manufacture and testing of high-performance optical subsystems
and components for optical communication networks require diverse technical
skills and expertise. Key elements of our technological capabilities include:
INTEGRATED SYSTEMS DESIGN. The design, manufacture and testing of our
optical subsystems require a combination of sophisticated technical competencies
in optical engineering, electronic circuit design, mechanical engineering and
electro-mechanical packaging. We believe our technical competencies in these
areas enable us to produce optical subsystems with some of the industry's lowest
radiated EMI levels. Our technical capabilities in miniaturization and advanced
circuitry integration also allow us to design products with higher port density
and smaller packages.
ADVANCED OPTICAL SUBASSEMBLY DESIGN. We combine advanced semiconductor
laser designs and our internally developed device positioning, alignment and
bonding technologies with integrated optical packaging techniques to produce
advanced optical subassemblies. We believe these designs and technologies
improve the performance of our products as well as enhance yields and reduce
material costs.
ELECTRONIC CIRCUIT DESIGN. Our electronic circuit design expertise includes
a full range of analog and digital signaling capabilities. Our proprietary
designs and innovations in laser driver, pre-amplifier and post-processing
circuits have allowed us to be early entrants in the Gigabit data communication
market. We believe our electronic circuit design capabilities will enable us to
develop future optoelectronic products capable of even faster data rates.
ADVANCED SEMICONDUCTOR DEVICE DEVELOPMENT. As the need for higher bandwidth
continues, we expect demand to increase for products operable at 10 Gbps and
above. Anticipating this potential demand, we recently acquired research and
development capabilities in formulating compound semiconductor devices such as
VCSELs and pin detectors. We believe these capabilities will enable us to
develop products with higher data rate capabilities.
PRECISION MOLDING CAPABILITY. Our experience in the precision molding of
polymer materials allows us to minimize optical signal loss and maximize
performance for our customers' products. This capability is at the core of both
our approach to the subassembly fabrication within our optical subsystems
product lines and our optical component products.
MANUFACTURING SYSTEMS. Our in-house manufacturing expertise enables us to
design, implement and optimize manufacturing processes from the initial
development of product prototypes through full-scale production. To maximize
production yield and minimize production costs, our manufacturing process
includes extensive quality assurance systems and performance testing.
MANUFACTURING
Our integrated manufacturing capabilities include product design,
engineering, fabrication, assembly and packaging of our products. We also
provide quality assurance through proprietary internal testing procedures
throughout the entire manufacturing process. These capabilities enable us to
reduce development times, increase end-to-end production yields and rapidly
respond to customer needs, enabling us to leverage our diverse skill base and
multiple core competencies in design and manufacturing.
We currently manufacture our gigabit optical subsystems and components in
our Chicago, Illinois facility. Our megabit optical subsystems are manufactured
at our Palm Bay, Florida facility. These operations involve high-capacity
pick-and-place equipment, wave and convection-reflow soldering systems,
precision plastic molding equipment, evaporative metal deposition chambers,
automated and
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semi-automated chip-to-wire bonding equipment and laser welding systems as well
as extensive test equipment laboratories, clean-room capacity and in-house
tool-making capability. We fabricate compound semiconductor wafers using
metallorganic chemical vapor deposition reaction chambers and related ancillary
and test equipment in Bedford, Massachusetts.
We manufacture expanded-beam, harsh environment fiber optic connectors for
tactical military and other extreme conditions in Haverhill, England. This
operation involves precision plastic molding equipment, micron tolerance
machining, and fiber metalization capability, as well as extensive test
equipment laboratories and clean-room capacity. These resources allow us to
manufacture specialized fiber optic products. In January 2000, we began
producing value-added fiber optic cable assemblies for the China and other Asian
markets through a majority-owned subsidiary in Shenzhen, China.
The raw materials required to manufacture our products are generally
available from several suppliers, although certain key components, such as
semiconductor devices, are available from a limited number of suppliers.
Although we enter into long-term agreements for the purchase of certain key
components from time to time, our purchases from limited source suppliers are
generally made on a purchase order basis. In certain circumstances, we maintain
an inventory of limited source components to limit the potential impact of a
component shortage.
RESEARCH AND DEVELOPMENT
As of April 13, 2000, we had 85 employees engaged in research and
development, including 12 engineers with advanced degrees, 8 of whom have Ph.Ds.
Our research and development expenses were $4.7 million in the nine months ended
January 31, 2000 and $3.3 million and $2.4 million in the fiscal years ended
April 30, 1999 and 1998, respectively.
We believe continued investment in technology is critical to our future
success. We concentrate our research and development activities on enhancing our
existing products and developing new products to meet the evolving needs of our
customers and maintain our technological leadership position. Our interaction
with customers throughout the product design process enables us to anticipate
emerging technological trends in the networking industry and focus our research
and development efforts on addressing these needs. Consistent with this
strategy, specific research and development personnel are devoted to gigabit per
second subsystem design, megabit per second subsystem design, optical component
design and compound semiconductor technology designs.
We are currently developing higher performance products that incorporate
value-added features and increased functionality. For instance, we are
developing optical transceivers for 10 Gbps Ethernet and the next generation
Fibre Channel communication applications, 1550nm versions of our optical
subsystems for longer transmission distances, and advanced compound
semiconductor technology designs.
CUSTOMERS
We sell our products primarily to optical communication OEMs and resellers.
In some cases, we sell our products directly to contract manufacturers who, at
the direction of our customers, incorporate them into products being assembled
by these contract manufacturers for our customers. The following table lists our
customers who, together with their contract manufacturers, have purchased more
than $75,000 of our products during the nine-month period ended January 31,
2000:
Agilent Technologies, Inc.
Alcatel
Amdahl Corporation
Anicom, Inc.
Anixter International, Inc.
ATL Products, Inc.
Avnet, Inc.
CableExpress Corporation
Ciprico, Inc.
Cisco Systems, Inc.
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Comdisco, Inc.
Condumex, Inc.
Corning Incorporated
D-Link Systems, Inc.
Data Optic Cable, Inc.
EMC Corporation
Fiber Instrument Sales, Inc.
Fiberdyne Labs, Inc.
Gruber Industries, Inc.
Hewlett-Packard Company
Inrange Technologies Corporation
Internix Incorporated
JNI Corporation
Lockheed Sanders, Inc.
LSI Logic Corporation
Lucent Technologies Inc.
LuxN, Inc.
McDATA Corporation
Methode Electronics, Inc.
MTI Technology Corporation
Network Peripherals Inc.
Nortel Networks Corporation
Philips Broadband Networks
Qlogic Corporation
Silicon Graphics, Inc.
Sun Microsystems, Inc.
A small number of customers have historically accounted for a significant
portion of our net sales. For the fiscal year ended April 30, 1999, our three
largest customers accounted for 43% of our net sales, with Nortel, Cisco and
Alcatel accounting for 27%, 10% and 6% of our net sales, respectively. For the
nine months ended January 31, 2000, our three largest customers accounted for
41% of our net sales, with Cisco, Nortel and Alcatel accounting for 27%, 7% and
7% of our net sales, respectively.
SALES, MARKETING AND TECHNICAL SUPPORT
We market and sell our products domestically and internationally through our
direct sales force, local resellers and manufacturers' representatives.
Specifically, we have established relationships with resellers and
manufacturers' representatives in Australia, Europe, India, Israel and the
Pacific Rim.
Our marketing organization develops strategies and implements programs to
support the sale of our products and enhance our reputation as a technological
leader in the industry. Our current marketing efforts include the following
initiatives:
- ongoing interaction with customers in the context of product development
and technical support occurs frequently and plays a key role in our
marketing effort;
- advertising and other promotional activities in industry trade journals
and publications targeting design engineers;
- participation in major trade show events and conferences in the
communications network industry to promote our broad lines of optical
subsystems and components; and
- active interaction with our customers in industry associations and
standards committees to promote and further enhance Gigabit Ethernet,
Fibre Channel and passive interconnection technologies, promote
standardization in the LAN and SAN markets and increase our visibility as
industry experts.
We believe our ability to deliver value-added customer service and technical
support is essential to our business. Our sales force and design engineers work
closely with our customers through the design and manufacturing process. We also
provide extensive technical support to our customers after the design and
qualification process is complete. We intend to strengthen our current customer
relationships by continuing to deliver a high level of value-added service and
technical support and leveraging our reputation for high quality products and
service to establish relationships with new customers.
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COMPETITION
The market for optical subsystems and components for optical communication
network applications is highly competitive and subject to rapidly changing
technology. We believe the primary competitive factors impacting our business
are:
- data rate, port density, reliability and other performance features;
- ability to rapidly scale production for high volumes;
- timeliness of new product introductions;
- length of product design cycle;
- compatibility with emerging industry standards;
- scope and responsiveness of service and technical support;
- price and performance characteristics; and
- established reputation with key customers.
We believe we generally compare favorably with our competitors with respect
to these factors. For optical subsystems, we compete primarily with Agilent
Technologies, Inc., Finisar Corporation, Infineon Technologies Corp.,
International Business Machines Corporation, and Optical Communications
Products, Inc. For optical components, we compete primarily with Infineon
Technologies Corp., Lucent Technologies, Inc., Molex, Inc., and Tyco
International, Ltd. and numerous other smaller companies. Many of our current
and potential competitors have significantly greater financial, technical,
marketing, purchasing and other resources than we do, and as a result, may be
able to:
- respond more quickly to new or emerging technologies or standards and to
changes in customer requirements;
- devote greater resources to the development, promotion and sale of their
products; and
- deliver competitive products at a lower price.
In addition, some of our existing and potential customers are also current
and potential competitors. These companies may attempt to integrate their
operations by producing their own optical subsystems or components or by
acquiring one of our competitors, thereby eliminating the need to purchase our
products. Furthermore, larger companies in other related industries may develop
or acquire technologies and apply their significant resources, including their
distribution channels and brand name recognition, to capture significant market
share.
We cannot assure you that we will be able to compete successfully against
either current or future competitors. Increased competition could result in
significant price erosion, reduced revenue, lower margins or loss of market
share, any of which would significantly harm our business.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. As of April 30, 2000, we had 47
U.S. patents issued and 30 U.S. patent applications pending. Of our 47 issued
U.S. patents, 17 relate to integrated systems design, 3 relate to optical
subassembly design, 2 relate to electronic circuit design, 11 relate to
semiconductor materials, 7 relate to precision molding, 4 relate to
manufacturing systems and 3 relate to other technologies. These issued patents
expire between 2005 and 2017. We cannot assure you that any patents will issue
as a result of our pending patent applications or, if issued, that any patent
claim allowed will be sufficiently broad to protect our technology. In addition,
we cannot assure you that any existing or future patents will not be challenged,
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invalidated or circumvented, or that any right granted thereunder would provide
us with meaningful protection of our technology. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. We may be unable to detect the
unauthorized use of our intellectual property or to take appropriate steps to
enforce our intellectual property rights. Policing unauthorized use of our
products and technology is difficult. 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. Our inability to adequately protect against
unauthorized use of our intellectual property could devalue our property content
and impair our ability to compete effectively. Further, enforcing our
intellectual property rights could result in the expenditure of significant
financial and managerial resources, whether or not we are successful. Litigation
may be necessary in the future to enforce our intellectual property rights. This
litigation could be costly and its outcome cannot be predicted with certainty.
If we are unable to protect our intellectual property, our business could be
significantly harmed.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. From time to time,
third parties may assert patent, copyright, trademark and other intellectual
property rights to technologies used in our business. Any claims, with or
without merit, could be time-consuming, result in costly litigation, and divert
the efforts of our technical and management personnel. If we are unsuccessful in
defending ourselves against these types of claims, we may be required to do one
or more of the following:
- stop selling our products that use or incorporate the challenged
intellectual property;
- attempt to obtain a license to sell or use the relevant technology or
substitute technology, which license may not be available on reasonable
terms or at all; or
- redesign those products that use the relevant technology.
In the event a claim against us was successful and we could not obtain a
license to the relevant technology on acceptable terms or license a substitute
technology or redesign our products to avoid infringement, our business would be
significantly harmed.
LITIGATION
Methode is a plaintiff in two lawsuits relating to our intellectual property
rights. The first lawsuit was filed by Methode in April 1999 and is against
Agilent Technologies, Inc., Finisar Corporation and Hewlett-Packard Company,
Inc. The second lawsuit was filed by Methode in October 1999 and is against
Infineon Technologies Corp. and Optical Communications Products, Inc. Both
actions are currently pending in the United States District Court for the
Northern District of California. In these actions, Methode alleges that
optoelectronic products sold by the defendants infringe upon two or more of five
Methode patents. Methode also alleges that Finisar breached its obligations
under a license and supply agreement with Methode by failing to provide it with
information regarding new technology related to the products licensed under the
agreement. Methode seeks monetary damages and injunctive relief. The defendants
in these lawsuits have filed various affirmative defenses and contend that the
Methode patents are invalid, unenforceable and/or not infringed by the products
sold by the defendants and, if successful, are seeking attorneys' fees and costs
in connection with the lawsuit. In addition, Finisar has filed a counterclaim
asserting that one of its founders is the primary inventor of the technology
that is the subject of all five patents, that Methode improperly obtained the
patents based on Finisar's disclosure of the technology to Methode and that
Finisar is the rightful owner or co-owner of the patents. Finisar has alleged
that Methode failed to disclose certain information to the Patent and Trademark
Office (PTO) that, if known to the PTO, would have prevented the issuance of one
of the patents and that Methode engaged in inequitable conduct before the PTO.
Finisar has also alleged breach of contract, conversion, trespass, unfair
competition and unjust enrichment and seeks
52
<PAGE>
compensatory damages, restitution and the correction of inventorship with
respect to the five Methode patents.
As part of our separation from Methode, the five Methode patents which are
the subject of these lawsuits and Methode' rights in this litigation have been
contributed to us and we have agreed to indemnify Methode against all costs,
expenses and liabilities associated with these lawsuits. We intend to pursue
these lawsuits and defend against Finisar's counterclaim vigorously. These
lawsuits are in the preliminary stage, and we cannot predict their outcome with
certainty. Patent litigation is particularly complex and can extend for a
protracted time, which can substantially increase the cost of such litigation.
If one or more of the patents that are the subject of this litigation were found
to be invalid or unenforceable, we would lose future royalty payments from our
current licensees of such patents. We could also be required to pay significant
monetary damages to one or more of the defendants and/ or be required to
reimburse them for their legal fees. If we lose our right to future royalty
payments from our current licensees and/or are required to pay significant money
damages to one or more of the defendants, our business would be significantly
harmed.
REGULATORY MATTERS
Our properties and business operations are subject to a wide variety of
federal, state, and local environmental, health and safety laws and other legal
requirements, including those relating to the storage, use, discharge and
disposal of toxic, volatile or otherwise hazardous substances used in our
manufacturing processes. If we fail to obtain required permits or otherwise fail
to operate within these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities. Although we believe that we are in
compliance and have complied with all applicable legal requirements, we may be
required to incur additional costs to comply with current or future legal
requirements.
FACILITIES
Our corporate headquarters is located in Chicago, Illinois. This facility
occupies two buildings owned by us with approximately 88,500 total square feet
and contains our administrative offices, sales and marketing offices, research
and development facilities and primary manufacturing facility. We also own an
approximately 16,000 square foot facility in Palm Bay, Florida, which contains
administrative offices, sales and marketing, research and development, and
manufacturing facilities. We sublease approximately 21,000 square feet for
research and development, sales and marketing and manufacturing operations in
Bedford, Massachusetts. This sublease expires in November 2005.
We lease approximately 15,000 square feet for design and manufacturing in
Haverhill, Suffolk, United Kingdom. This lease expires in 2010. We also lease
approximately 15,000 square feet manufacturing facility in Shenzhen, China. This
lease expires in 2009.
We believe our current facilities will be adequate to meet our needs for the
foreseeable future.
