<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 2000
REGISTRATION NO. 333-34864
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
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 of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code number) No.)
</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 MICHELLE B. RUTTA
Lord, Bissell & Brook Dewey Ballantine LLP
115 South LaSalle Street 1301 Avenue of the Americas
Chicago, Illinois 60603 New York, New York 10019
(312) 443-0700 (212) 259-8000
</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... 10,062,500 shares $18.00 $181,125,000
<CAPTION>
AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE(3)
<S> <C>
Common Stock, $.01 par value... $47,817
</TABLE>
(1) Includes 1,312,500 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.
(3) $48,576 was previously paid by the Registrant on April 14, 2000.
--------------------------
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 JUNE 5, 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
8,750,000 SHARES
[LOGO]
STRATOS LIGHTWAVE, INC.
COMMON STOCK
----------------------------------------------------------------
This is our initial public offering of shares of common stock. We are offering
8,750,000 shares. No public market currently exists for our shares.
We have applied to list the shares on the Nasdaq National Market under the
symbol "STLW." We expect the public offering price to be between $16.00 and
$18.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. "RISK FACTORS" BEGIN ON PAGE 8.
<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 1,312,500
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>
Description of Inside Cover Art:
The inside front cover contains images of various Stratos Lightwave optical
subsystem and component products, a stylized diagram of a
MAN/WAN/Telecommunications network which shows the location of Stratos Lightwave
optical products in this network, and a stylized diagram of a local area network
attached to a storage area network, which includes elements found in most
applications such as communication lines, servers, switches, workstations and
storage devices, and which shows a close-up of a Stratos Lightwave subsystem and
the location of Stratos Lightwave optical products in these networks.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary................... 4
Risk Factors......................... 8
Forward-Looking Statements........... 20
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............................. 39
Management........................... 53
Arrangements Between Methode
Electronics and Stratos
Lightwave.......................... 63
Principal Stockholder................ 72
Description of Capital Stock......... 73
Shares Eligible for Future Sale...... 77
Underwriting......................... 78
Legal Matters........................ 80
Experts.............................. 80
Where You Can Find More Information.. 81
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.
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.
3
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR COMBINED FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS
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 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, synchronous optical network (SONET) 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 net sales
increased to $71.8 million in the fiscal year ended April 30, 2000 from
$46.5 million in the fiscal year ended April 30, 1999.
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 expansion 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 existing
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 using optical
technology for high data rate networking, data storage and telecommunication
applications.
Optical communication original equipment manufacturers (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 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.
4
<PAGE>
We believe our solution provides 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 standards 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 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.
- 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.
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 86.1% of the outstanding shares of our common stock, or
approximately 84.3% 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 Methode and those stockholders. This transaction is
sometimes referred to in this prospectus as the spin-off. While
5
<PAGE>
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."
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.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Stratos Lightwave....... 8,750,000 shares
Common stock to be outstanding after the
offering...................................... 62,779,807 shares, or 64,092,307 shares if the
underwriters' over-allotment option is exercised in
full.
Common stock to be held by Methode immediately
after the offering............................ 54,029,807 shares
Use of proceeds................................. We estimate that our net proceeds from this
offering will be approximately $136.8 million based
on an assumed initial public offering price of
$17.00 per share. We intend to use these net
proceeds for general corporate purposes, to repay
an estimated $2.0 million in advances from a
Methode subsidiary 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.......... "STLW"
</TABLE>
The number of shares of our common stock to be outstanding after this
offering does not include 4,500,000 shares of our common stock reserved for
issuance under our 2000 Stock Plan. We have granted options to purchase
3,712,300 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 Lightwave 2000 Stock Plan."
6
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro forma income (loss) per share, basic and diluted, and shares outstanding
gives effect to the 54,028,807 shares issued by us to Methode in association
with the contribution and transfer to us of our business as of May 28, 2000.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
--------------------------------------------------------
1996 1997 1998 1999 2000
----------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $14,485 $20,966 $24,158 $46,458 $71,785
Gross profit.................................... 5,580 6,845 6,502 16,915 23,721
Income (loss) from operations................... 293 (882) (1,616) 5,582 4,591
Other income.................................... -- -- 188 50 1,459
Net income (loss)............................... $ 176 $ (507) $ (858) $ 3,502 $ 3,790
Pro forma income (loss) per share, basic and
diluted....................................... $ 0.00 $ (0.01) $ (0.02) $ 0.06 $ 0.07
======= ======= ======= ======= =======
Pro forma shares outstanding.................... 54,030 54,030 54,030 54,030 54,030
======= ======= ======= ======= =======
</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 assumed offering price of
$17.00 per share, after deducting the underwriting discount and estimated
offering expenses payable by us, the repayment of an estimated $2.0 million in
advances from a Methode subsidiary, $1.5 million of which was used to fund
working capital, and the payment of $3.0 million as additional purchase price
with respect to our previous acquisition of Polycore Technologies.
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF APRIL 30, 2000
-------------------------------------------- ----------------------
1996 1997 1998 1999 ACTUAL AS ADJUSTED
----------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ -- $ -- $ -- $ 550 $ 537 $132,373
Working capital......................... 5,544 4,444 5,749 11,994 17,747 151,083
Total assets............................ 11,761 14,619 17,110 31,523 61,137 197,973
Long-term obligations, less current
portion............................... -- -- -- -- -- --
Stockholders' net investment............ 10,886 12,939 14,596 26,169 52,962 189,798
</TABLE>
OTHER INFORMATION
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.
In this prospectus, "Stratos Lightwave," "Stratos," the "company," "we,"
"us" and "our" each refers to Stratos Lightwave, Inc., and "Methode Electronics"
and "Methode" refers to Methode Electronics, Inc.
We intend to file U.S. trademark applications for "Stratos," "Stratos
Lightwave" and our Stratos logo. All other product names, trade names and
trademarks appearing in this prospectus are the property of their holders.
7
<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.
RISKS RELATING TO OUR BUSINESS
OUR NET SALES AND OPERATING RESULTS VARY SIGNIFICANTLY FROM QUARTER TO QUARTER,
AND OUR STOCK PRICE MAY FALL IF OUR QUARTERLY PERFORMANCE DOES NOT MEET
ANALYSTS' OR INVESTORS' EXPECTATIONS.
Our quarterly net sales and operating results have varied significantly in
the past and are likely to vary significantly in the future, which makes it
difficult to predict our future operating results. Although our annual net sales
have generally improved over the last five years, we believe that
quarter-to-quarter comparisons of our net sales and operating results are not
meaningful and should not be relied upon as an indicator of our future
performance. Some of the factors which cause our net sales and operating results
to vary include:
- the timing of customer orders, particularly from our largest customers;
- our ability to manufacture and ship our products on a timely basis;
- changes in our product mix;
- competitive pressures resulting in lower prices;
- the introduction of new products or technologies by us or our competitors;
and
- the timing of our receipt of license fees and royalty payments relating to
our intellectual property.
In one or more future quarters, our net sales or 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. IF THESE EVENTS DO NOT OCCUR, THE GROWTH IN
OUR NET SALES IS NOT LIKELY TO CONTINUE AND OUR BUSINESS WOULD LIKELY BE
SIGNIFICANTLY HARMED.
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 on the growth of these markets
and their use of optical communication technologies. If these markets grow more
slowly than expected, or if the use of optical communication technologies in
these markets does not expand, the growth in our net sales is not likely to
continue and our business would likely 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
PRODUCTS WILL NO LONGER BE COMPETITIVE AND OUR NET SALES WILL 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
8
<PAGE>
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 our products and technologies, our products will no longer be
competitive and our net sales will 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 ARE INCORPORATED INTO LARGER SYSTEMS WHICH MUST COMPLY WITH VARIOUS
DOMESTIC AND INTERNATIONAL GOVERNMENT REGULATIONS. IF THE PERFORMANCE OF OUR
PRODUCTS CONTRIBUTES TO OUR CUSTOMERS' INABILITY TO COMPLY WITH THESE
REQUIREMENTS, WE MAY LOSE THESE CUSTOMERS AND OUR NET SALES WILL DECLINE.
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 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. If the performance of our products contributes to our customers'
inability to comply with existing or evolving standards established by
regulatory authorities or to obtain timely domestic or foreign regulatory
approvals we may lose these customers and our net sales will decline.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING INDUSTRY STANDARDS OR ALTERNATIVE
TECHNOLOGIES IN OUR MARKETS, WE MAY BE REQUIRED TO MAKE SIGNIFICANT EXPENDITURES
TO REDESIGN OUR PRODUCTS.
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 redesign 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
redesigning our products or developing new products to meet new standards or any
other standard that may emerge, our net sales will decline.
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 CANCELS,
REDUCES OR DELAYS PURCHASES OF OUR PRODUCTS.
Our success will depend on our continued ability to develop and manage
relationships with significant customers. For the 2000 fiscal year, our three
largest customers and their respective contract manufacturers accounted for 44%
of our net sales, with Cisco, Nortel and Alcatel accounting for 26%, 10% and 8%
of our net sales, respectively. For the 1999 fiscal year, our three largest
customers and their respective 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. We expect our dependence on sales to a small number of
large customers to continue.
9
<PAGE>
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. 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, our inability to successfully
develop relationships with additional customers or future price concessions that
we may make could cause our net sales to significantly decline.
Our sales to other business units within Methode have also represented a
significant portion of our net sales. Sales to Methode represented 8.2% of our
net sales in fiscal 2000 and 8.6% of our net sales in fiscal 1999. 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 NET
SALES TO DECLINE OR INCREASE OUR OPERATING EXPENSES.
We cannot predict the timing of our sales 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 sales shortfall and our net
sales may decline. The period of time between our 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. Even after incurring these
costs, we ultimately may not sell any or only small amounts of our products to
these potential customers. Consequently, if new sales do not result from our
efforts to qualify our products, our operating expenses will increase.
OUR CUSTOMERS MAY CEASE PURCHASING OUR PRODUCTS AT ANY TIME AND MAY CANCEL OR
DEFER PURCHASES ON SHORT NOTICE, WHICH MAY CAUSE OUR NET SALES TO DECLINE OR
INCREASE OUR OPERATING EXPENSES.
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. Our customers base their orders for our products on
the forecasted sales and manufacturing schedules for their own products. Our
customers have in the past significantly accelerated, canceled or delayed orders
for our products in response to unanticipated changes in the manufacturing
schedules for their own products, and will likely do so again in the future. The
reduction, cancellation or delay of individual customer purchase orders could
cause our net sales to decline. Moreover, these uncertainties complicate our
ability to accurately plan our manufacturing schedule and may increase our
operating expenses.
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 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
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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 will cause our
gross margins to decline, which would significantly harm our operating results.
THE MARKET FOR OPTICAL SUBSYSTEMS AND COMPONENTS IS HIGHLY COMPETITIVE, WHICH
MAY RESULT IN LOST SALES OR LOWER GROSS MARGINS.
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. 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 are attempting to
integrate their operations by producing their own optical subsystems or
components or acquiring one or more of our competitors which may eliminate the
need to purchase our products. Furthermore, larger companies in other related
industries are developing and acquiring technologies and applying their
significant resources, including their distribution channels and brand name
recognition, in an effort to capture significant market share. While this trend
has not historically impacted our competitive position, it may result in future
decreases in our net sales.
WE DEPEND ON SUPPLIERS FOR SEVERAL KEY COMPONENTS AND IF THESE SUPPLIERS ARE
UNABLE TO MEET OUR NEEDS, WE MAY EXPERIENCE DELAYS IN SHIPMENTS AND INCREASED
COSTS.
We purchase several key components that are 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. These shortages and
delays have typically occurred when demand within the industry has increased
rapidly and exceeds the capacity of suppliers of key components in the short
term. Delays and shortages also often occur in the early stages of a product's
life cycle. The length of shortages and delays in the past has varied from
several days to a month. We are unable to predict the length of any future
shortages or delays.
We currently have two or more sources for all key components. Although we
enter into long-term agreements for the purchase of key components from time to
time, our purchases of key components are generally made on a purchase order
basis. We may also maintain an inventory of limited source components to limit
the potential impact of a component shortage.
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,
our 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,
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which may cause delays in shipments, increased design and manufacturing costs
and increased prices for our products.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WE WILL INCUR ADDITIONAL
OPERATING EXPENSES AND OUR OPERATING RESULTS WILL SUFFER.
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.
For example, the number of our employees has increased from approximately 200 as
of April 30, 1997 to 499 as of April 30, 2000. 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, we will incur additional expenses which
will cause our operating results to suffer.
OUR SUCCESS DEPENDS ON OUR ABILITY TO HIRE AND RETAIN QUALIFIED TECHNICAL
PERSONNEL, AND IF WE ARE UNABLE TO DO SO, OUR PRODUCT DEVELOPMENT EFFORTS AND
CUSTOMER RELATIONS WILL SUFFER.
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 technical personnel in each of these
areas. We intend to increase the number of our employees who perform 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 hire and retain qualified personnel, our product
development efforts and customer relations will 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. For example, we experienced a
two-month manufacturing delay in connection with one of our products as a result
of a defective component supplied by a third party. 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 our products from
time to time and may incur warranty or repair costs, be subject to liability
claims for damages related to product defects or experience manufacturing delays
as a result of these defects in the future, any or all of which could be
substantial. The length of any future manufacturing delays in connection with a
product defect will depend on the nature of the defect and whether we or one of
our component suppliers was the source of the defect. Moreover, the occurrence
of defects, 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.
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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 AND REGULATORY RISKS ASSOCIATED WITH INTERNATIONAL
OPERATIONS MAY LIMIT OUR SALES AND INCREASE OUR COSTS OF DOING BUSINESS ABROAD.
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
15.2% of our net sales in fiscal 2000 and approximately 9.7% of our net sales in
fiscal 1999. 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;
- 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 factors could adversely impact our international sales or increase our
costs of doing business abroad or impair our ability to expand into
international markets, and therefore could significantly harm our business.
FUTURE ACQUISITIONS WE UNDERTAKE COULD HARM OUR BUSINESS BY DIVERTING OUR
RESOURCES AND INCREASING OUR COSTS.
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 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,
including:
- difficulties in integrating operations, products, technologies and
personnel;
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- 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; and
- potential loss of key employees of purchased organizations.
OUR RECENT ACQUISITIONS HAVE NOT GENERATED SIGNIFICANT SALES, AND IF THESE
BUSINESSES DO NOT BECOME PROFITABLE OUR OPERATING RESULTS COULD BE SERIOUSLY
HARMED.
In April 1999, Methode acquired Polycore Technologies, Inc., which we
operate as our Stratos Micro Systems 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 up to two years after
this offering. If these businesses do not become profitable, our operating
results could be seriously harmed.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS WOULD SIGNIFICANTLY
IMPAIR THEIR VALUE AND 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 protect our proprietary rights to the same extent as do the
laws of the United States. Further, enforcing our intellectual property rights
could result in the expenditure of significant financial and managerial
resources and the success of these 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. Our inability to adequately protect against unauthorized use of our
intellectual property would significantly impair its value and our competitive
position.
WE ARE CURRENTLY INVOLVED IN PENDING LITIGATION WHICH, IF DECIDED AGAINST US,
COULD IMPAIR OUR ABILITY TO PREVENT OTHERS FROM USING OUR TECHNOLOGY, RESULT IN
THE LOSS OF FUTURE ROYALTY INCOME AND REQUIRE US TO PAY SIGNIFICANT MONETARY
DAMAGES.
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 that optoelectronic products sold by the defendants
infringe upon between two and five Methode patents. The defendants in these
lawsuits have filed various affirmative defenses. In
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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's rights in these lawsuits 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 the ability to prevent others from using the
technology which is the subject of the invalidated patents as well as future
royalty payments from our current licensees of these 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.
RISKS RELATING TO OUR SEPARATION FROM METHODE ELECTRONICS
WE HAVE NEVER OPERATED AS A STAND-ALONE COMPANY AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO IMPLEMENT THE SYSTEMS AND CONTROLS NECESSARY TO SUPPORT
OUR BUSINESS.
Our business was contributed and transferred to us by Methode as of May 28,
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 support our
business.
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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 86.1%
of our outstanding shares of common stock, or approximately 84.3% 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;
- 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 the 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.
Two members of our board of directors are also directors of Methode. These
directors 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, these directors 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 are faced with decisions that could have
different implications for Methode and us.
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OUR CHARTER CONTAINS PROVISIONS WHICH GENERALLY PERMIT METHODE TO ENGAGE IN
BUSINESS ACTIVITIES SIMILAR TO OUR BUSINESS WITHOUT OUR PARTICIPATION AND LIMIT
METHODE'S DUTY TO ADVISE US OF CORPORATE OPPORTUNITIES, WHICH MAY RESULT IN OUR
LOSS OF CORPORATE OPPORTUNITIES WHICH COULD BENEFIT US.
Our restated certificate of incorporation provides that Methode and its
officers, directors, agents, stockholders and affiliates will have the right,
except as otherwise agreed by Methode and us, to engage or invest in any
business activity, including business activities similar to our business, and we
will not have the right to participate with Methode in these business
opportunities. Our restated certificate of incorporation also contains
provisions which limit the duty of Methode and its directors, officers and
employees to advise us of business and investment opportunities which may be of
interest to our company. These provisions may result in our loss of business and
investment opportunities which could benefit us. See "Description of Capital
Stock--Corporate Opportunities."
Methode and its affiliates have agreed not to engage anywhere in the world
in the manufacture or sale, other than to its current customers as of the
contribution date, of specified optoelectronic products and processes, or the
manufacture of standard fiber optic connector products and/or accessories. These
non-compete restrictions will terminate one year after the spin-off date. For a
more detailed description of these restrictions, see "Arrangements Between
Methode Electronics and Stratos Lightwave--Master Separation Agreement."
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH METHODE WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS, THE RESOLUTION OF WHICH MAY NOT BE AS
FAVORABLE TO US AS IF WE WERE DEALING WITH AN UNAFFILIATED PARTY.
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;
- 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 these agreements. See "Arrangements between Methode
Electronics and Stratos Lightwave."
WE HAVE AGREED TO CONTRACTUAL LIMITATIONS UNDER OUR SEPARATION AGREEMENTS WITH
METHODE WHICH COULD LIMIT THE CONDUCT OF OUR BUSINESS AND OUR ABILITY TO PURSUE
OUR BUSINESS OBJECTIVES.
We have agreed to contractual limitations under our separation agreements
with Methode which place restrictions on our ability to conduct our business.
Under our tax sharing and indemnification agreement with Methode, we have agreed
to 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 restrictions in the tax sharing and indemnification agreement generally
expire two years after Methode completes its proposed spin-off of its equity
interest in us.
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Under our initial public offering and distribution agreement with Methode,
we have agreed not to take any action which would limit Methode's ability to
sell our shares or its rights as a stockholder of our company in a manner which
is not applicable to our stockholders generally. In addition, we have agreed not
to issue, prior to the proposed spin-off, any shares of common stock or rights,
warrants or options to acquire our stock, if such issuance would result in
Methode owning less than 80.5% of our common stock. These restrictions in the
initial public offering and distribution agreement will be binding on us as long
as Methode owns at least 50% of our outstanding common stock or until Methode
notifies us that it no longer intends to proceed with the proposed spin-off.
Under our master separation agreement with Methode, we and our affiliates
have agreed not to engage in:
- the manufacture or sale, other than to our current customers as of the
contribution date, of standard cable assemblies and specified cable
management cabinets and value-added cable assemblies for local area
networks, data centre, telecom and other project installation driven
applications in Europe;
- the manufacture or sale of electronic interconnect devices anywhere in the
world; and/or
- the sale of standard cable assembly or cable management cabinets in
combination with system integration or system installation services to
end-user clients in the United States and Europe.