EMPLOYEES
As of April 13, 2000, we employed a total of 455 full-time employees, 305 of
whom were primarily engaged in manufacturing, 85 of whom were engaged in
research and development, 26 of whom were engaged in sales, marketing and
technical support, and 39 of whom were engaged in administration. We also from
time to time employ part-time employees and hire independent contractors. Our
employees are not represented by any collective bargaining agreement, and we
have never experienced a work stoppage. We believe that our employee relations
are good.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth information concerning our directors,
executive officers and key employees and their ages as of April 14, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- -------- --------------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
William J. McGinley........ 76 Director
James W. McGinley.......... 44 President, Chief Executive Officer and Director
Philip W. Schofield........ 42 Vice President and Chief Operating Officer
David A. Slack............. 47 Vice President, Finance and Chief Financial Officer
KEY EMPLOYEES:
Richard C.E. Durrant....... 38 Managing Director of Stratos (UK)
David R. Lipinski.......... 48 Vice President, Corporate Development
Kenneth R. Marchman........ 38 General Manager, Fiber Optic Products
Everett S. McGinley........ 42 President and General Manager of Bandwidth Semiconductor
Georgette L. Meyer......... 51 Vice President and Controller
David W. Norling........... 50 Vice President, Corporate Sales and Marketing
Michael T. Perkins......... 44 Vice President, Administration
Donald A. Rimdzius......... 47 General Manager, Optoelectronic Products
Robert M. Scharf........... 44 Vice President and General Manager of Stratos
Communication Modules
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
William J. McGinley has been a member of our board of directors since our
inception. Mr. W. McGinley is the founder of Methode, has been Chairman of the
Board of Methode since 1994 and served as President of Methode for the periods
from January 1997 through July 1998, and from 1946 through 1994. Mr. W. McGinley
has been a director of Methode since 1946. Mr. W. McGinley has a B.A. in
Journalism from Amherst College. Mr. W. McGinley is the father of Mr. James W.
McGinley.
James W. McGinley has been our President, Chief Executive Officer and a
director since our inception. Mr. J. McGinley has been President of Methode
since August 1998, and a director of Methode since 1993. Mr. J. McGinley intends
to resign as President of Methode prior to the closing of this offering. Mr. J.
McGinley previously served as President of Methode's Optical Interconnect
Products Division from January 1995 through July 1998. Mr. J. McGinley has a
B.A. in Liberal Arts from Evergreen State University. Mr. J. McGinley is the son
of Mr. William J. McGinley.
Philip W. Schofield has been our Vice President and Chief Operating Officer
since our inception. Mr. Schofield previously served as Vice President of
Methode's Fiber Optic Products Group from April 1994 through April 2000.
Mr. Schofield has a B.S. in Physics from University of Cincinnati and an M.S. in
Electro-Optics from the University of Houston.
David A. Slack has been our Chief Financial Officer since our inception.
Mr. Slack previously served as the Chief Financial Officer of the
Optoelectronics Group of Methode from March 27, 2000 through April 2000. From
1993 through March 27, 2000, Mr. Slack served as Director of Finance, Chief
Financial Officer and Director of Information Technology of Bretford
Manufacturing, Inc., a
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<PAGE>
manufacturer of furniture, carts, mounts, screens and other equipment. From 1977
to 1988, Mr. Slack served as a controller of various divisions of Methode.
Mr. Slack has a B.S. in Accounting from the University of Illinois and an M.B.A.
from Lake Forest Graduate School of Management.
KEY EMPLOYEES
Richard C.E. Durrant has been the Managing Director of our Stratos (UK)
subsidiary since its acquisition in December 1998. Mr. Durrant previously served
as the Managing Director of Methode Fibre Optic Europe Ltd from 1997 through
April 2000. From 1993 through 1997 Mr. Durrant served as Sales Director of Mikon
Ltd., a Methode subsidiary. Mr. Durrant has a Higher National Diploma in
Mechanical Engineering from the University of Southeast London.
David R. Lipinski has been our Vice President of Corporate Development since
our inception. Mr. Lipinski has been Executive Director of Corporate Development
for Methode since April 1996. Mr. Lipinski intends to terminate his employment
with Methode prior to the closing of this offering. From July 1995 through April
1996, Mr. Lipinski served as Principal Financial Strategy Consultant for D.R.
Lipinski & Co. Previously, Mr. Lipinski served as Vice President of Corporate
Development for Comarco, Inc. from August 1992 through June 1995. Mr. Lipinski
has a B.S. in Physics from the United States Naval Academy and an M.B.A. from
the University of New Haven.
Kenneth R. Marchman has been our General Manager of Fiber Optic Products
since our inception. Mr. Marchman previously served as General Manager of the
domestic division of the Fiber Optic Products Group of Methode from January 1999
through April 2000. From November 1993 through January 1999, Mr. Marchman served
as Sales Manager of the domestic division of the Fiber Optic Products Group of
Methode. Mr. Marchman has a B.S. in Electrical Engineering from the University
of the Pacific.
Everett S. McGinley has been President and General Manager of our Bandwidth
Semiconductor subsidiary since its acquisition in December 1999. Mr. E. McGinley
previously served as Vice President of Business Development for Spire
Corporation from March 1998 through December 1999 and Vice President and General
Manager of Optoelectronics for Spire Corporation from April 1997 through
February 1998. From January 1993 through March 1997, Mr. E. McGinley served as
Vice President of Axios Ltd. Mr. E. McGinley has a B.S. in Chemistry from the
University of Lowell and a Ph.D. in Physical Chemistry from the University of
Wisconsin. Mr. E. McGinley is not related to Mr. William J. McGinley or
Mr. James W. McGinley.
Georgette L. Meyer has been our Vice President and Controller since our
inception. Ms. Meyer previously served as Controller for the Optoelectronics
Division of Methode from April 1997 through April 2000. From January 1995
through March 1997, Ms. Meyer served as Operations Manager and Controller for
Nalge Nunc International. Ms. Meyer has a B.A. in Sociology from Purdue
University and an M.B.A. from Loyola University.
David W. Norling has been our Vice President of Corporate Sales and
Marketing since our inception. Mr. Norling has been Vice President of Corporate
Sales and Marketing of Methode since June 1999. Mr. Norling intends to terminate
his employment with Methode prior to the closing of this offering. From March
1998 through May 1999, Mr. Norling served as Vice President of Sales and
Marketing for Kings Electronics. Mr. Norling served as Director of Sales and
Marketing for Datron-Transco Inc. from February 1997 through February 1998. From
1982 through December 1996 Mr. Norling served as District Sales Manager for
Methode. Mr. Norling has a B.S. in International Marketing from Northern
Illinois University and an M.B.A. from Northern Illinois University.
Michael T. Perkins has been our Vice President of Administration since our
inception. Mr. Perkins has been Manager of Investor Relations of Methode since
May 1997. Mr. Perkins intends to terminate his employment with Methode prior to
the closing of this offering. Mr. Perkins was Controller of the
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<PAGE>
Optical Group of Methode from January 1996 through April 1997 and Director of
Divisional Accounting, Procedures and Controls of Methode from 1991 through
December 1995. Mr. Perkins attended Loyola University.
Donald A. Rimdzius has been our General Manager of Optoelectronic Products
since our inception. Mr. Rimdzius previously served as General Manager of the
Optoelectronics Division of Methode from June 1999 through April 2000. From
March 1996 through May 1999, Mr. Rimdzius served as Director of Engineering and
Manufacturing of the Optoelectronics Division of Methode. Previously,
Mr. Rimdzius served as Manager of Equipment for White Cap Global Tech Center
from 1994 through February 1996. Mr. Rimdzius has a B.S. in Electrical
Engineering from the Illinois Institute of Technology and an M.B.A. from the
University of Chicago.
Robert Scharf has been Vice President and General Manager of our Stratos
Communication Modules subsidiary since it's acquisition in April 1999. From 1994
through April 1999, Mr. Scharf was Vice President of Polycore Technologies, the
predecessor to Stratos Communication Modules. Mr. Scharf has a B.S. in
Mechanical Engineering from Cornell University and an M.B.A. from Youngstown
State University.
COMPOSITION OF THE BOARD OF DIRECTORS
Our bylaws provide that the board shall determine the number of members of
our board of directors. Our board of directors is currently composed of two
directors. Before the completion of this offering, we will increase our board to
include three independent directors who will not be employed by Stratos or
affiliated with Methode.
Prior to the completion of this offering, our board of directors will be
divided into three classes as nearly equal in size as possible with staggered,
three-year terms. At each annual meeting of our stockholders, the successors to
the class of directors whose term expires at that time will be elected for a
three-year term.
BOARD COMMITTEES
Prior to the completion of this offering, we intend to establish an audit
committee and a compensation committee. Both the audit committee and the
compensation committee will consist of independent directors. The audit
committee will consist solely of three independent directors.
The audit committee will recommend the appointment of our independent
auditors, review our internal accounting procedures and financial statements,
and consult with and review the services provided by our independent auditors.
The audit committee will also review compliance with the applicable Securities
and Exchange Commission and Nasdaq rules regarding audit committees and will
prepare a report for our annual proxy statements.
The compensation committee of our board of directors will review and
recommend to the board of directors the compensation and benefits of all
executive officers of Stratos, and establish and review general policies
relating to compensation and benefits of Stratos employees. The compensation
committee will also administer our 2000 Stock Plan.
COMPENSATION OF DIRECTORS
Directors of Stratos do not currently receive cash compensation for their
services as directors or members of committees of the board of directors.
However, non-employee directors will be eligible to receive stock options under
our 2000 Stock Plan. We reimburse directors for their reasonable expenses
incurred in attending board and committee meetings. Except for eligibility under
the 2000 Stock Plan and the reimbursement of expenses, we have not yet adopted
specific policies on directors' compensation and benefits.
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<PAGE>
OWNERSHIP OF METHODE ELECTRONICS STOCK BY OUR DIRECTORS AND EXECUTIVE OFFICERS
Since all of our common stock is currently owned by Methode, none of our
directors, director nominees or executive officers own any of our common stock.
To the extent that these individuals own shares of Methode Class A or Class B
common stock at the time of the proposed spin-off, they will participate in the
spin-off on the same terms as other holders of Methode Class A and Class B
common stock.
The following table sets forth the number of shares of Methode Class A and
Class B common stock beneficially owned on April , 2000 by each Stratos
director and director nominee and by our chief executive officer, our other
executive officers, and all of our directors, director nominees and executive
officers as a group. Except as otherwise noted, the individual director or
executive officer or their family members had sole voting and investment power
with respect to such securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS
- ------------------------ -------------- -------------------- ----------
<S> <C> <C> <C>
William J. McGinley.............................. Common Stock
Class A 229,368(1) 1.0%
Class B 890,902(1) 75.3%
James W. McGinley................................ Common Stock
Class A 39,835(2) *
Class B 289(2) *
Philip W. Schofield.............................. Common Stock
Class A 9,942 *
Class B 0 0.0%
David A. Slack................................... Common Stock
Class A 5,444 *
Class B 689 *
All Directors, Director Nominees and Executive
Officers as a Group (4 individuals)............ Common Stock
Class A 284,589 1.0%
Class B 891,880 75.3%
</TABLE>
- ------------------------
* Percentage represents less than 1% of the total shares of Methode common
stock outstanding as of April , 2000.
(1) Includes 108,877 shares of Class A and 7,638 shares of Class B common stock
held by Methode's Employee Stock Ownership Trust under which Mr. W. McGinley
has sole voting power and, prior to distribution under the terms of the
trust, no investment power; 72,680 shares of Class A common stock granted
but not yet vested pursuant to the Methode's Incentive Stock Award Plan as
to which he has sole voting power and 10,000 shares of Class B common stock
held by his wife.
(2) Includes 8,360 shares of Class A common stock held by Methode's Employee
Stock Ownership Trust for which Mr. J. McGinley has sole voting power and,
prior to distribution under the terms of the trust, no investment power;
14,535 shares of Class A common stock granted but not yet vested pursuant to
Methode's Incentive Stock Award Plan as to which he has sole voting power
and 536 shares of Class A and 268 shares of Class B common stock held by his
wife.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for our chief
executive officer and our other most highly compensated executive officer based
on compensation earned as an employee of Methode for the fiscal year ended April
30, 1999. None of our other executive officers received an annual salary and
bonus in excess of $100,000 for services rendered to Methode for the fiscal year
ended April 30, 1999. In connection with this offering, we have established
employee benefit plans and arrangements so that, following this offering, the
compensation and employee benefits of our executive officers and all of our
other employees will be provided primarily by us. See "Compensation and Employee
Benefits Plans" and "Arrangements Between Methode Electronics and Stratos
Lightwave--Employee Matters Agreement."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
AWARDS
---------- PAYOUTS
ANNUAL --------
COMPENSATION RESTRICTED ALL OTHER
NAME AND ------------------- STOCK LTIP COMPEN-
PRINCIPAL STRATOS FISCAL SALARY BONUS AWARD(S) PAYOUTS SATION
POSITION YEAR ($)(1) ($) ($)(2)(3) ($)(4) ($)(5)
- ----------------- -------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
James W. McGinley ....................... 1999 153,500 142,725 108,062 66,655 2,800
President and Chief Executive Officer
Philip W. Schofield ..................... 1999 127,824 50,063 31,432 53,795 2,805
Vice President and Chief Operating
Officer
</TABLE>
- ------------------------
(1) Includes a cash car allowance in fiscal 1999 of $3,900 for Mr. McGinley and
$6,000 for Mr. Schofield.
(2) These shares of restricted stock were awarded pursuant to Methode's
Incentive Stock Award Plan. Pursuant to this plan, key employees of Methode
are eligible to receive awards as determined by the plan's committee.
Historically, awards under this plan have been determined by dividing 1% of
the annual pre-tax earnings of the profit center applicable to the relevant
employee by the fair market value of Methode Class A common stock on the
first business day of the subsequent plan year. Restricted stock awarded
under this plan vests as of the earliest to occur of (i) the first day of
the third plan year following the year with respect to which the award was
made; (ii) retirement at or after age 65; (iii) termination on account of
disability; or (iv) death, if termination of employment has not occurred
before the executive's death.
(3) All restricted stock is valued at the closing price of Methode Class A
common stock on the date of grant. On April 30, 1999, Mr. J. McGinley held
14,955 restricted shares having a value of $227,175 and Mr. Schofield held
5,400 restricted shares having a value of $78,807. Dividends are paid on
restricted stock awards at the same rate as paid to all stockholders.
(4) LTIP payouts represent amounts paid pursuant to the Methode's Longevity
Contingent Bonus Program. This bonus program awards Methode officers and key
management personnel a matching bonus (equal to the amount of the current
quarterly bonus) which will be considered as earned and payable in three
years provided that the participant is still employed by Methode at that
time and performance has been satisfactory.
(5) The figures in this column represent amounts allocated under the Methode
Employee Stock Ownership Plan.
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<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS
The following table shows long term incentive plan awards made to our chief
executive officer and our other most highly compensated executive officer under
the Methode Longevity Contingent Bonus Program in the fiscal year ended April
30, 1999.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLANS
OR OTHER PERIOD -------------------------------
UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT ($) ($) ($)
- ---- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
James W. McGinley................ 3 years 142,725 142,725 142,725
Philip W. Schofield.............. 3 years 53,795 53,795 53,795
</TABLE>
TREATMENT OF METHODE ELECTRONICS RESTRICTED STOCK
Some Stratos employees were granted awards of restricted shares of Methode
Class A common stock under Methode's Incentive Stock Award Plan. As of
January 31, 2000, our employees held 10,400 shares of Methode restricted stock.
This restricted stock generally vests two years after the date of grant if the
individual is still employed by Methode. We intend to grant replacement awards
of restricted shares of our common stock as of the date of the spin-off for all
unvested shares of Methode restricted stock held by our employees as of the
spin-off. The number of shares of our restricted stock granted to these
employees will be determined using a conversion formula. The conversion formula
is expected to be based on the opening per share price of our common stock on
the first trading day after the spin-off relative to the closing per share price
of Methode Class A common stock on the last trading day before the spin-off.
These awards are expected to vest on May 1, 2001 provided the employee is still
employed by us as of that date.
TREATMENT OF METHODE ELECTRONICS STOCK OPTIONS
Some Stratos employees were granted options to purchase Methode Class A
common stock under Methode's 1997 Stock Plan. We intend to assume all of the
Methode options held by our employees which have not vested as of the date of
the proposed spin-off. As of January 31, 2000, our employees held unvested
options to purchase 39,831 shares of Methode Class A common stock at a weighted
average exercise price per share of $26.26. The price of Methode's Class A
common stock on that date was $34.125 per share. These assumed unvested options
are expected to convert at the spin-off into options to purchase our common
stock. The number of shares and the exercise price of the Methode options that
convert into our options are expected to be adjusted using a conversion formula.