Any of these restrictions could materially limit the way in which we conduct
our business and our ability to pursue our business objectives. For a more
detailed description of these restrictions, see "Arrangements Between Methode
Electronics and Stratos Lightwave--Master Separation Agreement," "Arrangements
Between Methode Electronics and Stratos Lightwave--Initial Public Offering and
Distribution Agreement" and "Arrangements Between Methode Electronics and
Stratos Lightwave--Tax Sharing and Indemnification Agreement."
IF THE PROPOSED 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
for reasons including 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 or other liability. If we were to become obligated to indemnify
Methode for this liability, our financial condition and business would be
significantly harmed. See "Arrangements Between Methode Electronics and Stratos
Lightwave--Tax Sharing and Indemnification Agreement."
OUR SEPARATION FROM METHODE MAY RESULT IN OUR LOSS OF THE RIGHT TO USE SOME
LICENSED INTELLECTUAL PROPERTY RIGHTS USED IN OUR BUSINESS, WHICH MAY RESULT IN
LOSS OF SALES OR AN INCREASE IN OUR COSTS.
We benefit from various license agreements for intellectual property rights
related to our business which were entered into by Methode prior to the
contribution and transfer of our business to us. Under the general assignment
and assumption agreement between Methode and our Stratos Lightwave, LLC
subsidiary, Methode has agreed to use its commercially reasonable efforts to
obtain any necessary consents or approvals in connection with the transfer of
these licenses to us. If Methode is unable to obtain these consents and transfer
these licenses to us, we would be required to discontinue using the licensed
technology, attempt to obtain a similar license which may not be available on
reasonable terms or at all, or redesign our products, which may result in loss
of sales or an increase in our costs.
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RISKS RELATING TO THIS OFFERING
OUR COMMON STOCK HAS NOT TRADED PUBLICLY, AND THE MARKET PRICE OF OUR COMMON
STOCK MAY DECLINE AFTER THIS OFFERING.
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 PRICES FOR SECURITIES OF TECHNOLOGY RELATED COMPANIES HAVE BEEN
VOLATILE IN RECENT YEARS AND OUR STOCK PRICE COULD FLUCTUATE SIGNIFICANTLY AFTER
THIS OFFERING.
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;
- 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 62,779,807 shares of common stock
outstanding. This includes the 8,750,000 shares of common stock we are selling
in this offering, which may be resold in the public market immediately after
this offering. The remaining 54,029,807 shares, representing approximately 86.1%
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
19
<PAGE>
in the open market, or the perception that these 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 THE NET PROCEEDS OF
THIS OFFERING, AND IF THESE FUNDS ARE NOT USED EFFECTIVELY, OUR LIQUIDITY AND
CAPITAL RESOURCES WILL BE ADVERSELY AFFECTED.
We intend to use part of the net proceeds of this offering to repay an
estimated $2.0 million of advances received from a Methode subsidiary and to pay
$3.0 million of additional purchase price in connection with our prior
acquisition of Polycore Technologies, Inc. See "Use of Proceeds." The remaining
$131.8 million of the net proceeds of this offering will be used for general
corporate purposes and are not allocated for a specific purpose, and, therefore,
our management will have broad discretion in determining how to use these funds.
If our use of these funds does not increase our cash flows from operations, our
liquidity and capital resources will be adversely affected.
FORWARD-LOOKING STATEMENTS
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."
20
<PAGE>
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. The effective
date of Methode's contribution and transfer to us of our business was May 28,
2000 and is sometimes referred to in this prospectus as the contribution date.
Prior to the contribution date, Methode conducted our business through various
divisions and subsidiaries.
SEPARATION AND TRANSITIONAL ARRANGEMENTS
Methode and our company have entered into various agreements which govern
the separation of our business from Methode. These agreements consist of a
master separation agreement, a general assignment and assumption agreement, a
master transition services agreement and an employee matters agreement. In
addition, prior to completion of this offering, Methode and our company will
enter into a tax sharing and indemnification agreement to allocate tax
liabilities between the parties. Prior to the completion of this offering, we
will also enter into an initial public offering and distribution agreement and a
registration rights agreement which govern our relationship with Methode between
the closing of this offering and the completion of the proposed spin-off.
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 86.1%
of the outstanding shares of our common stock, or approximately 84.3% 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 Methode and 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. This
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.
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<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be
approximately $136.8 million based on an assumed initial public offering price
of $17.00 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 $157.6 million.
We intend to use the net proceeds of this offering:
- to repay an estimated $2.0 million in advances received from a Methode
subsidiary after May 28, 2000;
- to pay $3.0 million of additional purchase price in connection with our
prior acquisition of Polycore Technologies, Inc.; and
- for general corporate purposes, including working capital, capital
expenditures, research and development and payments to Methode for
transition services. See "Arrangements Between Methode Electronics and
Stratos Lightwave--Master Transition Services Agreement."
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 April 30,
2000 and our capitalization on an as adjusted basis to reflect our receipt of
the net proceeds from the sale of 8,750,000 shares of common stock in this
offering at an assumed public offering price of $17.00 per share, after
deducting the estimated underwriting discount and offering expenses payable by
us.
<TABLE>
<CAPTION>
AS OF APRIL 30, 2000
-----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Stockholders' equity:
Preferred stock....................................... $ -- $ --
Common stock.......................................... -- 628
Additional paid-in capital............................ -- 189,170
Methode net investment................................ 52,962 --
------- --------
Total stockholders' equity.......................... 52,962 189,798
------- --------
Total capitalization.............................. $52,962 $189,798
======= ========
</TABLE>
The number of shares of our common stock to be outstanding after this
offering does not include 4,500,000 shares of our common stock reserved for
issuance under our Stratos 2000 Stock Plan. In May 2000 we granted options to
purchase 3,712,300 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 Combined 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 Lightwave 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 April 30, 2000 was
approximately $42.4 million, or $0.78 per share (after giving effect to the
54,028,807 shares of our common stock issued to Methode on May 28, 2000 in
connection with the contribution). After giving effect to the sale of our common
stock in this offering, at an assumed public offering price of $17.00 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 $179.2 million, or $2.85 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
$2.07 to Methode and dilution in net book value per share of $14.15 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 $17.00 per share. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $17.00
Net tangible book value per share as of April 30, 2000.... $0.78
Increase attributable to sale of common stock in the
offering................................................ 2.07
-----
Net tangible book value per share after this offering....... 2.85
------
Dilution per share to new investors......................... $14.15
======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the net
tangible book value per share after the offering would be $3.12 per share, the
increase in net tangible book value per share to existing stockholders would be
$2.34 per share and the dilution in net tangible book value to new investors
would be $13.88 per share.
The following table summarizes as of April 30, 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 $17.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Methode Electronics.............. 54,029,807 86.1% 52,962,000 26.3% $ 0.98
New investors.................... 8,750,000 13.9% 148,750,000 73.7% $17.00
---------- ---- ----------- ---- ------
Total............................ 62,779,807 100% 201,712,000 100% $ 3.21
========== ==== =========== ==== ======
</TABLE>
24
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
You should read the following selected combined 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, 1998, 1999 and 2000 and the combined balance sheet data as
of April 30, 1999 and 2000 are derived from, and are qualified by reference to,
our audited combined financial statements included elsewhere in this prospectus.
The combined statement of operations data set forth below for the fiscal year
ended April 30, 1997 and the combined balance sheet data as of April 30, 1997
and 1998 are derived from combined audited financial statements not included in
this prospectus. The combined statement of operations data set forth below for
the fiscal year ended April 30, 1996 and the combined balance sheet data as of
April 30, 1996 are derived from unaudited combined financial statements not
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 assumed offering price of
$17.00 per share, after deducting the underwriting discount and estimated
offering expenses payable by us, the repayment of an estimated $2.0 million in
advances from a Methode subsidiary, $1.5 million of which was used to fund
working capital, and the payment of $3.0 million in additional purchase price
with respect to our previous 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 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.
Pro forma income (loss) per share, basic and diluted, and shares outstanding
give effect to the 54,028,807 shares issued by us to Methode in association with
the contribution and transfer to us of our business as of May 28, 2000.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................ $14,485 $20,966 $24,158 $46,458 $71,785
Costs of sales................................... 8,905 14,121 17,656 29,543 48,064
------- ------- ------- ------- -------
Gross profit..................................... 5,580 6,845 6,502 16,915 23,721
------- ------- ------- ------- -------
Operating expenses:
Research and development....................... 1,441 2,294 2,353 3,301 7,045
Sales and marketing............................ 1,777 2,524 2,945 4,514 6,724
General and administrative..................... 2,069 2,909 2,820 3,518 5,361
------- ------- ------- ------- -------
Total operating expenses..................... 5,287 7,727 8,118 11,333 19,130
------- ------- ------- ------- -------
Income (loss) from operations.................... 293 (882) (1,616) 5,582 4,591
Other income..................................... -- -- 188 50 1,459
------- ------- ------- ------- -------
Income (loss) before income taxes................ 293 (882) (1,428) 5,632 6,050
Income taxes (benefit)........................... 117 (375) (570) 2,130 2,260
------- ------- ------- ------- -------
Net income (loss)................................ $ 176 $ (507) $ (858) $ 3,502 $ 3,790
------- ------- ------- ------- -------
Pro forma income (loss) per share, basic and
diluted........................................ $ 0.00 $ (0.01) $ (0.02) $ 0.06 $ 0.07
======= ======= ======= ======= =======
Pro forma shares outstanding..................... 54,030 54,030 54,030 54,030 54,030
======= ======= ======= ======= =======
</TABLE>
25
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF APRIL 30, 2000
----------------------------------------- -----------------------
1996 1997 1998 1999 ACTUAL AS ADJUSTED
-------- -------- -------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ -- $ -- $ -- $ 550 $ 537 $132,373
Working capital........................... 5,544 4,444 5,749 11,994 17,747 151,083
Total assets.............................. 11,761 14,619 17,110 31,523 61,137 197,973
Long-term obligations, less current
portion................................. -- -- -- -- -- --
Stockholders' net investment.............. 10,886 12,939 14,596 26,169 52,962 189,798
</TABLE>
26
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
YEAR ENDED APRIL 30, 2000
On December 29, 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.
The unaudited pro forma combined statement of operations for the fiscal year
ended April 30, 2000 was prepared as if the acquisition was made on May 1, 1999
using the unaudited statement of operation 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, 2000 which includes the results
of operations of Bandwidth Semiconductor for the four months ended April 30,
2000.
The unaudited pro forma combined financial information does not purport to
present our combined results of operations had the acquisition 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 has not been adjusted to reflect the
estimated expenses under our company's transitional service arrangements with
Methode because these expenses do not differ significantly from the costs
historically allocated to us by Methode for similar arrangements and reflected
in our historical financial statements. The transitional services between
Methode and our company will generally be in effect for one year following the
spin-off. Our expenses in connection with effecting our separation from Methode
are not expected to be material.
Pro forma income per share, basic and diluted, and shares outstanding give
effect to the 54,028,807 shares issued by the company to Methode in association
with the contribution and transfer to us of our business as of May 28, 2000.
The pro forma financial information should be read in conjunction with our
historical combined financial statements and the related notes included
elsewhere in the prospectus.
27
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
BANDWIDTH STRATOS
STRATOS SEMICONDUCTOR PRO FORMA
FISCAL YEAR EIGHT MONTHS FISCAL YEAR
ENDED ENDED ENDED
APRIL 30, OCTOBER 31, PRO FORMA APRIL 30,
2000 1999 ADJUSTMENTS 2000
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA:
Net sales..................................... $71,785 $2,885 $74,670
Cost of sales................................. 48,064 2,586 $ 129 (a) 50,779
------- ------ ----- -------
Gross profit.................................. 23,721 299 (129) 23,891
Operating expenses:
Research and development.................... 7,045 55 7,100
Sales and marketing......................... 6,724 792 7,516
General and administrative.................. 5,361 271 248 (b) 5,880
118 (c) 118
------- ------ ----- -------
Total operating expenses.................. 19,130 1,118 366 20,614
------- ------ ----- -------
Income (loss) from operations................. 4,591 (819) (495) 3,277
Other income.................................. 1,459 8 1,467
------- ------ ----- -------
Income (loss) before income taxes............. 6,050 (811) (495) 4,744
Income taxes (benefit)........................ 2,260 -- (510)(d) 1,750
------- ------ ----- -------
Net income (loss)............................. $ 3,790 $ (811) $ 15 $ 2,994
======= ====== ===== =======
Income per share--basic and diluted........... $ 0.06
=======
Shares outstanding............................ 54,030
=======
</TABLE>
28
<PAGE>
STRATOS LIGHTWAVE, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED APRIL 30, 2000
The pro forma adjustments to the unaudited pro forma combined statement of
operations for the year ended April 30, 2000 include adjustments for Bandwidth
Semiconductor as well as adjustments related to account for the allocation of
the purchase price and the pro forma combination of the companies.
(a) Represents additional depreciation over five years on the fixed assets of
Bandwidth Semiconductor written up to fair value at the date of acquisition.
(b) Represents the amortization over twenty-five years of the excess of purchase
price over net assets acquired of Bandwidth Semiconductor.
(c) Represents the amortization over twenty-five years 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.
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 SEVERAL 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 local area networks (LANs), storage
area networks (SANs), metropolitan area networks (MANs), wide area networks
(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,
synchronous optical network (SONET) and asynchronous transfer mode (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. The effective
date of Methode's contribution and transfer to us of our business was May 28,
2000. Prior to the that date, Methode conducted our business through various
divisions and subsidiaries.
After the completion of this offering, Methode will own approximately 86.1%
of the outstanding shares of our common stock, or approximately 84.3% 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 original equipment manufacturers
(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. Historically, product obsolescence relating to customer
cancellations, delays and rescheduling has not been material and therefore, we
do not currently maintain reserves for these matters. We determine reserves for
rapid technological change on a product by product basis. While it is likely
that obsolescence due to rapid technological change will continue, the timing
and amount of this obsolescence cannot be predicted with certainty.
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 fiscal year ended April 30, 2000, sales to customers in the
United States accounted for approximately 79.0% of our net sales and sales to
customers in the United Kingdom accounted for approximately 10.0% of our net
sales. No other geographic region accounted for a material portion 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, 2000, our three largest customers and
their respective contract manufacturers accounted for 44.0% of our net sales,
with Cisco, Nortel and Alcatel accounting for
30
<PAGE>
26.0%, 10% and 8% of our net sales, respectively. For the fiscal year ended
April 30, 1999, our three largest customers together with their respective
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. We
expect our dependence on sales to a small number of large customers to continue.
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 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 some 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. Historically, research and development
expenses have included allocations from Methode of expenses for salaries and
related expenses for research and development personnel. 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 of expenses for the salaries and
related expenses for sales and marketing personnel. We expect to continue to
make significant expenditures for sales and marketing services.
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 continue to make significant
expenditures for general and administrative services.
Other income consists of fees and royalties from the grant of licenses for
some 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
31
<PAGE>
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 governing the
provision of transition services by Methode and us on an interim basis after the
contribution date. This agreement provides for transitional services and mutual
support by each party to the other in one or more of the following areas:
accounting; tax; payroll; information technology; employee benefits
administration; human resources; sales and marketing; legal; investor relations;
quality assurance; and other administrative functions. 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
proposed spin-off. 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.
In December 1998, Methode acquired all of the outstanding shares of Stratos
Limited for $1.7 million in cash. This transaction was treated as a purchase for
accounting purposes. Stratos Limited's operations are located in Haverhill,
England. Stratos Limited designs, develops and manufactures optical components
for harsh environments, such as military applications.
In February 1999, Methode formed MP Optical Communications LLC in which it
acquired a sixty percent ownership interest. In September 1999, MP Optical
Communications LLC formed the Chinese corporation MP Optical Communication
(Shenzhen) Co., Ltd. (MP Optical China). We have agreed to contribute a total of
$1,700,000 in capital to MP Optical China by October 2001. As of April 30, 2000,
we had contributed $300,000 in capital to MP Optical China. On May 31, 2000, we
contributed an additional $171,000 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 LANs. We
operate this business as our Stratos Micro Systems 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>
FISCAL YEAR ENDED APRIL 30,
------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales....................................... 100.0 % 100.0 % 100.0 %
Costs of sales.................................. 73.1 63.6 67.0
----- ----- -----
Gross profit.................................... 26.9 36.4 33.0
----- ----- -----
Operating expenses:
Research and development...................... 9.7 7.1 9.8
Sales and marketing........................... 12.2 9.7 9.4
General and administrative.................... 11.7 7.6 7.4
----- ----- -----
Total operating expenses.................... 33.6 24.4 26.6
----- ----- -----
Income (loss) from operations................... (6.7) 12.0 6.4
Other income.................................... 0.8 0.1 2.0
----- ----- -----
Income (loss) before income taxes............... (5.9) 12.1 8.4
Income taxes (benefit).......................... (2.4) 4.6 3.1
----- ----- -----
Net income (loss)............................... (3.5)% 7.5 % 5.3 %
===== ===== =====
</TABLE>
FISCAL YEARS ENDED APRIL 30, 2000 AND 1999
NET SALES. Net sales increased to $71.8 million in the fiscal year ended
April 30, 2000 from $46.5 million in the fiscal year ended April 30, 1999. Of
this $25.3 million increase, $19.2 million is from an increase in net sales of
optical subsystems and $6.1 million is from an increase in net sales of optical
components. The increase in net sales of our optical subsystems was primarily
due to an increase in sales of our line of internal removable transceivers.
COST OF SALES. Cost of sales increased to $48.1 million in the fiscal year
ended April 30, 2000 from $29.5 million in the fiscal year ended April 30, 1999.
This increase was due primarily to an increase in the production of our internal
removable transceivers. Gross profit as a percentage of net sales, or gross
margin, decreased to 33.0% in the fiscal year ended April 30, 2000 from 36.4% in
the fiscal year ended April 30, 1999. Approximately 1.7% of the 3.4% decrease in
gross margin was the result of additional start-up and other non-recurring
expenses incurred during the fiscal year ended April 30, 2000 related to our
recently acquired Stratos Micro Systems and Bandwidth Semiconductor
subsidiaries. The balance of the decrease was due to more competitive pricing in
the optical subsystem market.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$7.0 million in the fiscal year ended April 30, 2000 from $3.3 million in the
fiscal year ended April 30, 1999. This increase of $3.7 million was due
primarily to $1.8 million in material and overhead costs related to major
product development projects, $1.7 million of additional personnel costs
dedicated to research and development, and $200,000 for new and expanded
research and development facilities in Chicago, Illinois and Bedford,
Massachusetts.
SALES AND MARKETING. Sales and marketing expenses increased to
$6.7 million in the fiscal year ended April 30, 2000 from $4.5 million in the
fiscal year ended April 30, 1999. This $2.2 million increase was due both to an
increase of $1.3 million in sales and marketing salaries, fringe benefits,
bonuses and commissions, $700,000 in field sales operating costs supporting our
sales volume, and $200,000 in advertising and promotional costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $5.4 million in the fiscal year ended April 30, 2000 from $3.5 million in the
fiscal year ended April 30, 1999. This
33
<PAGE>
$1.9 million increase was primarily due to $1.2 million of additional costs for
expanded plant facilities and staff, $500,000 of additional corporate management
and legal costs, as well as $200,000 for the amortization of goodwill resulting
from our three acquisitions.
OTHER INCOME. Other income consisted entirely of license fees received
during the period. License fees increased to $1.5 million in the fiscal year
ended April 30, 2000 from $50,000 in the fiscal year ended April 30, 1999.
License fees 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
$2.3 million in the fiscal year ended April 30, 2000 based on an effective tax
rate of 37.4% from $2.1 million in the fiscal year ended April 30, 1999 based on
an effective tax rate of 37.8%. No separate tax returns have been filed for our
business because our operating results have been fully consolidated for tax
purposes with the results of Methode.
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 one product line. 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 of $900,000 was due to $700,000
in personnel costs related to research and development and $200,000 in project
related material and overhead costs.