The conversion formula is expected to be based on the opening per share price of
our common stock on the first trading day after the spin-off relative to the
closing per share price of Methode Class A common stock on the last trading day
before the spin-off. The resulting options are expected to maintain the original
vesting provisions and option terms.
TREATMENT OF METHODE ELECTRONICS CONTINGENT BONUS AWARDS
Some Stratos employees were granted contingent bonuses under Methode's
Longevity Contingent Bonus Program. These bonuses are generally subject to
forfeiture if employment with Methode terminates before the third annual
anniversary of the grant date. We intend to assume the bonuses payable to our
employees on the closing of this offering. These bonuses will remain subject to
the same forfeiture provisions. As of April 30, 2000, the contingent bonuses of
our employees totaled $1.3 million.
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<PAGE>
EMPLOYEE BENEFIT PLANS
STRATOS 2000 STOCK PLAN
Prior to the completion of this offering, we will adopt a Stratos 2000 Stock
Plan, and Methode, as our sole stockholder, will approve the Stratos 2000 Stock
Plan. The following description of certain features of the plan is qualified in
its entirety by reference to the full text of the plan.
GENERAL; SHARES AVAILABLE FOR ISSUANCE UNDER THE PLAN. The 2000 Stock Plan
will enable us to make awards of options, restricted stock and stock
appreciation rights to our directors and employees, including our executive
officers. We believe the plan will provide us with flexibility in designing and
providing incentive compensation in order to attract and retain employees and
directors who are in a position to make significant contributions to our
success, to reward employees and directors for past contributions and to
encourage employees and directors to take into account our long-term interests
through ownership of our common stock. Subject to adjustment for stock splits
and similar events, the maximum number of shares of common stock that may be
issued under the plan is .
ADMINISTRATION; PARTICIPANTS. The 2000 Stock Plan will be administered by a
committee of two or more of our directors elected by the board. Unless otherwise
determined by the board, the compensation committee of the board will serve as
the plan committee. Our directors and employees (including employees of our
subsidiaries and affiliates) are eligible to receive awards under the plan, but
no participant may receive awards under the plan in any calendar year covering
more than shares of our common stock.
STOCK OPTIONS. The committee may grant stock options under the 2000 Stock
Plan to our directors and employees. Stock options enable the recipient to
purchase shares of our common stock at a price specified by the committee at the
time the award is made. The plan permits the granting of stock options that
qualify as incentive stock options under Section 422 of the Internal Revenue
Code, which may only be granted to employees, and stock options that do not
qualify for incentive stock option treatment, which may be granted to employees
or directors. The committee determines the per share exercise price of all stock
options. As a general rule, the exercise price for all incentive stock options
may not be less than the fair market value of a share of common stock at the
time of grant. Unless otherwise determined by the committee, the exercise price
for all non-incentive stock options will be the fair market value of a share of
common stock at the time of grant. The committee will determine when an option
may be exercised and its term, but the term may not exceed ten years. Unless
otherwise determined by the committee, options will vest 25% per year over a
four year period.
RESTRICTED STOCK. The committee may grant restricted stock under the 2000
Stock Plan. An award of restricted stock entitles the recipient to shares of our
common stock, subject to the conditions imposed by the committee which may
include a vesting requirement. Unless otherwise determined by the committee,
shares of restricted stock will vest 25% per year over a four year period. Until
the restrictions lapse, shares of restricted stock are non-transferable. In
general, recipients of restricted stock have all rights of a stockholder with
respect to the shares, including voting and dividend rights, subject only to the
conditions and restrictions generally applicable to restricted stock or to other
restrictions and conditions specifically set forth in the award agreement.
STOCK APPRECIATION RIGHTS. The committee may grant awards of stock
appreciation rights under the 2000 Stock Plan. An award of a stock appreciation
right entitles the recipient to surrender an exercisable award in exchange for a
payment equal to the product of (A) the excess of the fair market value of a
share of common stock on the date of surrender over the fair market value of a
share of common stock on the date the award was made and (B) the number of
shares of common stock subject to the award. This payment may be made is cash or
shares of common stock. The committee will determine when a stock appreciation
award may be surrendered and its term. Unless otherwise
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<PAGE>
determined by the committee, awards of stock appreciation rights will be
eligible for surrender at a rate of 25% per year over a four year period.
EFFECT OF TERMINATION OF EMPLOYMENT. As a general rule, the effect that a
termination of employment will have on a holder's awards will be set forth in
his or her award agreement. We expect that some terminations, such as
terminations upon retirement, death or for permanent disability, may result in
the accelerated vesting of options and stock appreciation rights and the lapsing
of restrictions on restricted stock. We also expect that other terminations will
result in the forfeiture of unvested options, stock appreciation rights and
restricted stock.
ADJUSTMENTS FOR CHANGES IN CAPITALIZATION; CHANGE IN CONTROL. The committee
will make appropriate adjustments to the maximum number of shares of common
stock that may be delivered under the plan and to outstanding awards to reflect
stock dividends, stock splits, and similar changes in capitalization. The plan
provides the committee with the discretion to accelerate the vesting of options,
stock appreciation rights and restricted stock in the event of a "Change in
Control" (as determined by the Committee). In the event of an extraordinary
corporate transaction such as a merger, the committee may provide for a cash
payment or substitute award to be delivered to plan participants in exchange for
their outstanding awards.
AMENDMENT AND TERMINATION. The committee may at any time discontinue
granting awards under the 2000 Stock Plan. Unless an earlier date is imposed by
the board, awards may not be made under the plan after , 2010. Our board
of directors may at any time amend the plan or any outstanding award for any
purpose permitted by law. However, none of these actions may adversely affect
the rights of a holder of any previously granted award.
GRANTS UNDER OUR 2000 STOCK PLAN. In connection with this offering, we have
made initial grants of stock options to some of our directors and employees,
including our executive officers, under the 2000 Stock Plan. An aggregate of
shares of common stock are issuable upon the exercise of these options,
and these options were granted at an exercise price of $ per share. The
following table sets forth the number of shares of our common stock underlying
these options:
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND STRATOS POSITION UNDERLYING OPTIONS
- ------------------------- ------------------
<S> <C>
James W. McGinley, President and Chief Executive Officer....
Philip W. Schofield, Vice President and Chief Operating
Officer...................................................
David A. Slack, Chief Financial Officer.....................
Non-employee directors as a group ( persons)..............
All employees as a group ( persons).......................
</TABLE>
STRATOS 401(k) PLAN
Our 401(k) retirement and deferred savings plan covers all eligible
employees and is intended to qualify as a tax-qualified plan under the Internal
Revenue Code. Employees are eligible to participate in the plan on the first day
of any quarter coincident with or immediately following the completion of one
year of service with Stratos. We intend to give our employees credit for service
with Methode. The plan provides that each participant may contribute up to 15%
of his or her pre-tax gross compensation up to a statutory limit, which is
$10,500 in calendar year 2000. All amounts contributed by participants and
earnings on participant contributions are fully vested at all times. Stratos may
contribute an amount equal to 3% of each participant's compensation, subject to
a maximum includable compensation of $170,000, which amount is subject to
adjustment for cost of living increases after calendar year 2000. All accounts
under the plan are fully vested at all times.
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INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, we will adopt
provisions in our restated certificate of incorporation which provide that our
directors shall not be personally liable for monetary damages to Stratos or its
stockholders for a breach of fiduciary duty as a director, except liability for:
- a breach of the director's duty of loyalty to Stratos or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- an act related to our unlawful stock repurchase or payment of a dividend
under Section 174 of the Delaware General Corporation Law; or
- transactions from which the director derived an improper personal benefit.
These limitations of liability do not apply to liabilities arising under the
federal securities laws and do not affect the availability of equitable remedies
such as injunctive relief or rescission. Our restated certificate of
incorporation will also authorize us to indemnify our officers, directors and
other agents to the fullest extent permitted under Delaware law.
As permitted by the Delaware General Corporation Law, our bylaws provide
that:
- we are required to indemnify our directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, subject to
limited exceptions;
- we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to limited
exceptions; and
- the rights provided in the bylaws are not exclusive.
We intend to enter into separate indemnification agreements with each of our
directors and officers which may be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. These
indemnification agreements may require us, among other things, to indemnify our
directors and officers against liabilities that may arise by reason of their
status or service as directors or officers, other than liabilities arising from
willful misconduct. These indemnification agreements also may require us to
advance any expenses incurred by the directors or officers as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance if available on reasonable terms.
At present, there is no pending litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification by us is
sought. In addition, we are not aware of any threatened litigation or proceeding
which may result in a claim for indemnification.
We intend to maintain directors' and officers' liability insurance.
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ARRANGEMENTS BETWEEN METHODE ELECTRONICS AND STRATOS LIGHTWAVE
On or about May 1, 2000, Methode and our company will enter into a master
separation agreement providing for the transfer from Methode to us of the assets
and liabilities relating to our business. Prior to the completion of this
offering, we will also enter into various other agreements with Methode
regarding the separation of our business and certain arrangements relating to
the period between the closing of this offering and the completion of the
proposed spin-off. These agreements include an initial public offering and
distribution agreement, a master transitional services agreement, an employee
matters agreement and a registration rights agreement. In addition, Methode and
our company will enter into a tax sharing agreement to address the allocation of
certain tax liabilities.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Methode.
We have provided below a description of the material terms of the Master
Separation Agreement and the other agreements listed above. You should read the
full text of these agreements which have been filed with the Securities and
Exchange Commission as exhibits to the registration statement of which this
prospectus is a part. See "Where You Can Find More Information."
MASTER SEPARATION AGREEMENT
Methode and our company will enter into a master separation agreement to
effect the separation of our business from Methode. Under this agreement,
Methode will transfer to us all of the assets and liabilities that relate to our
business. The date of transfer is expected to be on or about May 1, 2000 and is
sometimes referred to in this prospectus as the contribution date. The assets to
be transferred to us as of the contribution date include:
- all business operations whose financial performance is reflected in our
financial statements for the period ended January 31, 2000, as set forth
elsewhere in this prospectus; and
- all business operations initiated or acquired by us after January 31,
2000.
We have assumed all liabilities and agreed to perform all obligations of
Methode relating to our business any time on or before the contribution date.
These assumed liabilities include all liabilities relating to our business as
conducted through the contribution date that are unknown to Methode and/or
unrealized as of the contribution date.
Except as expressly set forth in the Master Separation Agreement or any
other agreement entered into between Methode and us in connection with our
separation from Methode, neither we nor Methode is making any representation or
warranty as to the business, assets or liabilities transferred or assumed as
part of the separation. Except as otherwise expressly set forth in the Master
Separation Agreement or in another agreement, all assets are being transferred
on an as is, where is, basis.
INTELLECTUAL PROPERTY. Under the Master Separation Agreement, Methode will
assign to us all of its intellectual property rights related to our business.
This transferred intellectual property includes U.S. and foreign:
- patents;
- copyrights;
- trademarks, servicemarks and other such items and the related goodwill of
the business;
- technology, know-how, research and development and trade secrets;
- licenses and other rights related to third party technology and
intellectual property used in our business;
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- the right to sue for infringements of these patents, copyrights,
trademarks and other intellectual property, including Methode's rights in
the two pending lawsuits relating to our intellectual property rights,
subject to our indemnification of Methode for any liabilities. For a
further discussion of these lawsuits, see "Business--Litigation;"
- computer software and databases;
- web sites, web pages and internet domain names;
- all other proprietary and intellectual property rights and information
used in our business; and
- all grants, registrations and applications related to the above
intellectual property.
Methode will agree to assign to us various contracts with third parties
relating to our business.
EXPENSES. We have agreed to pay the costs of the transfer of assets from
Methode to us, including:
- transfer taxes;
- expenses related to notices to customers, suppliers and other third
parties;
- fees related to the transfer or issuance of licenses, permits and
franchises;
- fees related to the assignment or transfer of contracts, agreements and
intellectual property;
- recording and other fees, taxes, charges and assessments related to the
transfer of real property; and
- costs related to the transfer of any employee.
GENERAL RELEASE OF PRE-SEPARATION CLAIMS. Effective as of the contribution
date, we have released Methode and its affiliates, agents, successors and
assigns, and Methode has released us, and our affiliates, agents, successors and
assigns, from any liabilities arising from events occurring on or before the
contribution date, including events occurring in connection with the activities
to implement the separation, the initial public offering and the distribution.
This provision will not impair a party from enforcing the master separation
agreement and the other separation agreements or any arrangements specified in
any of these documents.
INDEMNIFICATION. Pursuant to the Master Separation Agreement, we have
agreed to indemnify, defend and hold harmless Methode and each of its
subsidiaries and their respective successors-in-interest against any losses,
claims, damages, liabilities or actions arising out of or in connection with:
- the liabilities assumed by us as part of the separation, including,
without limitation, any liabilities arising out of the two pending
lawsuits relating to our intellectual property rights; and/or
- our conduct of our business and affairs after the contribution date.
Methode has agreed to indemnify, defend and hold harmless our company and
each of our subsidiaries and their respective successors-in-interest against any
losses, claims, damages, liabilities or actions, resulting from, relating to or
arising out of or in connection with:
- assets used or owned in connection with any businesses and operations of
Methode and its affiliates other than our business; and/or
- liabilities that are not incidental to or do not arise out of our business
and various liabilities in respect of indebtedness, income taxes, employee
or retirement benefit plans and other liabilities.
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Under the terms of the Master Separation Agreement, Methode and our company,
as indemnifying parties, have various rights. The indemnitee may defend and,
with the consent of the indemnifying party, compromise and settle a claim and
will be entitled to reimbursement for its reasonable attorneys' fees and
expenses incurred in defending the claim and indemnification for any liabilities
incurred as a result of the claim.
An indemnifying party may elect to defend, at its own expense and through
counsel chosen by it, any claim by a third party if the claim will, or is likely
to, obligate the indemnifying party to provide indemnification.
If an indemnifying party elects to defend a third-party claim but, in the
reasonable judgment of an indemnitee, the indemnifying party fails to timely,
properly and adequately defend the third-party claim, the indemnitee may do so.
There are restrictions on the ability of the indemnifying party to settle or
compromise a claim if the settlement or compromise would be harmful to the
indemnitee.
If an indemnitee recovers amounts from third parties, such as an insurance
company, these amounts will reduce the amount the indemnifying party must pay
unless the indemnitee or its affiliates remain directly or indirectly liable for
those amounts pursuant to self-insurance or re-insurance arrangements. If the
indemnitee incurs a net tax cost from the receipt of an indemnification payment,
the indemnifying party must compensate the indemnitee for the amount of the net
tax cost. If the indemnitee receives a net tax benefit from incurring or paying
for any indemnified loss or liability, the amount the indemnifying party must
pay will be reduced to take account of the net tax benefit.
RELATED-PARTY TRANSACTIONS. The Master Separation Agreement contains a
provision requiring the approval of a majority of our independent directors for
any transaction between Methode and our company with a value of $50,000 or more
until Methode no longer owns 50% or more of our outstanding capital stock. This
provision does not apply to arrangements specified in the Master Separation
Agreement and the other separation documents and purchases by Methode and its
subsidiaries of our products in the ordinary course of business.
DISPUTE RESOLUTION. The Master Separation Agreement contains provisions
that govern the resolution of disputes, controversies or claims that may arise
between Methode and us except to the extent otherwise provided for in any other
agreement entered into between Methode and us in connection with our separation
from Methode. The Master Separation Agreement provides that the parties will use
all commercially reasonable efforts to settle all disputes arising in connection
with the agreement without resorting to mediation, arbitration or otherwise. If
these efforts are not successful, either party may submit the dispute for
non-binding mediation. If mediation is not successful in resolving any dispute,
any party may resort to any remedies it may have at common law or otherwise,
including litigation. Neither party will be entitled to consequential, special,
exemplary or punitive damages.
FURTHER ASSURANCES. In addition to the actions specifically provided for
elsewhere in the Master Separation Agreement, each of Methode and our company
has agreed to use all commercially reasonable efforts to cause all actions,
agreements and obligations set forth in the master separation agreement to be
performed, as well as to enter into any subsequent agreements, as necessary, to
transfer any intellectual property that was inadvertently omitted from the
original transfer agreement.