SALES AND MARKETING. Sales and marketing expenses increased to $4.5 million
in the fiscal year ended April 30, 1999 from $2.9 million in the fiscal year
ended April 30, 1998. This increase was due to a $1.1 million increase in sales
and marketing salaries, fringe benefits, bonuses and commissions, and $500,000
in advertising and promotional costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $3.5 million in the fiscal year ended April 30, 1999 from $2.8 million in the
fiscal year ended April 30, 1998. This increase was primarily the result of
increased management staff and expenses to support growth.
OTHER INCOME. Other income 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. License
fees 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.
34
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly results of operations data
for each of the eight quarters ended April 30, 2000 and these 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 this
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.
Pro forma income per share, basic and diluted, and shares outstanding give
effect to the 54,028,807 shares issued by the company to Methode in association
with the contribution and transfer to us of our business as of May 28, 2000.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1998 1998 1999 1999
--------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales.................... $9,179 $11,558 $10,180 $15,541
Costs of sales............... 6,123 7,626 6,687 9,107
------ ------- ------- -------
Gross profit................. 3,056 3,932 3,493 6,434
------ ------- ------- -------
Operating expenses:
Research and development... 657 776 884 984
Sales and marketing........ 871 1,190 1,059 1,394
General and
administrative........... 713 903 741 1,161
------ ------- ------- -------
Total operating
expenses............... 2,241 2,869 2,684 3,539
------ ------- ------- -------
Income from operations....... 815 1,063 809 2,895
Other income................. -- -- -- 50
------ ------- ------- -------
Income before income taxes... 815 1,063 809 2,945
Income taxes................. 300 400 300 1,130
------ ------- ------- -------
Net income................... $ 515 $ 663 $ 509 $ 1,815
====== ======= ======= =======
Pro forma basic and diluted
income per share........... $ 0.01 $ 0.01 $ 0.01 $ 0.03
====== ======= ======= =======
Pro forma shares
outstanding................ 54,030 54,030 54,030 54,030
====== ======= ======= =======
<CAPTION>
QUARTER ENDED
----------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1999 1999 2000 2000
--------- ------------ ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales.................... $14,567 $16,023 $17,963 $23,232
Costs of sales............... 9,049 11,325 12,220 15,470
------- ------- ------- -------
Gross profit................. 5,518 4,698 5,743 7,762
------- ------- ------- -------
Operating expenses:
Research and development... 1,466 1,399 1,825 2,355
Sales and marketing........ 1,377 1,589 1,530 2,228
General and
administrative........... 1,081 1,330 1,355 1,595
------- ------- ------- -------
Total operating
expenses............... 3,924 4,318 4,710 6,178
------- ------- ------- -------
Income from operations....... 1,594 380 1,033 1,584
Other income................. 800 323 164 172
------- ------- ------- -------
Income before income taxes... 2,394 703 1,197 1,756
Income taxes................. 913 283 404 660
------- ------- ------- -------
Net income................... $ 1,481 $ 420 $ 793 $ 1,096
======= ======= ======= =======
Pro forma basic and diluted
income per share........... $ 0.03 $ 0.01 $ 0.01 $ 0.02
======= ======= ======= =======
Pro forma shares
outstanding................ 54,030 54,030 54,030 54,030
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1998 1998 1999 1999 1999 1999
--------- ------------ ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... 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
------ ------ ------ ------ ------ ------
Gross profit................. 33.3 34.0 34.3 41.4 37.9 29.3
------ ------ ------ ------ ------ ------
Operating expenses:
Research and development... 7.2 6.7 8.7 6.3 10.1 8.7
Sales and marketing........ 9.5 10.3 10.4 9.0 9.5 9.9
General and
administrative........... 7.8 7.8 7.3 7.5 7.4 8.3
------ ------ ------ ------ ------ ------
Total operating
expenses............... 24.4 24.8 26.4 22.8 27.0 26.9
------ ------ ------ ------ ------ ------
Income from operations....... 8.9 9.2 7.9 18.6 10.9 2.4
Other income................. 0.0 0.0 0.0 0.3 5.5 2.0
------ ------ ------ ------ ------ ------
Income before income taxes... 8.9 9.2 7.9 18.9 16.4 4.4
Income taxes................. 3.3 3.5 2.9 7.2 6.3 1.8
------ ------ ------ ------ ------ ------
Net income................... 5.6% 5.7 % 5.0 % 11.7 % 10.2% 2.6 %
====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
-------------------------
JANUARY 31, APRIL 30,
2000 2000
------------ ----------
<S> <C> <C>
Net sales.................... 100.0 % 100.0 %
Costs of sales............... 68.0 66.6
------ ------
Gross profit................. 32.0 33.4
------ ------
Operating expenses:
Research and development... 10.2 10.1
Sales and marketing........ 8.5 9.6
General and
administrative........... 7.5 6.9
------ ------
Total operating
expenses............... 26.3 26.6
------ ------
Income from operations....... 5.7 6.8
Other income................. 0.9 0.7
------ ------
Income before income taxes... 6.6 7.5
Income taxes................. 2.2 2.8
------ ------
Net income................... 4.4 % 4.7 %
====== ======
</TABLE>
35
<PAGE>
Net sales generally increased over the last eight 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 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 eight 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 established an
inventory reserve to protect against potential product obsolescence due to the
rapid technology changes in our markets. This reserve was established in a
manner consistent with our policy on obsolescence review; however, during the
quarter ended April 30, 2000 a significant portion of the inventory was utilized
in other products and most of this reserve was reversed.
Research and development expenses generally increased on an absolute basis
over the past eight 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 eight 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 eight 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. A Methode subsidiary will fund our
working capital needs with 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 $1.9 million for the fiscal
year ended April 30, 2000 and $48,000 in the fiscal year ended April 30, 1999
and net cash used in operating activities was $933,000 in the fiscal year ended
April 30, 1998. Cash provided by operating activities in the fiscal years ended
April 30, 2000 and 1999 resulted primarily from growth in net income and
increases in
36
<PAGE>
accounts payable and accrued expenses which were offset in part by increases in
accounts receivable and inventories. Cash used in operating activities in the
fiscal year ended April 30, 1998 resulted primarily from increases in accounts
receivable and inventories, which more than offset net income adjusted for
non-cash charges for depreciation and amortization.
Net cash used in investing activities was $24.8 million in the fiscal year
ended April 30, 2000, $7.0 million in the fiscal year ended April 30, 1999 and
$1.6 million in the fiscal year ended April 30, 1998. 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 Limited 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 and to repay an estimated $2.0 in advances from a Methode subsidiary.
We intend to use a portion of the net proceeds of this offering to make these
payments.
We had no material commitments for capital expenses as of April 30, 2000,
but we expect these 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 12 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.
37
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. We adopted SAB 101 effective February 1,
2000. This adoption did not have an effect on our revenue recognition policies.
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.
38
<PAGE>
BUSINESS
We develop, manufacture and sell optical subsystems and components for high
data rate networking, data storage and telecommunication applications. Our
optical subsystems 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
local area networks (LANs), storage area networks (SANs), metropolitan area
networks (MANs), wide area networks (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, synchronous optical network (SONET) and
asynchronous transfer mode (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 compared to our
competitors.
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
expansion 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 existing 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 using 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 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
39
<PAGE>
1 gigabit per second (Gbps). Dell'Oro Group Inc., a market research firm,
forecasts that the demand for Gigabit Ethernet switch ports will grow from
219,700 in 1998 to 17.4 million in 2002, a 198% compound annual growth rate.
Each Gigabit Ethernet switch port relies on a subsystem to transmit and receive
data. Due to the data rate and transmission distance limitations of copper
technology, we believe most of these Gigabit Ethernet switch ports will use
optical subsystems.
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 original equipment manufacturers (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 or 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 demand for Fibre
Channel switch ports will grow from 25,752 in 1998 to 2,551,279 by 2002, a 215%
compound annual growth rate. Each Fibre Channel switch port relies on a
subsystem to transmit and receive data. Due to the data rate and transmission
distance limitations of copper technology, we believe most of these Fibre
Channel switch ports will use optical subsystems.
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.
TELECOMMUNICATION NETWORKS. Optical technology also is being used in high
data rate telecommunication applications, including the intra-office connection
of clusters of telecommunication
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switches based on the 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
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 Federal Communications Commission standards for
electromagnetic interference 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
OEMs 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, SONET 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 compared to our competitors.
We believe 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 standards 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 electromagnetic interference 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 vertical cavity surface emitting laser, or 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 ceramic
materials in our optical components. 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. We believe 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 OEMs 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, we believe 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 and Nortel. Our field and product design engineers work closely with these
and other customers from the initial product design stage
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through the manufacturing process. We also provide extensive customer service
and technical 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 service-oriented approach and our existing
customer relationships 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. 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" 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
"Gigabit Interface Converter" or 1.25 Gbps-Gigabit Ethernet 1310nm Single mode-20 kilometers
"GBIC" 1.0625 Gbps-Fibre Channel
622 Mbps-ATM OC-12
155 Mbps-ATM OC-3
-----------------------------------------------------------------------------------------------------------
LC Removable-Small Form Factor
"Small Form Factor Pluggable" or
"SFP"
(Under development)
-----------------------------------------------------------------------------------------------------------
EXTERNAL REMOVABLE TRANSCEIVERS
-----------------------------------------------------------------------------------------------------------
SC Removable-External Form Factor 2.125 Gbps-2xFibre Channel 850nm Multimode-500 meters
"Media Interface Adapter" or "MIA" 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 electromagnetic interference levels in the industry,
assisting our customers in achieving required Federal Communications Commission
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 or 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
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applications where maintaining uninterrupted service is critical. Removable
transceivers are typically more expensive than 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 coupling, deliver some of the lowest
electromagnetic interference 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 or 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
high density fiber optic connectors specifically designed for internal systems
such as switches. These connectors are increasingly replacing electronic
interconnections inside many high-performance systems, solving many of the heat,
distance and electromagnetic interference 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 precision
connection of optoelectric devices to active subsystems, air tight fiber optic
connections used in laser packaging applications, precision attachment of
connectors to fiber optic cable, direct attachment of multi-fiber assemblies to
integrated circuits, and assembly, splicing and termination of high density
fiber optic 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 electromagnetic interference 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. We
currently have two or more suppliers for all key components. 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 30, 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 $7.0 million, $3.3 million and
$2.4 million in the fiscal years ended April 30, 2000, 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 $100,000 of our products during the fiscal year ended April 30, 2000:
Agilent Technologies, Inc.
Alcatel
Amdahl Corporation
Anicom, Inc.
Anixter International, Inc.
Avnet, Inc.
CableExpress Corporation
Ciprico, Inc.
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Cisco Systems, Inc.
Comdisco, Inc.
Condumex, Inc.
Corning Incorporated
D-Link Systems, Inc.
Data Optic Cable, Inc.
EMC Corporation
Fiber Instrument Sales, Inc.
Fiberdyne Labs, Inc.
Fujitsu
Gruber Industries, Inc.
Hewlett-Packard Company
Inrange Technologies Corporation
Internix Incorporated
JNI Corporation
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, 2000, our three
largest customers and their respective contract manufacturers accounted for 44%
of our net sales, with Cisco, Nortel and Alcatel accounting for 26%, 10% and 8%
of our net sales, respectively. For the fiscal year ended April 30, 1999, our
three largest customers and their respective 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.
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 is separate from Methode's sales and
marketing group and will not obtain marketing support after this offering.
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
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leveraging our reputation for high quality products and service to establish
relationships with new customers.
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
50
<PAGE>
2005 and 2017. Policing unauthorized use of our products and technology is
difficult. We file patent applications and other registrations in foreign
countries to establish and protect our proprietary rights where we believe such
filings are necessary to protect our technology. However, the laws of some
foreign countries do not protect our proprietary rights to the same extent as do
the laws of the United States. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. 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.
LITIGATION
Methode is a plaintiff in two lawsuits relating to our intellectual property
rights. The first lawsuit was filed by Methode in April 1999 in the United
States District Court for the Northern District of Illinois and is against
Agilent Technologies, Inc., Finisar Corporation and Hewlett-Packard Company,
Inc. In August 1999, the lawsuit was transferred to the United States District
Court for the Northern District of California. The second lawsuit was filed by
Methode in October 1999 in the United States District Court for the Northern
District of California and is against Infineon Technologies Corp. and Optical
Communications Products, Inc. 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 unspecified compensatory damages,
restitution and the correction of inventorship with respect to the five Methode
patents. On May 4, 2000, the Court granted Methode's motion to dismiss with
prejudice Finisar's counterclaims for conversion, trespass, unfair competition
and unjust enrichment on the grounds that these claims are preempted by federal
patent laws.
As part of our separation from Methode, the five Methode patents which are
the subject of these lawsuits and Methode's 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 the ability to prevent others from
using the technology which is the subject of the invalidated patents as well as
the value of these patents and future royalty payments from our current
licensees of these 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
51
<PAGE>
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, local, and foreign 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 an
approximately 15,000 square feet manufacturing facility in Shenzhen, China. This
lease expires in September, 2009.
We believe our facilities are adequate to meet our current needs.
EMPLOYEES
As of April 30, 2000, we employed a total of 499 full-time employees, 348 of
whom were primarily engaged in manufacturing, 85 of whom were engaged in
research and development, 27 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.
52
<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 May 25, 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
Michael P. Galvin(1)....... 47 Director Nominee
Brian J. Jackman(1)(2)..... 59 Director Nominee
Edward J.
O'Connell(1)(2).......... 47 Director Nominee
KEY EMPLOYEES:
Richard C.E. Durrant....... 38 Managing Director of Stratos Limited
David R. Lipinski.......... 48 Vice President, Corporate Development
Kenneth R. Marchman........ 38 General Manager, Fiber Optic Products
Everett S. McGinley........ 42 President of Bandwidth Semiconductor
Georgette L. Meyer......... 52 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>
------------------------
(1) Once elected, this director nominee will serve on the Compensation Committee
of the Board of Directors.
(2) Once elected, this director nominee will serve on the Audit Committee of the
Board of Directors.
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 The Evergreen State College. 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
53
<PAGE>
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 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.
DIRECTOR NOMINEES
Our board of directors has nominated, and shortly after the pricing and
before the closing of this offering intends to elect, three independent
directors. The nominees, Michael P. Galvin, Brian J. Jackman and Edward J.
O'Connell, have each agreed to serve on our board. None of the nominees are
affiliated with Methode or Stratos. Within ninety days after the completion of
this offering, our board of directors will elect a fourth independent director.
Michael P. Galvin has been President of Galvin Enterprises, Inc. since 1992.
As well as managing a venture capital portfolio of investments in biotechnology,
real estate development and business services, Galvin Enterprises, Inc. manages
Media Cybernetics, a leading global producer and distributor of analytical
imaging software. From 1989 to 1992, Mr. Galvin served as Assistant Secretary of
Commerce for Export Administration under the Bush Administration, managing the
U.S. government's dual-use (non-munitions) strategic trade and technology
transfer programs. From 1978 to 1989, Mr. Galvin was an attorney at the law firm
of Winston & Strawn where he was elected a corporate finance transactions
partner. Mr. Galvin received a Bachelor of Science in economics, CUM LAUDE, from
Boston College and Juris Doctor, CUM LAUDE, from Chicago-Kent College of Law
where he further served as Editor-in-Chief of its LAW REVIEW.
Brian J. Jackman has served as President of Global Systems and Technologies
of Tellabs, Inc. since 1998. Mr. Jackman has served as a director of
Tellabs, Inc. since 1993 and as Executive Vice President of Tellabs, Inc. since
1990. From 1993 to 1998, Mr. Jackman served as President of Tellabs
Operations, Inc. Prior to joining Tellabs, Inc., Mr. Jackman held several
management positions with International Business Machines. Mr. Jackman is also a
director of Spyglass, Inc.
Edward J. O'Connell has served as Chief Financial Officer of Hey Company,
LLC, a company involved with e-commerce, since 1999. From 1998 to 1999,
Mr. O'Connell served as the Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary of Delphi Information Systems, Inc. (now
known as "ebix.com"), a software, consulting services and e-commerce company.
From 1995 to 1998, Mr. O'Connell served as Chief Operating Officer and Chief
Financial Officer for Keck, Mahin & Cate, a provider of legal professional
services. In December 1997, Keck, Mahin & Cate filed a voluntary petition in
bankruptcy under Chapter 11 of the United States Bankruptcy Code. From 1991 to
1995, Mr. O'Connell served as Senior Vice President and Chief Financial Officer
of Genderm Corporation, a manufacturer of pharmaceuticals. From 1981 to 1991,
Mr. O'Connell served as Executive Vice President of Administration and Chief
Financial Officer of Union Special Corporation, a manufacturer of industrial
sewing equipment.
KEY EMPLOYEES
Richard C.E. Durrant has been the Managing Director of our Stratos Limited
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.
54
<PAGE>
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 of our Bandwidth Semiconductor
subsidiary since its acquisition in December 1999. Dr. 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, Dr. 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.
Dr. 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.
Mr. Norling served as District Sales Manager for Methode from February 1989
through December 1996 and as Manager, Corporate Marketing and Planning for
Methode from 1982 through January 1989. 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 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.
55
<PAGE>
Robert Scharf has been Vice President and General Manager of our Stratos
Micro Systems 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 Micro Systems. 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. Shortly after the pricing of this offering, we will increase our
board to include three independent directors who will not be employed by Stratos
or affiliated with Methode. Within ninety days after the completion of this
offering, our board will be expanded to six members and an additional
independent director will be elected.
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 solely of 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. Mr. Jackman and Mr. O'Connell
are nominated and have agreed to serve as members of the audit committee. The
additional independent director to be elected by our board of directors within
ninety days after the completion of this offering will also serve on the audit
committee.
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. Mr. Galvin, Mr. Jackman and
Mr. O'Connell are nominated and have agreed to serve as members of the
compensation committee.
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 currently intend to grant our non-employee directors an
initial grant of 25,000 options, with an annual grant of 5,000 shares
thereafter. We reimburse directors for their reasonable expenses incurred in
attending board and committee meetings.
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 May 15, 2000 by each Stratos director
and director nominee and by our
56
<PAGE>
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 230,199(1) *
Class B 890,902(1) 80.1%
James W. McGinley................................ Common Stock
Class A 40,044(2) *
Class B 289(2) *
Philip W. Schofield.............................. Common Stock
Class A 10,033(3) *
Class B 0 0.0%
David A. Slack................................... Common Stock
Class A 5,444 *
Class B 689 *
Michel P. Galvin................................. Common Stock
Class A 0 0.0%
Class B 0 0.0%
Brian J. Jackman................................. Common Stock
Class A 0 0.0%
Class B 0 0.0%
Edward J. O'Connell.............................. Common Stock
Class A 200 0.0%
Class B 0 0.0%
All Directors, Director Nominees and Executive
Officers as a Group (7 individuals)............ Common Stock
Class A 285,920 *
Class B 891,880 80.2%
</TABLE>
------------------------
* Percentage represents less than 1% of the total shares of Methode common
stock outstanding as of May 15, 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.
(3) Includes 2,238 shares of Class A common stock held by Methode's Employee
Stock Ownership Plan for which Mr. Schofield has sole voting power and,
prior to distribution under the terms of the trust, no investment power;
4,795 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 3,000 shares of Class A 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 years ended
April 30, 2000 and 1999. None of our other executive officers received an annual
salary and bonus in excess of $100,000 for services rendered to Methode for the
fiscal year ended April 30, 2000. In connection with this offering, we have
established employee benefit plans and arrangements so that, following this
offering, the compensation and employee benefits of our executive officers and
all of our other employees will be provided primarily by us. See "Employee
Benefits Plans" and "Arrangements Between Methode Electronics and Stratos
Lightwave--Employee Matters Agreement."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------------
AWARDS
---------- PAYOUTS
ANNUAL --------
COMPENSATION RESTRICTED ALL OTHER
NAME AND ------------------- STOCK LTIP COMPEN-
PRINCIPAL STRATOS FISCAL SALARY BONUS AWARD(S) PAYOUTS SATION
POSITION YEAR ($)(1) ($) ($)(2)(3) ($)(4) ($)(5)
----------------- -------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
James W. McGinley ....................... 2000 192,899 231,520 0 86,362 3,158
President and Chief Executive Officer 1999 153,500 142,725 108,062 66,655 2,800
Philip W. Schofield ..................... 2000 133,555 33,414 0 68,631 3,158
Vice President and Chief Operating 1999 127,824 50,063 31,432 53,795 2,805
Officer
</TABLE>
------------------------
(1) Includes a cash car allowance in fiscal 2000 and 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, 2000, Mr. J. McGinley held
14,535 restricted shares having a value of $215,465 and Mr. Schofield held
4,795 restricted shares having a value of $71,175. Dividends are paid on
restricted stock awards at the same rate as paid to all stockholders.