Each party to the Master Separation Agreement agrees to exercise its
reasonable efforts to obtain promptly any necessary consents and approvals and
to take such actions as may be reasonably necessary or desirable to carry out
the purposes of the Master Separation Agreement and the other agreements
summarized below. In the event that any transfers contemplated by the Master
Separation Agreement are not effected on or prior to the contribution date, the
parties agree to cooperate to effect such transfers as promptly practicable
following the contribution date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the
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expense of the party entitled thereto), and to retain any liability not so
transferred for the account of the party by whom such liability is to be
assumed.
INITIAL PUBLIC OFFERING AND DISTRIBUTION AGREEMENT
GENERAL. The Initial Public Offering and Distribution Agreement governs the
respective rights and duties of Methode and us with respect to this offering and
the proposed spin-off. Methode has announced that it plans to complete the
spin-off within six to twelve months after the date of this offering. We have
agreed to cooperate with Methode in all respects to complete the spin-off.
Methode intends to seek a private letter ruling from the IRS that the spin-off
of its shares of our common stock to its stockholders would be tax-free to
Methode and its stockholders for U.S. federal income tax purposes. We cannot
assure you that the IRS will provide Methode with a favorable ruling. Methode is
not obligated to complete the spin-off and we cannot assure you as to whether or
when it will occur.
Methode will determine the timing, structure and all of the terms of its
distribution of our common stock. Methode's final determination to proceed will
require a declaration of the spin-off by the Methode board of directors. Such a
declaration is not expected to be made until certain conditions, many of which
are outside the control of Methode, are satisfied, including:
- receipt by Methode of a ruling from the Internal Revenue Service as to the
tax-free nature of the spin-off; and
- the absence of any future change in market or economic conditions or in
Methode or our business and financial condition that causes the Methode
board of directors to conclude that the spin-off is not in the best
interest of Methode's stockholders.
COVENANTS. After this offering, Methode will continue to own a significant
portion of our common stock. As a result, Methode will continue to include us as
a subsidiary for various financial reporting, accounting and other purposes.
Accordingly, we have agreed to certain covenants in this agreement which will be
binding on us as long as Methode owns at least 50% of our outstanding common
stock. Some of these covenants are described below:
- We will not issue any shares of common stock or any rights, warrants or
options to acquire our common stock, if after giving effect to such
issuance Methode would own less than 80.5% of the then outstanding shares
of our common stock; and
- If Methode determines that, due to any action on our part, its
shareholding in us has dropped or will drop below 80.5%, it can require us
to reverse or terminate the action or issue additional equity securities
to it at no cost, or purchase additional equity securities of us in the
open market or from other third parties, in which case we would have to
reimburse Methode for the costs it incurred in making such a purchase.
After the second anniversary of the closing of this offering, these
provisions would terminate with respect to issuances of equity securities
by us under our 2000 Stock Plan, except that in the event of any such
issuance we may still be obligated to issue additional equity securities
to Methode at the per share fair market value of those securities.
In addition, we have agreed that, for so long as Methode is required to
consolidate our results of operations and financial position or account for its
investment in our company, we will provide Methode financial information
regarding our company and our subsidiaries, consult with Methode regarding the
timing and content of our earnings releases and cooperate fully with Methode in
connection with its public filings.
INDEMNIFICATION. We have generally agreed to indemnify Methode and its
affiliates against all liabilities arising out of:
- any breach by us or our affiliates of any of the provisions of the
agreement;
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- any incorrect or incomplete financial information provided by us or our
affiliates to Methode as required by the agreement; and
- any material untrue statements or omissions (other than those regarding
Methode) in this prospectus and the registration statement of which it is
a part and in any and all registration statements, information statements
and/or other documents filed with the SEC in connection with the proposed
spin-off.
Methode has agreed to indemnify us and our affiliates against all
liabilities arising out of:
- any breach by Methode or its affiliates of any of the provisions of the
agreement;
- any incorrect or incomplete financial information provided by Methode or
its affiliates to us as required by the agreement; and
- any material untrue statements or omissions regarding Methode in this
prospectus and the registration statement of which it is a part and in any
and all registration statements, information statements and/or other
documents filed with the SEC in connection with the spin-off.
Under the terms of this agreement, Methode and our company, as indemnifying
parties, have various rights. The indemnitee may defend and, with the consent of
the indemnifying party, compromise and settle a claim and will be entitled to
reimbursement for its reasonable attorneys' fees and expenses incurred in
defending the claim and indemnification for any liabilities incurred as a result
of the claim.
An indemnifying party may elect to defend, at its own expense and through
counsel chosen by it, any claim by a third party if the claim will obligate the
indemnifying party to provide indemnification.
There are restrictions on the ability of the indemnifying party to settle or
compromise a claim if the settlement or compromise would be harmful to the
indemnitee.
If Methode and we both claim to be entitled to indemnification for a
third-party claim, Methode and we will jointly control the defense of the claim.
If one party fails to defend jointly, the other party will solely defend the
claim, but in no case will one party compromise or settle a third-party claim
without the consent of the other party. All expenses of either party during the
joint defense of a claim will be initially paid by the party incurring the
expenses, with the expenses reallocated and reimbursed in accordance with the
indemnification obligations of the parties at the end of the defense of the
claim.
If an indemnitee recovers amounts from third parties, such as an insurance
company, these amounts will reduce the amount the indemnifying party must pay
unless the indemnitee or its affiliates remain directly or indirectly liable for
those amounts pursuant to self-insurance or re-insurance arrangements. If the
indemnitee incurs a net tax cost from the receipt of an indemnification payment,
the indemnifying party must compensate the indemnitee for the amount of the net
tax cost. If the indemnitee receives a net tax benefit from incurring or paying
for any indemnified loss or liability, the amount the indemnifying party must
pay will be reduced to take account of the net tax benefit.
EXPENSES. We will pay the costs, fees and expenses incurred in connection
with our separation from Methode, this offering and the spin-off, including the
costs and expenses of financial, legal, accounting and other advisers, if any.
MASTER TRANSITIONAL SERVICES AGREEMENT
The Master Transitional Services Agreement governs the provision of
transition services by Methode and us on an interim basis after the contribution
date. This agreement is reciprocal and provides for transitional services and
mutual support in the areas of accounting, treasury, information technology,
human resources, sales and marketing, legal, real estate and other corporate
services and infrastructure costs. Specified charges for transitional services
are generally at cost plus 20%. The
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transition period varies depending on the services but is generally for one year
after the proposed spin-off. The Master Transitional Services Agreement also
covers the provision of additional transitional services identified from time to
time after the contribution date that were inadvertently or unintentionally
omitted from the specified services, or that are essential to effectuate an
orderly transition under the master separation agreement, so long as the
provision of such services would not significantly disrupt the operations of the
party providing such services or significantly increase the scope of its
responsibility under this agreement. We believe that purchasing these services
from, and providing them to, Methode provides both Methode and us with an
efficient means of obtaining these services during the transition period.
EMPLOYEE MATTERS AGREEMENT
Methode will enter into an employee matters agreement which will be
effective upon the completion of this offering. This agreement sets forth our
mutual understanding with respect to the responsibilities, obligations and
liabilities relating to the compensation and benefits of our employees in
connection with the offering and spin-off. Under this agreement, with certain
exceptions, we will be solely responsible for the compensation and benefits of
our employees on and following the offering. The principal exception to this
rule is retirement benefits for our employees; Methode's tax-qualified
retirement plans will retain all assets and liabilities relating to our
employees on and after this offering (subject to any distributions from the
plans that are required or permitted by the plans and applicable law). The
Employee Matters Agreement also provides that equity awards granted to our
employees under Methode's equity incentive plans when they were employees of
Methode may be converted into equity awards of our company upon agreement
between Methode and us.
TAX SHARING AND INDEMNIFICATION AGREEMENT
Methode and our company will enter into a tax sharing and indemnification
agreement, which will allocate tax liabilities among Methode and our company and
address certain other tax matters such as responsibility for filing tax returns,
control of and cooperation in tax litigation and qualification of the
distribution as a tax-free transaction. Generally, Methode will be responsible
for taxes that are allocable to periods prior to the formation of our company,
and each of Methode and our company will be responsible for its own tax
liabilities (including its allocable share of taxes shown on any consolidated,
combined or other tax return filed by Methode) for periods after the formation
of our company. The Tax Sharing and Indemnification Agreement will prohibit
Methode and our company from taking actions that could jeopardize the tax
treatment of the distribution, and will require Methode and our company to
indemnify each other for any taxes or other losses that result from any such
actions. In addition, other events over which we do not have control may also
give rise to our indemnification obligation.
REGISTRATION RIGHTS AGREEMENT
Although Methode has announced its plans to complete the spin-off within six
to twelve months after the date of this offering, we cannot assure you that the
spin-off will occur within this time frame or at all. See "Risk Factors--Risk
Factors Relating to Our Separation from Methode Electronics." In the event that
Methode does not complete the spin-off, Methode could not freely sell all of our
shares that it owns without registration under the Securities Act.
Accordingly, we have entered into a registration rights agreement with
Methode to provide it with registration rights relating to the shares of our
common stock which it holds. These registration rights generally become
effective at such time as Methode informs us that it no longer intends to
proceed with or complete the spin-off. Methode will be able to require us to
register under the Securities Act all or any portion of our shares covered by
the registration rights agreement. In addition, the Registration Rights
Agreement will provide for various registration rights for Methode. Whenever we
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propose to register any of our securities under the Securities Act for ourselves
or others, subject to certain customary exceptions, we will be required to
provide prompt notice to Methode and include in that registration all shares of
our stock which Methode requests to be included.
The Registration Rights Agreement sets forth customary registration
procedures, including a covenant by us to make available our employees and
personnel for road show presentations. All registration expenses incurred in
connection with the registration rights agreement will be paid by us. In
addition, we will be required to reimburse Methode for the reasonable fees and
disbursements of its outside counsel retained in connection with any such
registration. The Registration Rights Agreement also imposes customary
indemnification and contribution obligations on us for the benefit of Methode
and any underwriters with respect to liabilities resulting from untrue
statements or omissions in any registration statement used in any such
registration, although Methode must indemnify us for those liabilities resulting
from information provided by Methode.
The registration rights under the registration rights agreement will remain
in effect with respect to the shares covered by the agreement until:
- those shares have been sold pursuant to an effective registration
statement under the Securities Act;
- those shares have been sold to the public pursuant to Rule 144 under the
Securities Act;
- those shares have been transferred and new certificates delivered, where
the new certificates do not bear a legend restricting further transfer and
where subsequent public distribution of those shares does not require
registration under the Securities Act;
- those shares cease to be outstanding; or
- the spin-off is consummated.
PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by Methode Electronics. After this offering, Methode will own
approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option
in full. Except for Methode, we are not aware of any person or group that will
beneficially own more than 5% of the outstanding shares of our common stock
following this offering.
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DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering and the filing of our restated
certificate of incorporation, our authorized capital stock will consist of
shares of common stock, $.01 par value, and shares of
undesignated preferred stock, $.01 par value. The following description of our
capital stock is subject to and qualified in its entirety by our restated
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is a part, and by the applicable
provisions of Delaware law.
COMMON STOCK
Prior to this offering, there were shares of common stock
outstanding, all of which were held of record by Methode.
The holders of our common stock are entitled to one vote per share with
respect to each matter presented to our stockholders on which the holders of
common stock are entitled to vote. Subject to preferences applicable to any
outstanding preferred stock, the holders of common stock are entitled to receive
ratably any dividends declared by our board of directors out of funds legally
available for that purpose. In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the prior distribution
rights of any preferred stock then outstanding. The holders of our common stock
have no preemptive, subscription or conversion rights. The outstanding shares of
common stock are, and all shares of common stock being offered hereby will be
upon the completion of this offering, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without action by our
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of our common stock. The issuance of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of our company without further action by our stockholders and may adversely
affect the market price, and the voting and other rights, of the holders of our
common stock. The issuance of preferred stock with voting and conversion rights
may adversely affect the voting power of the holders of common stock, including
the loss of voting rights to others. We have no current plans to issue any
shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW
CHARTER AND BYLAW PROVISIONS
Our restated certificate of incorporation and bylaws contain certain
provisions that could make it more difficult for a third party to acquire, or
may discourage a third party from attempting to acquire, control of our company.
These provisions, summarized below, are expected to discourage coercive takeover
practices and inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with our
board of directors. We believe that the benefits of increased protection give us
the potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us and outweigh the disadvantages
of discouraging such proposals because negotiation of such proposals could
result in an improvement of their terms.
CLASSIFIED BOARD OF DIRECTORS. Our board of directors is divided into three
classes. The directors in each class will serve for a three-year term, with one
class being elected each year by our stockholders. See "Management--Directors
and Officers." This system of electing and removing directors may
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discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS. Our restated certificate of incorporation provides
that special meetings of our stockholders may be called only by the chairman of
the board, our President or a majority of the whole board of directors.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our restated
certificate of incorporation eliminates the right of stockholders to act by
written consent without a meeting as of the date Methode no longer owns at least
50% of our common stock. Prior to that date, Methode, as our majority
stockholder, may take corporate actions requiring stockholder approval by
written consent without a stockholders' meeting.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder nominations for the election of directors and stockholder proposals
to be brought at any meeting of our stockholders. These provisions may preclude
stockholders from making nominations for directors at an annual or special
meeting of stockholders or from bringing other matters before an annual meeting
of stockholders.
AUTHORIZATION OF RIGHTS PLAN WITH CONTINUING DIRECTOR PROVISION. Our
restated certificate of incorporation expressly authorizes our board of
directors to adopt a stockholders rights plan of the type adopted by many public
companies. Such plans grant rights to stockholders to purchase securities of the
company and are intended to discourage purchases of substantial amounts of the
company's stock without the approval of the company's board of directors by
permitting the holders of rights other than the acquiror of the large block of
stock to exercise the rights in certain circumstances. The rights issued
pursuant to such plans can be redeemed by the board of directors in order to
permit the acquisition of a large block of the company's stock. The provision of
our restated certificate of incorporation authorizing the adoption of such a
plan by our board of directors permits the inclusion of a provision limiting the
ability of the board to redeem the rights unless there is a specified number or
percentage of "continuing directors" then in office and a provision that would
permit only "continuing directors" to redeem the rights or make any other
decisions or determinations that are provided for in any such rights plan. Such
provisions could limit a potential acquiror's ability to take control of the
board and thereafter redeem the rights in order to permit the acquisition of a
large block of our stock. Continuing directors are generally defined as
directors in office at the time the rights plan was adopted and any director who
subsequently becomes a member of the board if such director's nomination for
election to the board is recommended or approved by a majority of the continuing
directors then in office.
AMENDMENT OF CHARTER PROVISIONS. The amendment of any of the above
provisions would require approval by the holders of at least 80% of the
outstanding common stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless:
- prior to that date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of
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determining the number of shares outstanding those shares owned (a) by
persons who are directors and also officers, and (b) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in
a tender or exchange offer; or
- on or subsequent to such date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines a business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to specific exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of any class or series of stock of the
corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Section 203 defines an interested stockholder as any person that, together
with affiliates and associates, owns 15% or more of the outstanding voting stock
of the corporation, or is an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time with the three year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder.
CORPORATE OPPORTUNITIES
Subject to the restrictions described below, our restated certificate of
incorporation provides that we may engage in any lawful act or activity for
which a corporation may be organized under Delaware law.
Our restated certificate of incorporation provides that, except as Methode
and our company may otherwise agree in writing:
- Methode and its officers, directors, agents, stockholders and affiliates
will have the right to engage or invest in, independently or with others,
any business activity, including business activities that might be the
same or similar to our business;
- we and our other stockholders will not have any right in or to such
business activities or to receive and share in any income or proceeds
derived from such activities; and
- we will have no interest or expectancy, and specifically renounce any
interest or expectancy, in any such business activities.
If Methode or any of its officers, directors, agents, stockholders or
affiliates acquires knowledge of a potential transaction or matter which may be
a corporate opportunity for both Methode and us, such person will have no duty
to communicate or present that opportunity to us and will not breach any
fiduciary duty as a stockholder of our company or otherwise by reason of the
fact that such person pursues or acquires that corporate opportunity for itself,
directs, sells, or assigns that corporate
72
<PAGE>
opportunity to another person or entity or does not communicate information
regarding that corporate opportunity to us.