(4) LTIP payouts represent amounts paid pursuant to the Methode's Longevity
Contingent Bonus Program. This bonus program awards Methode officers and key
management personnel a matching bonus (equal to the amount of the current
quarterly bonus) which will be considered as earned and payable in three
years provided that the participant is still employed by Methode at that
time and performance has been satisfactory.
(5) The figures in this column represent amounts allocated under the Methode
Employee Stock Ownership Plan.
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<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS
The following table shows long term incentive plan awards made to our chief
executive officer and our other most highly compensated executive officer under
the Methode Longevity Contingent Bonus Program in the fiscal year ended April
30, 2000.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE NON-STOCK PRICE-BASED PLANS
OR OTHER PERIOD -------------------------------
UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR PAYOUT ($) ($) ($)
---- ---------------- --------- -------- --------
<S> <C> <C> <C> <C>
James W. McGinley................ 3 years 231,520 231,520 231,520
Philip W. Schofield.............. 3 years 33,414 33,414 33,414
</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
April 30, 2000, our employees held 21,290 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. The Methode restricted stock held by
our employees will be forfeited on the spin-off date pursuant to the terms of
the Methode Incentive Stock Award Plan. Pursuant to the employee matters
agreement, each Stratos employee who forfeits Methode restricted stock will
receive Stratos restricted stock in replacement of his forfeited Methode
restricted stock. The value of the replacement Stratos restricted stock shall be
substantially equal to the value of his forfeited Methode restricted stock as
determined by Stratos immediately before the record date for the spin-off. The
replacement Stratos restricted stock will maintain the original conditions and
vesting provisions applicable to the corresponding Methode restricted stock. See
"Arrangements Between Methode Electronics and Stratos Lightwave--Employee
Matters Agreement."
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. Unvested Methode options held by
our employees will be forfeited on the spin-off date pursuant to the terms of
the Methode 1997 Stock Plan. Under the terms of the Methode 1997 Stock Plan,
vested Methode options held by our employees will be forfeited by our employees
90 days after the spin-off date to the extent not previously exercised. Pursuant
to the employee matters agreement, we will assume all unvested Methode options
held by our employees on the spin-off date. As of April 30, 2000, our employees
held unvested options to purchase 43,731 shares of Methode Class A common stock
at a weighted average exercise price per share of $26.04. The closing price of
Methode's Class A common stock on April 28, 2000, the last trading day prior to
April 30, 2000, was $41.67 per share. These Methode options will convert at the
spin-off date into options to purchase our common stock. The number of shares
and the exercise price of Methode options that convert into Stratos options will
be adjusted using a conversion formula. The conversion formula will be based on
the opening per-share price of our common stock on the first trading day after
the record date for the spin-off relative to the closing per-share price of
Methode Class A common stock on the last trading day before the record date for
the spin-off. The resulting Stratos options will maintain the original vesting
provisions and option period. See "Arrangements Between Methode Electronics and
Stratos Lightwave--Employee Matters Agreement."
TREATMENT OF METHODE ELECTRONICS BONUS AWARDS
Some Stratos employees were granted contingent bonuses under various Methode
bonus plans. These bonuses are generally subject to forfeiture if employment
with Methode terminates before the second or third anniversary of the grant
date. Pursuant to the employee matters agreement, we have assumed a portion of
these bonuses as allocated by Methode based on the services performed by these
employees on behalf of Stratos. These assumed bonuses will remain subject to the
same forfeiture provisions. As of April 30, 2000, the contingent bonuses of our
employees which we assumed was
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$1.3 million. Any contingent bonuses owed to our employees which are not assumed
by Stratos will be paid in full by Methode on or before the date of the
spin-off.
EMPLOYEE BENEFIT PLANS
STRATOS LIGHTWAVE 2000 STOCK PLAN
We have adopted the Stratos Lightwave, Inc. 2000 Stock Plan, and Methode, as
our sole stockholder, has approved the Stratos Lightwave, Inc. 2000 Stock Plan.
The following description 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
enables 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 provides 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
4,500,000, and the aggregate number of shares of common stock for which awards
of restricted stock may be issued under the plan is 1,875,000.
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 1,600,000 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% after the first
year and 6.25% for each three-month period thereafter until the award has fully
vested.
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% after the first year and 6.25% for each
three-month period thereafter until the award has fully vested. 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
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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 determined
by the committee, awards of stock appreciation rights will be eligible for
surrender at a rate of 25% after the first year and 6.25% for each three-month
period thereafter until the award has fully vested.
EFFECT OF TERMINATION OF EMPLOYMENT. As a general rule, terminations upon
retirement, death or for permanent disability will result in the accelerated
vesting of options and stock appreciation rights and the lapsing of restrictions
on restricted stock. Other terminations will result in the forfeiture of
unvested options, stock appreciation rights and restricted stock and termination
by Stratos for cause will result in the forfeiture of all vested and 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 that if in the year following a change of control, as defined in the
plan, a participant is terminated without cause or resigns for reasons relating
to relocation or decreased responsibilities or compensation, all options and
stock appreciation rights will vest and all restrictions on restricted stock
will lapse. 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 April 14, 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. These grants are
contingent upon the closing of this offering and are subject to ratification by
the compensation committee. An aggregate of 3,712,300 shares of common stock are
issuable upon the exercise of these options, and these options were granted at
an exercise price to be equal to the public offering price set forth on the
cover page of this prospectus. 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.... 1,540,000
Philip W. Schofield, Vice President and Chief Operating
Officer................................................... 100,000
David A. Slack, Chief Financial Officer..................... 100,000
All employees as a group (206 persons)...................... 3,712,300
</TABLE>
401(k) PLAN
Our eligible employees are currently eligible to participate in Methode's
401(k) retirement and deferred savings plan. Methode's plan 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
or 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
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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. Pursuant to the terms of the
employee matters agreement with Methode, we have agreed to adopt a Stratos
401(k) retirement and deferred savings plan on or before the date of the
spin-off. We will give our employees credit under this plan for their service
with Methode. See "Arrangements Between Methode Electronics and Stratos
Lightwave--Employee Matters Agreement."
METHODE EMPLOYEE STOCK OWNERSHIP PLAN
Some of our employees participated in the Methode Employee Stock Ownership
Plan. Methode intends to terminate this plan. In April 2000, Methode requested a
determination from the Internal Revenue Service that the termination of this
plan will be tax-free to Methode and the participants in the plan. Once this
plan is terminated, participants will have the option to receive a direct
distribution of their plan assets, transfer their assets into an Individual
Retirement Account or transfer these assets into either the Methode or the
Stratos 401(k) plan, as the case may be. We do not intend to adopt an employee
stock ownership plan.
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 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
Methode and our company have entered into various agreements which govern
the separation of our business from Methode. These agreements consist of a
master separation agreement, a general assignment and assumption agreement, a
master transitional services agreement, and an employee matters agreement. The
effective date of Methode's contribution and transfer to us of our business was
May 28, 2000 and is sometimes referred to in this prospectus as the contribution
date. A Methode subsidiary will fund our working capital needs with interest
bearing loans through the closing of this offering.
Prior to the completion of this offering, we will also enter into various
other agreements with Methode relating to the period between the closing of this
offering and the completion of the proposed spin-off. These agreements consist
of an initial public offering and distribution agreement and a registration
rights agreement. In addition, Methode and our company will enter into a tax
sharing agreement to allocate tax liabilities between the parties between the
contribution date and the spin-off date.
The master separation agreement and the other agreements listed above 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
The master separation agreement contains the principal terms relating to the
separation of our business from Methode.
SEPARATION. As of the contribution date, Methode contributed and
transferred to us all of the capital stock and equity interests held by Methode
in subsidiaries and other entities that conducted our business and all other
assets and liabilities associated with our business in exchange for 54,028,807
shares of our common stock. The capital stock and equity interests transferred
to us consisted of:
- all of the equity interests in Bandwidth Semiconductor, LLC;
- all of the capital stock of Methode Communications Modules, Inc., which we
have renamed Stratos Micro Systems, Inc.;
- Methode's sixty percent equity interest in MP Optical Communications, LLC,
the parent of MP Optical China;
- all of the capital stock of Stratos Limited; and
- all of the equity interests in Stratos Lightwave, LLC.
The subsidiaries listed above comprise:
- all business operations whose financial performance is reflected in our
combined financial statements for the period ended April 30, 2000, as set
forth elsewhere in this prospectus; and
- all business operations relating to our business initiated or acquired by
Methode after April 30, 2000.
INDEMNIFICATION. Pursuant to the master separation agreement, we have
agreed to indemnify, defend and hold harmless Methode and each of its
subsidiaries, and each of their respective directors,
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officers, employees, agents, advisors and representatives, against any and all
actions, claims, damages, losses, or liabilities resulting from, relating to or
arising, whether prior to or following the contribution date, out of or in
connection with:
- all liabilities and obligations of Methode (other than the excluded
liabilities described below for which Methode will provide us with
indemnification) relating to or arising out of our business, whether
direct or indirect, absolute or contingent, and whether known or unknown;
and/or
- the operation of our business, including any liabilities arising out of
the two pending lawsuits relating to our intellectual property rights
described under "Business--Litigation."