Notwithstanding the provisions described above, our restated certificate of
incorporation provides that we have not renounced any interest or expectancy we
may have in any corporate opportunity that is offered to:
- an officer of our company who is also a director but not an officer or
employee of Methode;
- any person who is a director but not an officer of our company and who is
also a director, officer or employee of Methode, if such corporate
opportunity is expressly offered to such person in his or her capacity as
a director of our company; or
- any person who is an officer or employee of Methode and an officer of our
company if such corporate opportunity is expressly offered to such person
in his or her capacity as an officer or employee of our company.
For purposes of these corporate opportunity provisions, a director of our
company who is the chairman of the board of directors or a committee thereof
will not be deemed to be an officer of our company by reason of holding such
position, unless such person is a full time employee of our company.
The corporate opportunity provisions in our restated certificate of
incorporation will have no longer be in effect or operative at such time as
Methode ceases to beneficially own common stock representing at least 20% of the
total voting power of all classes of our outstanding capital stock entitled to
vote in the election of directors and no person who is one of our officers or
directors also is a director or officer of Methode.
Our restated certificate of incorporation provides that any person
purchasing or otherwise acquiring any interest in any shares of our capital
stock shall be deemed to have notice of and to have consented to these
provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the trading symbol " ."
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common stock.
Future sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock.
Upon completion of this offering, we will have outstanding shares
of our common stock, or shares if the underwriters exercise their
over-allotment option in full. These shares will be freely tradeable without
restriction under the Securities Act, except for any shares which may be
acquired by an affiliate of Stratos, as "affiliate" is defined in Rule 144 under
the Securities Act. Persons who may be deemed to be affiliates generally include
individuals or entities that control, are controlled by, or are under common
control with, Stratos and may include our directors and officers as well as
significant stockholders of Stratos, if any.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three-month period a number of shares
that does not exceed the greater of one percent of the then outstanding shares
of common stock and the average weekly trading volume in the common stock in the
open market during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain post-sale notice requirements and the
availability of current public information about us.
The shares of our common stock that will continue to be held by Methode
after the offering constitute "restricted securities" within the meaning of
Rule 144, and will be eligible for sale by Methode in the open market after the
offering, subject to certain contractual lockup provisions and the applicable
requirements of Rule 144, both of which are described below. We have granted
certain registration rights to Methode which are also described below.
Methode has announced that it plans to complete its divestiture of Stratos
six to twelve months after the offering by distributing all of its shares of
Stratos common stock to the holders of Methode Class A and Class B common stock.
Any shares distributed by Methode will be eligible for immediate resale in the
public market without restrictions by persons other than affiliates of Stratos.
Affiliates of Stratos would be subject to the restrictions of Rule 144 described
above.
Methode, our directors and executive officers and we have agreed not to
offer or sell any shares of our common stock, subject to certain exceptions
(including the distribution), for a period of 180 days after the date of this
prospectus, without the prior written consent of Lehman Brothers Inc. on behalf
of the underwriters. See "Underwriters."
An aggregate of shares of our common stock are reserved for issuance
under our 2000 Stock Plan. We intend to file a registration statement on
Form S-8 covering the issuance of shares of our common stock pursuant to the
2000 Stock Plan. Accordingly, the shares issued pursuant to the 2000 Stock Plan
generally will be freely tradeable, subject to the lockup restrictions described
above and the restrictions on resales by affiliates under Rule 144.
As part of our separation from Methode, we have granted Methode certain
registration rights. For a description of these rights, see "Arrangements
between Methode Electronics and Stratos Lightwave--Registration Rights
Agreement."
74
<PAGE>
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., CIBC World Markets Corp., U.S. Bancorp
Piper Jaffray Inc., Robert W. Baird & Co. Incorporated, Tucker Anthony, Inc. and
Fidelity Capital Markets, a division of National Financial Services Corporation,
are acting as representatives, have each agreed to purchase from us the
respective number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Lehman Brothers Inc.........................................
CIBC World Markets Corp.....................................
U.S. Bancorp Piper Jaffray Inc..............................
Robert W. Baird & Co. Incorporated..........................
Tucker Anthony, Inc.........................................
Fidelity Capital Markets, a division of National Financial
Services Corporation......................................
------
Total.....................................................
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include the requirement that the representations and
warranties made by us to the underwriters are true, that there is no material
change in the financial markets and that we deliver to the underwriters
customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
PAID BY STRATOS NO EXERCISE FULL EXERCISE
- --------------- ----------- -------------
<S> <C> <C>
Per Share............................................ $ $
Total................................................
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $ share. The underwriters may allow, and the dealers may reallow,
a concession not in excess of $ per share to brokers and dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable to cover
over-allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
75
<PAGE>
We have agreed that, without the prior consent of Lehman Brothers Inc., we
will not directly or indirectly offer, sell or otherwise dispose of any shares
of our common stock or any securities which may be converted into or exchanged
for any such shares of our common stock for a period of 180 days from the date
of this prospectus. All of our executive officers and directors and Methode have
agreed under the lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of our common stock or any securities which may
be converted into or exchanged for any such shares for the period ending
180 days after the date of this prospectus. See "Shares Eligible for Future
Sale."
Prior to the offering, there has been no public market for the shares of our
common stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of our
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
We have applied for a listing of our common stock on the Nasdaq National
Market under the symbol " ."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $ million.
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of our common stock.
The underwriters may create a short position in our common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create a
short position, then the representatives may reduce that short position by
purchasing our common stock in the open market. The representatives also may
elect to reduce any short position by exercising all or part of the
over-allotment option.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce the underwriters' short position
or to stabilize the price of our common stock, they may reclaim the amount of
the selling concession from the underwriters, and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
76
<PAGE>
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price shown on the
cover page of this prospectus.
At our request, the underwriters have reserved up to shares of the
common stock offered by this prospectus for sale to our officers, directors,
employees, consultants and their family members and to our business associates
at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase the reserved shares.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter in this offering, and will be
facilitating electronic distribution of information through the Internet,
intranet and other proprietary electronic technology.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Lord, Bissell & Brook, Chicago, Illinois. Certain legal matters relating to
the offering will be passed upon for the underwriters by Dewey Ballantine LLP,
New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited (a) our combined
financial statements as of April 30, 1998 and 1999 and January 31, 2000 and for
the fiscal years ended April 30, 1997, 1998 and 1999, and the nine month period
ended January 31, 2000, and (b) the financial statements of Polycore
Technologies, Inc. as of December 31, 1998 and for the year then ended, as set
forth in their reports. We have included these financial statements in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's reports, given on their authority as experts in accounting and
auditing.
The financial statements of Optoelectronics (a division of Spire
Corporation) as of September 30, 1999 and December 31, 1998, and for the nine
months ended September 30, 1999 and the year ended December 31, 1998 have
included in this prospectus and elsewhere in the registration statement in
reliance upon the report of KPMG LLP, independent certified public accountants,
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, including
the exhibits and schedules thereto, under the Securities Act with respect to the
shares to be sold in this offering. This prospectus does not contain all the
information set forth in the registration statement. For further information
about us and the shares to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to, are not
necessarily complete, and in each instance please refer to the copy
77
<PAGE>
of the contract, agreement or other document filed as an exhibit to the
registration statement, each statement being qualified in all respects by this
reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file with the SEC at the SEC's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement will also be available to you on the SEC's
web site. The address of this site is http://www.sec.gov.
78
<PAGE>
STRATOS LIGHTWAVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Stratos Lightwave, Inc.
Report of Independent Auditors............................ F-2
Combined Statements of Operations......................... F-3
Combined Balance Sheets................................... F-4
Combined Statements of Cash Flows......................... F-5
Combined Statements of Changes in Stockholder's Net
Investment................................................ F-6
Notes to Combined Financial Statements.................... F-7
Polycore Technologies, Inc.
Report of Independent Auditors............................ F-17
Balance Sheet............................................. F-18
Statement of Income....................................... F-19
Statement of Shareholders' Deficit........................ F-20
Statement of Cash Flows................................... F-21
Notes to Financial Statements............................. F-21
Optoelectronics (a Division of Spire Corporation)
Independent Auditors' Report.............................. F-24
Balance Sheets............................................ F-25
Statements of Operations.................................. F-26
Statements of Shareholder's Equity........................ F-27
Statements of Cash Flows.................................. F-28
Notes to Financial Statements............................. F-29
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Methode Electronics, Inc.
We have audited the accompanying combined balance sheets of Stratos
Lightwave, Inc. (the "Company") as of April 30, 1998, 1999, and January 31,
2000, and the related combined statements of operations, net stockholder's
investment, and cash flows for each of the three fiscal years ended April 30,
1999 and for the nine months ended January 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the 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, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
April 30, 1998, 1999, and January 31, 2000, and the results of its operations
and its cash flows for each of the three fiscal years ended April 30, 1999 and
for the nine months ended January 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
March 14, 2000, except for Note 1
as to which the date is April 12, 2000
F-2
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................... $20,966 $24,158 $46,458 $30,917 $48,553
Costs of sales............................... 14,121 17,656 29,543 20,436 32,594
------ ------ ------ ------- ------
Gross profit................................. 6,845 6,502 16,915 10,481 15,959
------ ------ ------ ------- ------
Operating expenses:
Research and development................... 2,294 2,353 3,301 2,317 4,690
Sales and marketing........................ 2,085 2,344 3,335 2,299 3,538
General and administrative................. 3,348 3,421 4,697 3,178 4,724
------ ------ ------ ------- ------
Total operating expenses................. 7,727 8,118 11,333 7,794 12,952
------ ------ ------ ------- ------
Income (loss) from operations................ (882) (1,616) 5,582 2,687 3,007
Other income (expense), net.................. -- 188 50 -- 1,287
------ ------ ------ ------- ------
Income (loss) before income taxes............ (882) (1,428) 5,632 2,687 4,294
Income taxes (benefit)....................... (375) (570) 2,130 1,000 1,600
------ ------ ------ ------- ------
Net income (loss)............................ $ (507) $ (858) $3,502 $ 1,687 $2,694
====== ====== ====== ======= ======
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF
------------------- JANUARY 31,
1998 1999 2000
-------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 550 $ 608
Accounts receivable, less allowance (1998--$175;
1999--$184; 2000--$184)................................. 3,802 9,031 7,640
Trade receivables from related companies.................. 1,551 1,855 2,905
------ ------ ------
5,353 10,886 10,545
Inventories:
Finished products....................................... 303 283 519
Work in process......................................... 353 468 988
Materials............................................... 3,181 6,165 8,255
------ ------ ------
3,837 6,916 9,762
Current deferred income taxes............................. 212 230 579
Prepaid expenses.......................................... 11 99 103
------ ------ ------
Total current assets.................................. 9,413 18,681 21,597
Other assets:
Goodwill, less accumulated amortization (1999--$15;
2000--$94).............................................. -- 1,570 10,822
Other..................................................... 198 247 246
------ ------ ------
198 1,817 11,068
Property, plant and equipment:
Land...................................................... 274 392 392
Buildings and building improvements....................... 5,485 6,665 10,320
Machinery and equipment................................... 6,962 11,362 19,216
------ ------ ------
12,721 18,419 29,928
Less allowances for depreciation.......................... 5,630 7,411 9,395
------ ------ ------
7,091 11,008 20,533
------ ------ ------
Total assets............................................ $16,702 $31,506 $53,198
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $1,415 $3,370 $4,621
Trade payables to related companies....................... -- 433 112
Other accrued expenses.................................... 103 722 1,076
Income taxes.............................................. -- 47 226
------ ------ ------
Total current liabilities............................. 1,518 4,572 6,035
Deferred income taxes....................................... 176 173 263
Stockholder's net investment................................ 15,008 26,761 46,900
------ ------ ------
Total liabilities and stockholder's equity.............. $16,702 $31,506 $53,198
====== ====== ======
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).............................. $ (507) $ (858) $3,502 $1,687 $ 2,694
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for depreciation and
amortization............................... 990 1,294 1,693 1,176 2,079
Provision for losses on accounts
receivable................................. 24 138 200 200 --
Provision for deferred income taxes.......... 38 (291) (98) (68) (245)
Changes in operating assets and liabilities:
Accounts receivable........................ 232 (1,424) (4,713) (2,265) 1,392
Inventories................................ (474) (788) (2,301) (625) (2,776)
Current deferred income taxes and prepaid
expenses................................. (3) (--) (63) (84) (16)
Accounts payable and accrued expenses...... (173) 816 1,644 (385) 1,754
------- ------- ------ ------ -------
Net cash provided by (used in) operating
activities................................... 127 (1,113) (136) (364) 4,882
Investing activities:
Purchases of property, plant and equipment..... (2,461) (1,639) (4,594) (2,780) (7,918)
Acquisitions, net of cash aquired.............. -- -- (2,505) (1,736) (12,963)
Other.......................................... (63) (69) (50) (53) (17)
------- ------- ------ ------ -------
Net cash used in investing activities.......... (2,524) (1,708) (7,149) (4,569) (20,898)
Financing activities:
Repayments of notes assumed in acquisitions.... -- -- (545) (495) --
Net cash transfers from Methode Electronics,
Inc.......................................... 2,397 2,821 8,380 5,582 16,074
------- ------- ------ ------ -------
Net cash provided by financing activities...... 2,397 2,821 7,835 5,087 16,074
Net increase in cash and cash equivalents...... -- -- 550 154 58
Cash at beginning of period.................... -- -- -- -- 550
------- ------- ------ ------ -------
Cash at end of period.......................... $ -- $ -- $ 550 $ 154 $ 608
======= ======= ====== ====== =======
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S NET INVESTMENT
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at April 30, 1996................................... $10,666
Net loss.................................................... (507)
Net transactions with Methode Electronics, Inc.............. 3,116
-------
Balance at April 30, 1997................................... 13,275
Net loss.................................................... (858)
Net transactions with Methode Electronics, Inc.............. 2,591
-------
Balance at April 30, 1998................................... 15,008
Net income.................................................. 3,502
Net transactions with Methode Electronics, Inc.............. 8,251
-------
Balance at April 30, 1999................................... 26,761
Net income.................................................. 2,694
Net transactions with Methode Electronics, Inc.............. 17,445
-------
Balance at January 31, 2000................................. $46,900
=======
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JANUARY 31, 2000
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On February 23, 2000 Methode Electronics, Inc. (Methode) announced plans to
create a separate company comprised of its optical products business,
subsequently named Stratos Lightwave, Inc. (Company). Methode intends to
transfer on or about May 1, 2000 (Transfer Date) the ownership of its
subsidiaries Bandwidth Semiconductor LLC, Stratos Communication Modules, Inc.
and Stratos, Ltd. (Stratos (UK)), the assets and liabilities of its Fiber Optic
and Optoelectronic divisions, its ownership interest in MP Optical
Communications LLC, and the properties associated with the optoelectronic
research center and the Methode corporate facility (which also houses the Fiber
Optic and Optoelectronic divisions) to the Company.
After completion of the Company's initial public offering, Methode will own
at least 80% of the Company's outstanding common stock. Methode also announced
its intention to distribute at a later date (Distribution Date), all of the
shares of the Company's common stock owned by Methode to the stockholders of
Methode, although Methode is under no obligation to complete this distribution.
Methode, prior to the initial public offering, intends to file with the Internal
Revenue Service for a favorable letter ruling to the effect that the subsequent
distribution of Methode's ownership will be a tax-free distribution for U.S.
federal income tax purposes.
The Company was incorporated in Delaware on April 12, 2000 as a wholly-owned
subsidiary of Methode. The Company authorized 1,000 shares of $0.01 par value
common stock and issued all 1,000 shares to Methode.
Methode and the Company will enter into a master separation agreement under
which Methode will make, if necessary, capital contributions and/or interest
bearing loans to the Company to pay for capital transactions and/or liabilities
arising in the normal course of business prior and/or subsequent to the Transfer
Date. It is expected that these capital contributions and loans will continue
until the proceeds are received from the initial public offering.
The financial statements reflect the historical combined financial position
and results of operations of the Company under the structure to be implemented
on the Transfer Date. All significant intercompany accounts among the combined
companies have been eliminated in the combination. Methode's net investment has
been reflected as Stockholder's Net Investment in the combined financial
statements. Historical earnings per share are not presented as the Company is
wholly owned by Methode.
The combined financial statements include transfers and allocations of costs
and expenses from Methode and its subsidiaries primarily for activities relating
to the Company.
The combined financial statements may not necessarily be representative of
results that would have been attained if the Company operated as a separate
independent entity.
INTERIM FINANCIAL INFORMATION: The interim financial information for the
nine months ended January 31, 1999 is unaudited but, in the opinion of
management, has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of its
financial position at such date and its operating results and cash flows for
these periods. Results for the nine months ended January 31, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year
2000 or any future period.
F-7
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT: Properties are stated on the basis of cost.
The Company amortizes such costs by annual charges to income, computed on the
straight-line method using estimated useful lives of 5 to 35 years for buildings
and improvements and 3 to 15 years for machinery and equipment for financial
reporting purposes. Accelerated methods are generally used for income tax
purposes.
RESEARCH AND DEVELOPMENT COSTS: Costs associated with the development of
new products are charged to expense when incurred.
ADVERTISING: The Company expenses all advertising costs in the year
incurred. Advertising expense was $716,000 for the nine months ended
January 31, 2000, $961,000 in 1999, $488,000 in 1998, and $401,000 in 1997.
REVENUE RECOGNITION: Revenue from product sales, net of trade discounts and
allowances, is recognized at the time the product is shipped.
OTHER INCOME: Other income consists of license fees that are received and
recognized at the time the license agreement is executed and, in addition,
certain agreements also require a monthly royalty payment based upon a
percentage of the licensee's sales of the licensed product.
TAXES ON EARNINGS: The Company's operating results historically have been
included in Methode's consolidated U.S. and state income tax returns or in tax
returns of certain Methode foreign subsidiaries. The provision for income taxes
in the Company's combined financial statements has been determined as if the
Company were taxed as a separate entity. Methode and the Company will enter into
a tax sharing agreement effective May 1, 2000 that requires tax calculation,
accrual and payment by the Company as if the Company was filing a separate tax
return. All income tax payments are made by Methode. Deferred tax assets and
liabilities are recognized for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts.
LONG-LIVED ASSETS: The Company periodically reviews long-lived assets to
determine if there are indicators of impairment. When indicators of impairment
are present, the Company evaluates the carrying value of property, plant, and
equipment and intangibles, including goodwill, in relation to the operating
performance and future undiscounted cash flows of the underlying businesses. The
Company adjusts the net book value of the underlying assets if the sum of the
expected future cash flows is less than book value.
FOREIGN CURRENCY TRANSLATION: The results of operations of the Company's
foreign operations are translated into U.S. dollars using average exchange rates
during the year, while the assets and liabilities are translated using period
end exchange rates. The related translation adjustments are recorded in
Stockholder's Net Investment.
INTANGIBLES: The excess of purchase price over the estimated fair value of
net assets of acquired companies is being amortized on a straight-line basis
over 25 years.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts
F-8
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB), No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. We do not believe this statement
will have a significant impact on our financial statements.
Effective May 1, 1999, the Company adopted American Institute of Certified
Public Accountants Statement of Position (SOP), No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP
No. 98-1 requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The adoption of this statement did
not have a significant impact on our financial results.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS), No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for our fiscal
year ending April 30, 2001. We believe that this statement will not have a
significant impact on our financial results.
2. ACQUISITIONS
On December 30, 1999, Methode purchased for approximately $13,000,000 in
cash, including costs of acquisition, substantially all the assets of the
Optoelectronics division of Spire Corporation.
On April 15, 1999, Methode purchased substantially all of the assets of
Polycore Technologies, Inc., a developer of highly integrated data communication
modules for Local Area Network equipment. The purchase price, including direct
acquisition costs, for this business referred to as Stratos Communication
Modules, was $795,500 in cash plus additional contingent consideration that may
become due based upon the attainment of certain performance targets. Effective
February 23, 2000, the Company entered into an amendment to the Asset Purchase
Agreement which provides that in the event the Company is part of an initial
public offering of shares to be accomplished not later than November 15, 2000,
the sum of $2,956,500 will become payable to the seller within 30 days following
the initial public offering in full satisfaction of such additional contingent
consideration. Any amount paid will be accounted for as additional purchase
price. The excess of purchase price over net assets acquired excludes contingent
consideration.
On December 1, 1998, Methode purchased for cash of $1,735,800, all of the
outstanding shares of Stratos Ltd. (formerly AB Stratos, Ltd.) of Haverhill,
England. Stratos Ltd. is a developer and manufacturer of fiber optic
connectivity products for harsh environments.
F-9
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
2. ACQUISITIONS (CONTINUED)
The allocation of the cash purchase price to the net assets acquired is as
follows:
<TABLE>
<CAPTION>
OPTOELECTRONICS STRATOS
DIVISION OF COMMUNICATION STRATOS
AMOUNT ALLOCATED TO SPIRE CORPORATION MODULES (UK)
------------------- ----------------- ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets acquired:
Cash................................. $ -- $ 26 $ --
Accounts receivable.................. -- 26 691
Inventories.......................... 71 72 705
Property, plant & equipment.......... 3,592 134 843
Other................................ -- -- 25
------ ---- -----
Total assets....................... 3,662 258 2,264
Liabilities assumed:
Notes payable........................ -- 50 494
Accounts payable..................... 33 79 939
Accrued expenses..................... -- 14 --
------ ---- -----
Total liabilities.................. 33 143 1,433
------ ---- -----
Net assets acquired.................. 3,630 115 831
Excess purchase price................ 9,333 680 905
------ ---- -----
Purchase price....................... $12,963 $795 $1,736
====== ==== =====
</TABLE>
The cash acquisitions described above were funded by Methode.
The above-described acquisitions were accounted for using the purchase
method of accounting, and the results of operations of the acquired companies
have been included in the Company's combined financial statements from their
respective dates of acquisition. Had these acquisitions been made as of the
beginning of fiscal 1999, unaudited, pro forma sales and operating results would
be as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
APRIL 30, 1999 JANUARY 31, 2000
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Net sales................................... $55,365 $51,437
Net income.................................. $1,952 $1,915
</TABLE>
3. EMPLOYEE STOCK OWNERSHIP PLAN
Eligible full-time employees of the Company participate in Methode's
Employee Stock Ownership Plan. Eligible employees are generally U.S. employees
who have completed one year of service. The purpose of the Plan is to assist
employees in accumulating capital ownership in Methode and, through that
ownership, to promote in them a strong interest in the successful operation of
Methode. Methode made annual contributions on behalf of the Company of $98,100,
$75,700 and $54,900 to the Plan during fiscal 1999, 1998 and 1997 respectively
and $144,000 for the nine months ended January 31,
F-10
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
3. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
2000. Such contributions have been recorded as expenses by the Company.
Contributions were determined by the Board of Directors of Methode.
Methode is to apply for a determination letter from the Internal Revenue
Service to terminate the plan. The Company's employees will have the option to
receive a direct distribution of their Plan assets, transfer them to an
Individual Retirement Account or transfer them to a new Company 401(k) Plan.
4. TAX NOTE
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
AS OF APRIL 30,
------------------- AS OF JANUARY 31,
1998 1999 2000
-------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities--
Accelerated tax depreciation................. $ 318 $ 315 $ 393
----- ----- -----
Deferred tax assets:
Inventory valuation differences.............. 82 81 430
Investment basis differences................. 142 142 130
Bad debt reserves............................ 68 68 68
Vacation accruals............................ 62 81 81
----- ----- -----
Total deferred tax assets.................. 354 372 709
----- ----- -----
Net deferred tax assets...................... $ 36 $ 57 $ 316
===== ===== =====
Net current deferred tax assets.............. $ 212 $ 230 $ 579
Net non-current deferred tax liabilities..... (176) (173) (263)
----- ----- -----
$ 36 $ 57 $ 316
===== ===== =====
</TABLE>
Income taxes (benefit) consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------ ----------------------
1997 1998 1999 1999 2000
-------- -------- -------- ----------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Federal.......................... $(332) $(226) $1,775 $ 858 $1,356
Foreign.......................... -- -- 47 15 179
State............................ (81) (53) 406 195 310
----- ----- ----- ----- -----
(413) (279) 2,228 1,068 1,845
Deferred (credit).................. 38 (291) (98) (68) (245)
----- ----- ----- ----- -----
$(375) $(570) $2,130 $1,000 $1,600
===== ===== ===== ===== =====
</TABLE>
F-11
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
4. TAX NOTE (CONTINUED)
A reconciliation of the consolidated provisions for income taxes to amounts
determined by applying the prevailing statutory federal income tax rate of 34%
to pre-tax earnings is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income tax at statutory rate.......................... $(298) $(484) $1,916 $ 914 $1,467
Effect of:
State income taxes.................................. (47) (70) 257 121 175
FSC benefit......................................... (37) (23) (50) (37) (39)
Foreign operations with lower statutory rates....... -- -- -- -- (13)
Other--net.......................................... 7 7 7 2 10
----- ----- ----- ----- -----
Income tax provision.................................. $(375) $(570) $2,130 $1,000 $1,600
===== ===== ===== ===== =====
</TABLE>
The Company settles its income tax liability through the Stockholder's Net
Investment account. No provision has been made for income taxes of approximately
$60,000 at January 31, 2000 which would be payable should undistributed net
income of $732,000 of foreign operations be distributed as dividends, as the
Company plans to continue these foreign operations and does not contemplate such
distributions in the foreseeable future.
5. TRANSACTIONS WITH METHODE
The Company's revenue from sales of products to Methode was $4,133,100 for
the nine months ended January 31, 2000, $2,725,900 in 1997, $3,482,300 in 1998
and $4,018,000 in 1999.
The Company's costs and expenses include allocations from Methode for
centralized advertising, legal, accounting, employee benefits, real estate,
insurance services, information technology services, treasury and other Methode
corporate and infrastructure costs. These allocations have been determined on
bases that Methode and the Company considered to be a reasonable approximation
of the utilization of services provided or the benefit received by the Company.
The allocation methods include relative sales, headcount, square footage,
transaction processing costs, adjusted operating expenses and others.
For purposes of governing certain of the ongoing relationships between the
Company and Methode at and after the separation and to provide for an orderly
transition, the Company and Methode will enter into various agreements to
provide similar services as those described above. The agreements govern
individual transitional services as requested by Methode or the Company, of the
other party. Such services are to be provided in accordance with the policies,
procedures and practices in effect before the transfer date. The term of each
agreement shall be one year (provision for extension exists) unless earlier
terminated.
F-12
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
5. TRANSACTIONS WITH METHODE (CONTINUED)
Charges to the Company from Methode for allocations in the fiscal years
ended April 30, 1997, 1998 and 1999 and for the nine months ended January 31,
2000 were classified as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JANUARY 31,
------------------------------ -----------------
1997 1998 1999 2000
-------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cost of sales...................................... $ 345 $ 391 $ 826 $ 823
Research and development........................... 172 281 464 599
Sales and marketing................................ 113 357 798 979
General and administrative......................... 2,727 2,831 3,756 3,266
----- ----- ----- -----
Total............................................ $3,357 $3,860 $5,844 $5,667
===== ===== ===== =====
</TABLE>
6. PENDING LITIGATION
Certain litigation arising in the normal course of business is pending
against the Company. Management is of the opinion that the resolution of such
litigation will not have a significant effect on the combined financial
statements of the Company.
7. MATERIAL CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During the nine months ended January 31, 2000, shipments to Cisco
Systems, Inc. and its contract manufacturers amounted to 27% of combined net
sales.
During the fiscal year ended April 30, 1999, sales to Nortel Networks
Corporation and Cisco Systems, Inc. and their individual contract manufacturers
amounted to 27% and 10% respectively, of combined net sales.
During the fiscal year ended April 30, 1997, sales to General Signal
Networks and Cable Express Corporation amounted to 11% and 12% respectively, of
combined net sales.
No sales to any one customer during the fiscal year ended April 30, 1998
represented 10% or more of combined net sales.
Accounts receivable are generally due within 30 to 45 days. Credit losses
relating to all customers consistently have been within management's
expectations. Accounts receivable from two customers accounted for approximately
30% of the total outstanding balance at January 31, 2000.
8. SEGMENT INFORMATION
The Company operates in one industry segment, the design, manufacture and
sale of optical subsystems and components for high data rate networking, data
storage and telecommunication applications.
F-13
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
8. SEGMENT INFORMATION (CONTINUED)
Information about the results of the Company's operations in different
geographic regions is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30, NINE MONTHS
------------------------------ ENDED JAN. 31,
1997 1998 1999 2000
-------- -------- -------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales:
United States..................... $20,966 $24,157 $44,516 $44,702
Europe............................ -- -- 1,942 3,851
------ ------ ------ ------
$20,966 $24,157 $46,458 $48,553
====== ====== ====== ======
Net income (loss):
United States..................... $ (507) $ (858) $3,419 $2,321
Europe............................ -- -- 83 373
------ ------ ------ ------
$ (507) $ (858) $3,502 $2,694
====== ====== ====== ======
Long-lived assets:
United States..................... $6,727 $7,091 $10,920 $29,525
Europe............................ -- -- 1,658 1,830
------ ------ ------ ------
$6,727 $7,091 $12,578 $31,355
====== ====== ====== ======
</TABLE>
9. CONTINGENT RECEIVABLE
The Company has a license agreement which includes contingent receivables,
in the aggregate, of a minimum of $200,000 to a maximum of $2.2 million
dependent upon the outcome of certain specified events. These events are not
within the control of the Company and the ultimate occurrence is not probable.
Therefore, no amounts have been recorded at January 31, 2000.
10. STOCK AWARDS AND STOCK OPTIONS
Under the terms of the Methode Electronics, Inc. Incentive Stock Award Plan,
restricted Methode Class A Common Stock is awarded to eligible participants
based upon their profit centers' profitability. Generally the awards vest two
years after the date of issuance if the participant is still employed by
Methode. Four participants who will become employees of the Company have
outstanding awards equal to 10,400 shares, which under the terms of the plan
will vest April 30, 2001. These awards will be converted to awards of the
Company's stock assuming Methode successfully completes a tax-free distribution
of its investment in the Company to its stockholders. The converted amount will
be determined as of the close of business on the distribution date to reflect
the aggregate intrinsic value of the award as of the date before the
distribution expressed in shares of the Company's stock. These Company awards
will vest on April 30, 2001, assuming these participants are still employed as
of that date by the Company.
Methode also has a 1997 Stock Plan that awards stock options to key
employees. Options granted to participants who become employees of the Company
and which are unvested at the Distribution
F-14
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
10. STOCK AWARDS AND STOCK OPTIONS (CONTINUED)
Date will be converted at the Distribution Date to options to purchase Company
shares in the same manner as the stock awards discussed in the preceding
paragraph. Options granted to participants which are expected to be vested at
the Distribution Date will not be converted into options to purchase shares of
the Company. Stock options granted to date vest over a period of 6 to 30 months
after the date of the grant and have a term of 10 years.
The following table summarizes the transactions pursuant to the 1997 Stock
Plan:
OPTIONS NOT ELIGIBLE FOR CONVERSION TO COMPANY STOCK
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------------- -------------------------
WTD. AVG. WTD. AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
April 30, 1997.................................... -- $ -- -- $ --
Granted........................................... 25,905 15.53
Cancelled......................................... --
------
April 30, 1998.................................... 25,905 15.53
Granted........................................... 23,108 15.00
Cancelled......................................... (5,000) 15.40
------
April 30, 1999.................................... 44,013 15.27 11,153 15.53
Granted........................................... 36,081 25.49
Exercised......................................... (15,698) 15.45
Cancelled......................................... (4,232) 17.75
------
January 31, 2000.................................. 60,164 $21.18 15,281 $15.27
====== ===== ====== =====
</TABLE>
OPTIONS ELIGIBLE FOR CONVERSION TO COMPANY STOCK
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
------------------------- -------------------------
WTD. AVG. WTD. AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
April 30, 1999..................... -- $ -- -- --
Granted............................ 41,081 26.19
Exercised.......................... -- -- --
Cancelled.......................... (1,250) 23.78
------ ----- ------ -----
January 31, 2000................... 39,831 $26.27 -- --
====== ===== ====== =====
</TABLE>
There were no options eligible for conversion to Company stock granted in 1998
and 1997.
F-15
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 2000
10. STOCK AWARDS AND STOCK OPTIONS (CONTINUED)
Unvested options to purchase Methode Class A Common Stock that are potentially
eligible for conversion to options to purchase Company stock are summarized
below:
OPTIONS OUTSTANDING AT JANUARY 31, 2000
<TABLE>
<CAPTION>
RANGE OF AVG. REMAINING WTD. AVG.
EXERCISE PRICES SHARES LIFE (YEARS) EXERCISE PRICE
- --------------- -------- -------------- --------------
<S> <C> <C> <C>
$15.94-$19.06 2,115 9.4 $17.68
23.28-23.78 22,716 9.6 23.77
31.25 15,000 9.9 31.25
------ --- ------
39,831 9.7 $26.27
====== === ======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123 and
has not recorded any compensation expense associated with these stock options.
Consistent with prior years, stock-based compensation continues to be recorded
using the intrinsic value method prescribed in APB No. 25 and related
Interpretations. If the Company had determined compensation cost based on the
fair value at the grant date consistent with SFAS No. 123, the Company's net
income (loss) in the years ended April 30, 1997, 1998 and 1999 and for the nine
months ended January 31, 2000 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1998 1999 2000
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss)
As reported................... $(507,000) $(858,000) $3,402,000 $2,694,000
Pro forma..................... (507,000) (877,000) 3,398,000 2,514,000
</TABLE>
The weighted average estimated fair value of options granted during fiscal
1998, 1999 and for the nine months ended January 31, 2000 was $5.87, $6.61 and
$14.42, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Risk free interest rate............................. 5.5% 5.4% 5.90%
Expected option life in years....................... 6.0 6.0 6.0
Expected volatility................................. 37.8% 43.8% 55.2%
Dividend yield...................................... 1.3% 1.4% 0.5%
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Polycore Technologies, Inc.
We have audited the accompanying balance sheet of Polycore
Technologies, Inc. as of December 31, 1998, and the related statements of
income, shareholders' deficit, and cash flows for the year then ended. 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 in accordance with auditing standards generally
accepted in the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Polycore Technologies, Inc.
at December 31, 1998 and the results of their operations and their cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
March 10, 2000
F-17
<PAGE>
POLYCORE TECHNOLOGIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $118,342
Accounts receivable....................................... 32,256
Inventories, net of allowances of $55,000:
Finished products....................................... 24,702
Materials............................................... 26,115
-------
50,817
Prepaid expenses.......................................... 6,166
-------
Total current assets........................................ 207,581
MACHINERY AND EQUIPMENT
Machinery and equipment..................................... 240,570
Less allowance for depreciation............................. (127,777)
-------
112,793
-------
Total assets............................................ $320,374
=======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $37,053
Accrued expenses.......................................... 11,838
Capital lease obligation.................................. 19,526
Deferred revenue.......................................... 333,253
-------
Total current liabilities................................... 401,670
SHAREHOLDERS' DEFICIT
Common stock (no par value; 2 shares authorized, issued and
outstanding).............................................. 37,899
Accumulated deficit......................................... (119,195)
-------
(81,296)
-------
Total liabilities and shareholders' deficit............. $320,374
=======
</TABLE>
See notes to financial statements.
F-18
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Income:
Net sales................................................. $ 800,673
Other..................................................... 450,389
----------
1,251,062
Costs and expenses:
Cost of products sold..................................... 354,390
Selling and administrative expenses....................... 863,387
----------
1,217,777
Net income.................................................. $ 33,285
==========
</TABLE>
See notes to financial statements.
F-19
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK, ACCUMULATED SHAREHOLDERS'
CLASS A DEFICIT DEFICIT
------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997........... $ 62,691 $(152,480) $(89,789)
Shareholders' distribution............. (24,792) -- (24,792)
Net income for the year................ -- 33,285 33,285
-------- --------- --------
Balance at December 31, 1998........... $ 37,899 $(119,195) $(81,296)
======== ========= ========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
-------------
<S> <C>
Operating activities:
Net income.................................................. $ 33,285
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation.............................. 38,255
Net loss on disposal of equipment....................... 762
Changes in operating assets and liabilities:
Accounts receivable....................................... 152,194
Inventories............................................... 43,086
Accounts payable and accrued expenses..................... (35,783)
Deferred revenue.......................................... (105,790)
---------
Net cash provided by operating activities................... 126,009
Investing activities:
Purchases of property, plant, and equipment................. (62,362)
---------
Net cash used in investing activities....................... (62,362)
Financing activities:
Shareholders' distributions................................. (24,792)
---------
Net cash used in financing activities....................... (24,792)
---------
Increase in cash and cash equivalents....................... 38,855
Cash and cash equivalents at beginning of year.............. 79,487
---------
Cash and cash equivalents at end of year.................... $ 118,342
=========
Interest paid............................................... $ 3,209
</TABLE>
NONCASH FINANCING ACTIVITIES
In November 1998, the Company entered into a 12 month capital lease
arrangement for machinery and equipment worth $26,000. At the end of the lease
term, the Company has the option to purchase the assets for $1. The assets have
been classified as machinery and equipment. The remaining lease obligation of
$19,526 is classified as capital lease obligation in the balance sheet.
See notes to financial statements.
F-21
<PAGE>
POLYCORE TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF BUSINESS
Polycore Technologies, Inc. (Company) is a designer and manufacturer of
optical data links and active network input/output connectors. The Company's
products include transmitters, receivers and transceivers used with optical
fiber media and compatible with Ethernet, Fast Ethernet, Gigabit Ethernet,
Asynchronous Transfer Mode and other communications protocols.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
MACHINERY AND EQUIPMENT: Machinery and equipment are stated on the basis of
cost. The Company amortizes such costs by annual charges to income, computed on
an accelerated method using estimated lives of 5 to 7 years.
RESEARCH AND DEVELOPMENT COSTS: Costs associated with the development of new
products are charged to expense when incurred. Research and development costs
for the year amounted to $40,000.
REVENUE RECOGNITION: Net sales reflect revenue primarily from product sales
that are recognized at the time the product is shipped.
CASH EQUIVALENTS: All highly liquid investments with a maturity of three
months or less when purchased are carried at their approximate fair value and
classified in the balance sheet as cash equivalents.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. EMPLOYEE BENEFIT PLANS
The Company has a qualified contributory thrift plan that covers
substantially all employees. The Company's contributions to this plan, which are
based on a percentage of employees' contributions, were approximately $12,000
during 1998.
4. LINES OF CREDIT
As of December 31, 1998, the Company had unused lines of credit amounting to
$130,000. Borrowings under this line of credit bear interest at prime plus 1.5%
and are secured by all of the Company's assets. During 1998, the Company
borrowed against the lines of credit. All borrowings were repaid by December 31,
1998.
5. LEASES
Certain equipment and operating properties are rented under non-cancelable
and cancelable operating leases. Total rental expense under operating leases was
$37,000 for the year ended December 31, 1998. At December 31, 1998, future
minimum lease payments under operating leases having initial lease terms in
excess of one year are $9,000 to be paid in 1999.
F-22
<PAGE>
POLYCORE TECHNOLOGIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
6. SUBCHAPTER S ELECTION AND INCOME TAXES
The stockholders of the Company elected, under Subchapter S of the Internal
Revenue Code, to include the companies income in their own income for federal
income tax purposes. Accordingly, the Company is not subject to federal income
taxes.
7. SALE OF TECHNOLOGY
In December 1996, the Company entered into an agreement to sell certain
optoelectronic technology, including certain technology which had not been
developed (Technology Agreement), for $600,000 plus royalties on the sale of
products using the technology. The Company recognizes the revenue associated
with this agreement based on the stage of completion of the project. In 1998,
the Company recognized revenue, included in net sales, of approximately $106,000
and expenses of $25,000 related to this contract. As of December 31, 1998, the
Company had deferred revenue of $333,000 associated with this agreement. In 1999
the other party was notified by the Company that it was terminating the
Technology Agreement with no further requirements by either party.
8. MATERIAL CUSTOMERS
Sales to two customers approximated 78% of net sales in 1998. As of December
31, 1998, these two customers comprised the entire accounts receivable balance.
The Company performs periodic evaluations of its customers' financial condition
and generally does not require collateral. Receivables are generally due in 30
days. Credit losses relating to all customers consistently have been within
management's expectation.
9. OTHER INCOME
During 1998, the Company entered into a Memorandum of Intent for a joint
development, production, and distribution agreement (Development Agreement).
During the negotiations of the Development Agreement, which was never
consummated, the Company received $450,000 for exclusively negotiating with one
company. The income related to this exclusivity has been included in other
income in the financial statements.
10. SUBSEQUENT EVENT
Effective April 15, 1999, the Company sold certain of its assets,
liabilities, and rights of the Polycore name to Methode Electronics, Inc. The
Company did not transfer any liabilities associated with the Technology
Agreement (See Note 7) to Methode. In association with the sale, the Company
changed its name to Rockledge Microsystems, Inc.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Spire Corporation:
We have audited the accompanying balance sheets of Optoelectronics (a
Division of Spire Corporation) as of September 30, 1999 and December 31, 1998,
and the related statements of operations, shareholder's equity and cash flows
for the nine-month period ended September 30, 1999 and the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Optoelectronics (a Division
of Spire Corporation) as of September 30, 1999 and December 31, 1998, and the
results of its operations and its cash flows for the nine-month period ended
September 30, 1999 and the year ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
February 4, 2000
F-24
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets
Accounts receivable, trade:
Amounts billed.......................................... $ 759,595 $ 927,849
Retainage............................................... 43,821 55,117
Unbilled costs.......................................... 194,974 339,037
---------- ----------
998,390 1,322,003
Less allowance for doubtful accounts.................... 15,000 21,800
---------- ----------
Net accounts receivable............................... 983,390 1,300,203
---------- ----------
Inventories............................................... 76,782 40,241
---------- ----------
Total current assets.................................. 1,060,172 1,340,444
---------- ----------
Property and equipment...................................... 10,700,136 10,494,999
Less accumulated depreciation and amortization............ 8,604,569 8,244,681
---------- ----------
Net property and equipment............................ 2,095,567 2,250,318
---------- ----------
Patents (less accumulated amortization, $177,188 in 1999 and
$167,700 in 1998)......................................... 93,656 99,317
---------- ----------
Total assets.......................................... $3,249,395 $3,690,079
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable.......................................... $ 219,255 $ 304,167
Accrued liabilities....................................... -- 54,739
Advances on contracts in progress......................... 154,908 357,663
---------- ----------
Total current liabilities............................... 374,163 716,569
---------- ----------
Shareholder's Equity
Intercompany advances from Spire Corporation................ 2,875,232 2,973,510
---------- ----------
Total liabilities and shareholder's equity............ $3,249,395 $3,690,079
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------- ------------------
<S> <C> <C>
Net sales and revenues
Contract research, service and license revenues.......... $ 3,369,811 $ 6,106,024
----------- -----------
Total net sales and revenues........................... 3,369,811 6,106,024
----------- -----------
Costs and expenses
Cost of contract research, services and licenses......... 2,990,661 5,450,295
Selling, general and administrative expenses............. 1,128,702 1,594,606
Other operating charges.................................. -- 608,911
----------- -----------
Total costs and expenses............................... 4,119,363 7,653,812
----------- -----------
Loss from operations....................................... (749,552) (1,547,788)
Interest income (expense), net............................. (12,852) 1,209
----------- -----------
Loss before income taxes................................... (762,404) (1,546,579)
Income tax expense (benefit)............................... -- (340,536)
----------- -----------
Net loss................................................... $ (762,404) $(1,206,043)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
STATEMENTS OF SHAREHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, December 31, 1997 $ 3,512,404
Net loss.................................................. (1,206,043)
Net intercompany activity................................. 667,149
-----------
Balance, December 31, 1998.................................. 2,973,510
Net loss.................................................. (762,404)
Net intercompany activity................................. 664,126
-----------
Balance, September 30, 1999................................. $ 2,875,232
===========
</TABLE>
See accompanying notes to financial statements
F-27
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $ (762,404) $(1,206,043)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 369,376 474,905
Deferred tax benefit................................. -- (340,536)
Changes in assets and liabilities:
Accounts receivable................................ 316,813 497,691
Inventories........................................ (36,541) 93,460
Accounts payable and accrued liabilities........... (139,651) (192,440)
Advances on contracts in progress.................. (202,755) 307,663
----------- -----------
Net cash used in operating activities............ (455,162) (365,300)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment...................... (205,137) (290,306)
Increase in patent costs................................. (3,827) (11,543)
----------- -----------
Net cash used in investing activities.................. (208,964) (301,849)
----------- -----------
Cash flows from financing activities:
Net intercompany activity with Spire Corporation......... 664,126 667,149
----------- -----------
Net cash provided by financing activities.............. 664,126 667,149
----------- -----------
Net increase (decrease) in cash and cash equivalents....... -- --
Cash and cash equivalents, beginning of period............. -- --
----------- -----------
Cash and cash equivalents, end of period................... $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(1) DESCRIPTION OF THE BUSINESS
Optoelectronics (the "Company") is a division of Spire Corporation
("Spire"). On December 31, 1999, Spire sold certain assets and liabilities of
Optoelectronics to Methode Electronics, Inc. ("Methode") for approximately
$13 million. Optoelectronics develops, manufactures and markets optoelectronic
products for telecommunications, biomedical and electronics applications.
Spire and Methode have also entered into several agreements governing
various relationships between the Company and Methode, including a sub-lease
agreement, employee transfer agreement, non-competition agreement, services
agreement, and several sub-contract agreements.
(2) BASIS OF PRESENTATION
The accompanying financial statements of Optoelectronics include the results
of operations and assets and liabilities directly related to Optoelectronics'
operations.
Optoelectronics was allocated approximately $891,000 and $1,526,000 of costs
related to Spire's shared administrative functions in 1999 and 1998,
respectively. The allocation costs are included in the general, administrative
and other expenses in the statements of operations. Allocations of corporate
costs, which include finance and administration, are allocated on a net revenue
basis. Human resource administration and corporate employee benefit costs are
allocated based on employee head count. Purchasing department costs are
allocated based upon divisional purchases versus total company purchases. Rent,
utilities and related facility costs are allocated based upon square footage
occupied. Management believes that such allocation methodologies are reasonable.
The expenses allocated to Optoelectronics for these services are not necessarily
indicative of the expenses that would have been incurred if Optoelectronics had
been a separate, independent entity and had otherwise managed these functions.
Subsequent to the sale, Methode will be required to manage these functions and
will be responsible for the expenses associated with the management of
Optoelectronics.
Optoelectronics' operations have been financed through its operating cash
flows and debt and equity financing of Spire. Optoelectronics' interest income
(expense) includes an allocation of Spire's interest income (expense) based upon
net revenues. Optoelectronics is expected to have a capital structure different
from the capital structure in the accompanying financial statements and
accordingly, interest income (expense) is not necessarily indicative of the
interest expense that Optoelectronics would have incurred as a separate,
independent company.
Income tax expense was calculated as if Optoelectronics filed separate
income tax returns. As Spire manages its tax position on a consolidated basis,
which takes into account the results of all of its businesses, Optoelectronics'
effective tax rate in the future would vary from its historical effective tax
rates. Optoelectronics' future effective tax rate will largely depend on its
structure and tax strategies.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
Revenue for service contracts is recognized upon performance of the
service. Revenue on government research contracts is recorded as costs
are incurred and includes a pro-rated portion of the estimated profit.
F-29
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined by the average cost method, on a first-in, first-out (FIFO)
basis. Inventories consist primarily of raw materials.
(C) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful
lives of the respective assets, as follows:
<TABLE>
<S> <C>
Machinery and equipment 5 and 7 years
Furniture and fixtures 5 years
Lesser of 10 years or remaining life of facility
Leasehold improvements lease
</TABLE>
Maintenance and repairs are charged to expense as incurred. Major
renewals and betterments are added to property and equipment accounts at
cost.
(D) PATENT COSTS
Patent costs are capitalized and amortized over five years using the
straight-line method.
(E) INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(F) RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred,
except where such costs are reimbursable under customer funded contracts.
During the nine months ended September 30, 1999 and year ended
December 31, 1998, unfunded research and development costs were $55,000
and $178,000, respectively.
(G) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-30
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) FINANCIAL INSTRUMENTS
Financial instruments of the Company consist of accounts receivable and
accounts payable. The carrying amounts of these financial instruments
approximate their fair value.
(I) LONG-LIVED ASSETS
Impairment losses are recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. In such instances, the carrying values of long-lived
assets are reduced to their estimated fair value, as determined using an
appraisal or a discounted cash flow approach, as appropriate.
(J) NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The
Company will adopt SFAS 133 on January 1, 2001. The impact of SFAS 133 on
the financial statements is not expected to be material.
Also in 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The Company adopted SOP 98-1 and SOP 98-5 on
January 1, 1999. The adoption of these pronouncements did not have a
material effect on the financial statements.
(4) ACCOUNTS RECEIVABLE
Unbilled costs on contracts in progress represent revenues recognized on
contracts for which billings have not been presented to customers as of each
balance sheet date. These amounts are billed and generally collected within one
year.
Retainage represents revenues on certain United States Government sponsored
research and development contracts. These amounts, which usually represent 15%
of the Company's research fee on each applicable contract, are not collectible
until a final cost review has been performed by government auditors. Included in
retainage are amounts expected to be collected after one year which totaled
$23,000 and $11,000 at September 30, 1999 and December 31, 1998, respectively.
All other accounts receivable are expected to be collected within one year.
The primary source of revenue for the Company is contracts with United
States Government agencies. During the nine-months ended September 30, 1999 and
the year ended December 31, 1998, revenues from contracts with United States
Government agencies accounted for approximately 74% and 80% of the Company's
total revenues, respectively. At September 30, 1999 and December 31, 1998
accounts receivable from United States Government agencies amounted to $530,646
and $665,746, respectively.
All contracts with United States Government agencies have been audited and
settled through December 1995. Except as discussed in the following paragraph,
the Company has not incurred significant losses as a result of government
audits.
F-31
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(4) ACCOUNTS RECEIVABLE (CONTINUED)
On March 2, 1998 Spire received a letter from the Office of the United
States Attorney for the Eastern District of Virginia stating that it was
considering the commencement of a civil action concerning seven research
initiatives undertaken by Spire (four of which were Optoelectronics initiatives)
in the period from 1990 to the present. The letter alleged that, in certain
instances, Spire had failed to inform the government of pending or previously
submitted proposals for work the government alleges was related to proposals
which were funded. Rather than continuing to incur the legal costs and expend
management resources in litigating this matter, Spire settled with the
government on August 18, 1998 for $547,000. See Note 8.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computer software.................................. $ 64,498 $ 63,703
Machinery and equipment............................ 10,133,499 9,951,516
Furniture and fixtures............................. 190,133 190,243
Leasehold improvements............................. 289,537 289,537
Construction in progress........................... 22,469 --
----------- -----------
$10,700,136 $10,494,999
=========== ===========
</TABLE>
(6) INCOME TAXES
Total federal and state income tax expense (benefit) for the nine months
ended September 30, 1999 and year ended December 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current:
State............................................ $ -- $ --
Federal.......................................... -- --
----------- -----------
-- --
----------- -----------
Deferred:
State............................................ -- --
Federal.......................................... -- --
----------- -----------
-- (340,536)
----------- -----------
$ -- $ (340,536)
=========== ===========
</TABLE>
Actual income tax expense (benefit) for the nine months ended September 30,
1999 and year ended December 31, 1998 differs from the "expected" income tax
expense (benefit) for the year
F-32
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(6) INCOME TAXES (CONTINUED)
(computed by applying the U.S. federal corporate income tax rate of 34% to
earnings (loss) before income taxes) as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Computed "expected" income tax benefit............. $ (250,478) $ (525,837)
State tax, net of federal benefit.................. (46,191) (96,971)
Increase in valuation allowance.................... 295,169 280,272
Other.............................................. 1,500 2,000
----------- -----------
$ -- $ (340,536)
=========== ===========
</TABLE>
The amount recorded as a deferred income tax asset as of September 30, 1999
represents the amount of tax benefits of existing deductible temporary
differences or carryforwards that are more likely than not to be realized
through the generation of sufficient future taxable income within the
carryforward period. At September 30, 1999, based on the Company's level of net
income and projected earnings, the Company increased the valuation allowance by
$295,169. The Company continually re-evaluates the recoverability of deferred
tax assets.
The tax effects of temporary differences that give rise to significant
portions of net deferred tax assets at September 30, 1999 and December 31, 1998
are presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable.............................. $ 11,517 $ 8,779
Inventories...................................... 2,072 1,086
Federal net operating loss carryforwards......... 739,237 506,446
State net operating loss and investment tax
credit........................................... 136,324 93,395
----------- -----------
Total gross deferred tax assets................ 889,150 609,706
Less: valuation allowance...................... (575,441) (280,272)
----------- -----------
Net deferred tax assets........................ 313,709 329,434
----------- -----------
Deferred tax liabilities:
Property and equipment........................... (313,709) (329,434)
----------- -----------
Total gross deferred tax liabilities........... (313,709) (329,434)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
(7) COMMITMENTS
Spire subleases its facilities from a company that leases the building from
a trust; the principal beneficiary of the trust is the principal stockholder of
Spire. The sublease originally was for a period of ten years, after which the
Company exercised its option to extend for an additional five-year period
expiring on November 30, 2000 with an option for an additional five-year
extension period. The agreement provides for minimum rental payments plus annual
increases linked with the Consumer
F-33
<PAGE>
OPTOELECTRONICS (A DIVISION OF SPIRE CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(7) COMMITMENTS (CONTINUED)
Price Index. Total rent expense allocated to the Company utilizing the method
discussed in Note 2 under this lease was $343,000 and $461,000 in 1999 and 1998,
respectively.
(8) OTHER OPERATING CHARGES
During 1998, the Company incurred other operating charges, which included
expenses of a non-recurring nature as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Allocated settlement of Government claim.................... $415,720
Allocated legal costs incurred in settlement of Government
claim..................................................... 120,840
Severance and associated fringe benefit costs incurred in
downsizing Company........................................ 72,351
-------
$608,911
=======
</TABLE>
The downsizing program initiated by Spire during 1998 resulted in the
reduction of 24 employees. Through December 31, 1998, total employee reduction
for the Optoelectronics division amounted to two and $3,841 of the amount
provided for the related severance and fringe benefit costs had been spent. The
remaining severance provision of $68,510 was utilized in 1999.
The settlement of government claim and related legal costs represents an
allocation of Spire's total associated costs of $706,000 based upon the ratio of
the value of Optoelectronics' contracts under question to Spire's total value of
questioned contracts.
F-34
<PAGE>
SHARES
STRATOS LIGHTWAVE, INC.
COMMON STOCK
-------------
PROSPECTUS
, 2000
---------------------
LEHMAN BROTHERS
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
ROBERT W. BAIRD & CO.
TUCKER ANTHONY CLEARY GULL
FIDELITY CAPITAL MARKETS
A DIVISION OF NATIONAL FINANCIAL SERVICES CORPORATION
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in connection
with the issuance and distribution of the securities described in this
registration statement. All amounts shown are estimates except for the
Securities and Exchange Commission registration fee, the NASD filing fee and the
Nasdaq National Market application fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $
NASD filing fee.............................................
Nasdaq National Market application fee......................
Blue sky qualification fees and expenses....................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Director and officer liability insurance....................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
----------
Total....................................................... $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's certificate of
incorporation and bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnification agreements
(Exhibit 10. ) with its directors and officers which would require the
Registrant, among other things, to indemnify them against certain liabilities
which may arise by reason of their status or service (other than liabilities
arising from willful misconduct of a culpable nature). The Registrant also
intends to maintain director and officer liability insurance, if available on
reasonable terms. These indemnification provisions and the indemnification
agreements may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Underwriters of the Registrant and its officers and directors for certain
liabilities arising under the Securities Act, or otherwise.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
See also related undertakings in Item 17 below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, on April , 2000,
the Registrant issued 1,000 shares of common stock to Methode, Inc. for an
aggregate of $1,000. The Registrant believes that
II-1
<PAGE>
this issuance was exempt under Section 4(2) of the Securities Act as a
transaction not involving any public offering.
No underwriters were involved in connection with the sale of securities
referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant
3.2* Form of Restated Certificate of Incorporation of Registrant
3.3* Bylaws of Registrant
4.1* Specimen certificate representing the common stock
5.1* Opinion of Lord, Bissell & Brook
10.1* Form of Master Separation Agreement between Methode
Electronics, Inc. and Registrant
10.2* Form of Initial Public Offering and Distribution Agreement
between Methode Electronics, Inc. and Registrant
10.3* Form of Tax Sharing Agreement between Methode Electronics,
Inc. and Registrant
10.4* Form of Master Transitional Services Agreement between
Methode Electronics, Inc. and Registrant
10.5* Form of Employee Matters Agreement between Methode
Electronics, Inc. and Registrant
10.6* Form of Registration Rights Agreement between Methode
Electronics, Inc. and Registrant
10.7* Form of Indemnity Agreement between Registrant and
Registrant's directors and officers
10.8* Stratos, Inc. 2000 Stock Plan
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
23.3* Consent of Lord, Bissell & Brook (included in Exhibit 5.1)
24.1* Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on April 14, 2000.
<TABLE>
<S> <C> <C>
STRATOS LIGHTWAVE, INC.
By: /s/ JAMES W. MCGINLEY
-----------------------------------------
James W. McGinley
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM J. MCGINLEY
------------------------------------------- Director April 14, 2000
William J. McGinley
/s/ JAMES W. MCGINLEY
------------------------------------------- President, Chief Executive April 14, 2000
James W. McGinley Officer and Director
/s/ DAVID A. SLACK Chief Financial Officer
------------------------------------------- (Principal Financial and April 14, 2000
David A. Slack Accounting Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant
3.2* Form of Restated Certificate of Incorporation of Registrant
3.3* Bylaws of Registrant
4.1* Specimen certificate representing the common stock
5.1* Opinion of Lord, Bissell & Brook
10.1* Form of Master Separation Agreement between Methode
Electronics, Inc. and Registrant
10.2* Form of Initial Public Offering and Distribution Agreement
between Methode Electronics, Inc. and Registrant
10.3* Form of Tax Sharing Agreement between Methode Electronics,
Inc. and Registrant
10.4* Form of Master Transitional Services Agreement between
Methode Electronics, Inc. and Registrant
10.5* Form of Employee Matters Agreement between Methode
Electronics, Inc.and Registrant
10.6* Form of Registration Rights Agreement between Methode
Electronics, Inc. and Registrant
10.7* Form of Indemnity Agreement between Registrant and
Registrant's directors and officers
10.8* Stratos, Inc. 2000 Stock Plan
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of KPMG LLP, independent auditors
23.3* Consent of Lord, Bissell & Brook (included in Exhibit 5.1)
24.1* Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
II-5
<PAGE>
CERTIFICATE OF INCORPORATION
OF
STRATOS LIGHTWAVE, INC.
ARTICLE I
The name of the corporation is Stratos Lightwave, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle. The name of the registered agent of the
Corporation at that address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the Delaware General
Corporation Law (the "DGCL").
ARTICLE IV
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Thousand (1,000) shares of
Common Stock, par value one cent ($.01) per share (the
"Common Stock").
ARTICLE V
The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the board of directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Certificate of
Incorporation or the by-laws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the by-laws so provide.
<PAGE>
C. Special meetings of stockholders of the Corporation may be
called only by the Chairman of the Board or the President or by the
board of directors acting pursuant to a resolution adopted by a
majority of the Whole Board. For purposes of this Certificate of
Incorporation, the term "Whole Board" shall mean the total number of
authorized directors whether or not there exist any vacancies in
previously authorized directorships.
ARTICLE VI
The board of directors is expressly empowered to adopt, amend or repeal
by-laws of the Corporation. Any adoption, amendment or repeal of the by-laws of
the Corporation by the board of directors shall require the approval of a
majority of the Whole Board. The stockholders shall also have power to adopt,
amend or repeal the by-laws of the Corporation; provided, however, that, in
addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of all of the then-outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to adopt, amend or repeal any
provision of the by-laws of the Corporation.
ARTICLE VII
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is amended to authorize corporate action further eliminating or limiting
the personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time
of such repeal or modification.
ARTICLE VIII
The name and mailing address of the incorporator are as follows:
NAME MAILING ADDRESS
---- ---------------
Ingrid J. Scheckel 115 S. LaSalle St., 35th Floor
Chicago, IL 60603
2
<PAGE>
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming
a corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do hereby certify the facts herein stated are
true, and have accordingly hereunto set my hand this 12th day of April, 2000.
/s/ INGRID J. SCHECKEL
------------------------------
Ingrid J. Scheckel
3
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports (a) dated March 14, 2000, except for Note 1 as to
which the date is April 12, 2000, with respect to the combined financial
statements of Stratos Lightwave, Inc. for the three years ended April 30,
1999 and the nine months ended January 31, 2000 and (b) dated March 10, 2000
with respect to the financial statements of Polycore Technologies, Inc. for
the year ended December 31, 1998, included in the Registration Statement,
Form S-1 and related Prospectus of Stratos Lightwave, Inc. dated April 14,
2000.
Ernst & Young LLP
Chicago, Illinois
April 14, 2000
<PAGE>
Exhibit 23.2
The Board of Directors
Spire Corporation:
We consent to the inclusion of our report dated February 4, 2000, with
respect to the balance sheets of Optoelectronics (a Division of Spire
Corporation) as of September 30, 1999 and December 31, 1998, and the related
statements of operations, shareholder's equity and cash flows for the
nine-month period ended September 30, 1999 and the year ended December 31,
1998, which report appears in the registration statement on Form S-1 of
Stratos Lightwave, Inc. dated April 14, 2000. Additionally, we consent to the
reference of our firm under the heading "Experts" in the prospectus.
KPMG LLP
Boston, Massachusetts
April 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR YEAR 9-MOS
9-MOS
<FISCAL-YEAR-END> APR-30-1997 APR-30-1998 APR-30-1999 APR-30-1999
APR-30-2000
<PERIOD-START> MAY-01-1996 MAY-01-1997 MAY-01-1998 MAY-01-1998
MAY-01-1999
<PERIOD-END> APR-30-1997 APR-30-1998 APR-30-1999 JAN-31-1999
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<CASH> 0 0 550 0
608
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 5,528 11,070 0
10,729
<ALLOWANCES> 0 175 184 0
184
<INVENTORY> 0 3,837 6,916 0
9,762
<CURRENT-ASSETS> 0 9,413 18,861 0
21,597
<PP&E> 0 12,721 18,419 0
29,928
<DEPRECIATION> 0 5,630 7,411 0
9,395
<TOTAL-ASSETS> 0 16,702 31,506 0
53,198
<CURRENT-LIABILITIES> 0 1,518 4,572 0
6,035
<BONDS> 0 0 0 0
0
0 0 0 0
0
0 0 0 0
0
<COMMON> 0 0 0 0
0
<OTHER-SE> 0 15,008 26,761 0
46,900
<TOTAL-LIABILITY-AND-EQUITY> 0 16,702 31,506 0
53,198
<SALES> 20,966 24,158 46,458 30,917
48,553
<TOTAL-REVENUES> 20,966 24,346 46,508 30,917
49,840
<CGS> 14,121 17,656 29,453 20,436
32,594
<TOTAL-COSTS> 14,121 17,656 29,453 20,436
32,594
<OTHER-EXPENSES> 0 0 0 0
0
<LOSS-PROVISION> 0 0 0 0
0
<INTEREST-EXPENSE> 0 0 0 0
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<INCOME-PRETAX> (882) (1,428) 5,632 2,687
4,294
<INCOME-TAX> (375) (570) 2,130 1,000
1,600
<INCOME-CONTINUING> (507) (858) 3,502 1,687
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<DISCONTINUED> 0 0 0 0
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<EXTRAORDINARY> 0 0 0 0
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<CHANGES> 0 0 0 0
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<NET-INCOME> (507) (858) 3,502 1,687
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