Methode has agreed to indemnify, defend and hold harmless our company and
each of our subsidiaries, and each of their respective directors, officers,
employees, agents, advisors and representatives, against any and all actions,
claims, damages, losses, or liabilities resulting from, relating to or arising,
whether prior to or following the contribution date, 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;
- liabilities that are not incidental to or do not arise out of or were not
incurred with respect to our business;
- indebtedness for borrowed money and similar obligations of Methode and its
affiliates;
- tax liabilities, except as otherwise provided in the tax sharing and
indemnification agreement; and
- liabilities relating to employee or retirement arrangements maintained or
contributed to by Methode or its affiliates, except as provided in the
other agreements between the parties and except for accrued benefit
obligations incurred in the ordinary course of business and reflected in
our financial statements.
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.
ACCESS TO INFORMATION. Both Methode and our company have agreed to
cooperate and provide each other with reasonable access to all information,
other than information which is confidential or privileged, that is relevant to
the performance of the master separation agreement or any other
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agreement between the parties or otherwise relates to its business and the prior
relationship between the parties. We have also agreed to preserve all books and
records relating to our business for a specified period of time, to thereafter
notify Methode if we intend to destroy any of these records, and to give Methode
the opportunity to take possession of those records if it desires to do so. In
addition, each party has agreed to use its commercially reasonable efforts to
make its directors, officers, employees and other representatives available as
witnesses in connection with any legal proceedings in which the other party may
be involved.
Methode and our company have generally agreed not to disclose or release any
information regarding the other party in its possession or provided to it or to
use this information for any purpose other than as permitted under the master
separation agreement or any other agreement between the parties, except to the
extent that the information is in the public domain, is later lawfully acquired
from other sources, or has been independently generated.
RELEASE OF PRE-CONTRIBUTION CLAIMS. As of the contribution date, we have
released Methode and its subsidiaries and representatives, and Methode has
released us, and our subsidiaries and representatives, 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 spin-off. 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.
INSURANCE MATTERS. The master separation agreement contains provisions
governing our insurance coverage from the contribution date to the spin-off
date. In general, Methode has agreed to maintain insurance policies on our
behalf which are generally comparable to those maintained by Methode and we have
agreed to reimburse Methode for our share of premium expenses and applicable
self-insurance retentions, deductibles, retrospective premium adjustments and
similar amounts related to insurance coverage during that period.
NON-COMPETE RESTRICTIONS. The master separation agreement contains
restrictions on Methode and Stratos and their respective affiliates from
engaging in specified business activities for a period commencing on the
contribution date and ending one year after the spin-off date.
Methode and its affiliates have agreed not to engage anywhere in the world
in:
- the manufacture or sale of the following products or processes, other than
to its current customers as of the contribution date: optoelectronic
device connectorization, optical test and characterization of these
optical devices; custom optical device assembly and/or packaging
processes; custom or specialty optical connector design, manufacture and
termination; passive optical component and circuit assembly splicing or
termination, except for hybrid copper/fiber cable assemblies; multi-fiber
mechanical ribbon splice components and tooling; and/or optoelectronic
subsystems, or
- the manufacture of standard fiber optic connector products and/or
accessories.
Stratos and its affiliates have agreed not to engage in:
- the manufacture or sale, other than to our current customers as of the
contribution date, of standard cable assemblies and/or cable management
cabinets and value-added cable assemblies for local area networks, data
center, telecom and other project installation driven applications in
Europe;
- the manufacture or sale of electronic interconnect devices anywhere in the
world; and/or
- the sale of standard cable assembly or cable management cabinets in
combination with system integration or system installation services to
end-user clients in the United States and Europe.
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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.
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.
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 take, or cause to be
taken, all actions, and to do, or cause to be done, all things, reasonably
necessary, proper or advisable, to consummate the transactions contemplated by
the master separation agreement and the other agreements between the parties
described in this prospectus.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The general assignment and assumption agreement governs the transfer to
Stratos Lightwave, LLC of assets and liabilities relating to our business which
were directly held by Methode. On the date of this agreement, Stratos Lightwave,
LLC was a wholly-owned subsidiary of Methode. All of the equity interests of
Stratos Lightwave, LLC were subsequently contributed by Methode to our company
as of the contribution date pursuant to the master separation agreement and
Stratos Lightwave, LLC is now a wholly-owned subsidiary of our company.
ASSET TRANSFER. Methode transferred to Stratos Lightwave, LLC all of the
assets owned by Methode or with respect to which Methode had the right to
transfer that were used primarily in our business. These assets included:
- all contracts and agreements primarily related to our business;
- the real property, including all buildings, structures and other
improvements located thereon, used in our business;
- all inventory;
- all equipment;
- all receivables, other than intercompany receivables from Methode and its
affiliates;
- all management information systems and software used primarily in our
business;
- all intellectual property rights related to our business, including
patents, copyrights, trademarks, trade names, logos, internet domain
names, web sites, technology, information, know-how and trade secrets, and
licenses and other rights related to the foregoing; and
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- Methode's rights in the two pending lawsuits relating to our intellectual
property rights, subject to our indemnification of Methode for any
liabilities related to these lawsuits. For a further discussion of these
lawsuits, see "Business--Litigation."
All of the assets being transferred by Methode to Stratos Lightwave, LLC
were transferred on an as is, where is, basis, and Methode did not make any
representation or warranty as to any asset transferred to or assumed by Stratos
Lightwave, LLC.
EXCLUDED ASSETS. The assets transferred by Methode to Stratos Lightwave,
LLC did not include:
- assets used or owned in connection with any businesses and operations of
Methode and its affiliates other than our business;
- the "Methode" name and all intellectual property rights that are not
related to our business;
- all intercompany receivables from Methode and its affiliates; and
- specified management information systems and software.
ASSUMED LIABILITIES. Stratos Lightwave, LLC has assumed all liabilities and
has agreed to perform all obligations of Methode relating to our business any
time on or before the date of the general assignment and assumption agreement.
These assumed liabilities include all liabilities relating to our business that
are unknown to Methode and/or unrealized as of the date of the general
assignment and assumption agreement.
EXCLUDED LIABILITIES. The liabilities assumed by Stratos Lightwave, LLC
from Methode did not include:
- any indebtedness for borrowed money and similar obligations of Methode and
its affiliates;
- any tax liabilities, except as otherwise provided in the tax sharing and
indemnification agreement;
- liabilities relating to employee or retirement arrangements maintained or
contributed to by Methode or its affiliates, except as provided in the
other agreements between the parties and except for accrued benefit
obligations incurred in the ordinary course of business and reflected in
our financial statements; and
- any liabilities and obligations that were not incidental to or did not
arise out of or were not incurred with respect to our business.
FURTHER ASSURANCES. Each party has agreed to cooperate in good faith to
effect the transfer or assumption of any assets or liabilities that were
inadvertently retained by Methode or transferred to Stratos Lightwave, LLC
contrary to the agreement of the parties. In addition, each party has agreed to
execute all additional documents, and to take all other actions as are
necessary, to effect the transfer of assets and assumption of liabilities
contemplated by the assignment and assumption agreement.
CONSENTS AND APPROVALS. Methode has agreed to use all commercially
reasonable efforts, without any obligation to expend any funds or incur any
liabilities, to obtain all necessary consents and approvals in connection with
the transfers contemplated by the general assignment and assumption agreement.
To the extent any required consents were not obtained prior to the date of the
general assignment and assumption agreement, the assets which require a consent
to be transferred to Stratos Lightwave, LLC will be retained by Methode, and
Methode has agreed to use all commercially reasonable efforts to provide Stratos
Lightwave, LLC, to the extent permitted by law, with the benefits of those
assets, at the expense of Stratos Lightwave, LLC, and to take other actions as
may be reasonably required to place Stratos Lightwave, LLC in the same position
as if those assets had been
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transferred to it. In this event, Stratos Lightwave, LLC will discharge
Methode's liabilities in connection with those assets.
EXPENSES. Stratos Lightwave, LLC has agreed to pay all costs of the
transfer of assets from Methode to it incurred on or after May 28, 2000,
including:
- moving expenses;
- 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 and expenses 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.
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 provides for transitional services and mutual support by
each party to the other in one or more of the following areas: accounting; tax;
payroll; information technology; employee benefits administration; human
resources; sales and marketing; legal; investor relations; quality assurance;
and other administrative functions. 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 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 these services would not
significantly disrupt the operations of the party providing these 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
We have entered into an employee matters agreement with Methode to allocate
the assets, liabilities and responsibilities relating to our current and former
employees and their participation in Methode benefit plans.
GENERAL. All eligible Stratos employees will continue to participate in the
Methode benefit plans until the spin-off date or until we establish benefit
plans for our employees. We intend to establish our own benefit plans no later
than the spin-off date, which shall include a 401(k) retirement and deferred
savings plan.
Once we establish our own benefit plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. No Stratos
benefit plan will provide benefits that overlap benefits under the corresponding
Methode benefit plan. Each Stratos benefit plan will provide that all service,
compensation and other benefit determinations that were recognized under the
corresponding Methode benefit plan as of the spin-off date will be recognized
under the Stratos benefit plan. Assets relating to employee liabilities assumed
by us will be transferred to us or to the related Stratos plans and trusts from
trusts and other funding vehicles associated with Methode's benefit plans.
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OPTIONS. Unvested Methode options held by our employees will be forfeited
on the spin-off date pursuant to the terms of the Methode 1997 Stock Plan. We
will assume all unvested Methode options held by our employees on the spin-off
date. These Methode options will convert at the spin-off date into options to
purchase our common stock. The number of shares and the exercise price of
Methode options that convert into Stratos options will be adjusted using a
conversion formula. The conversion formula will be based on the opening
per-share price of our common stock on the first trading day after the record
date for the spin-off relative to the closing per-share price of Methode
Class A common stock on the last trading day before the record date for the
spin-off. The resulting Stratos options will maintain the original vesting
provisions and option period.
RESTRICTED STOCK. Methode restricted stock held by our employees will be
forfeited on the spin-off date pursuant to the terms of the Methode Incentive
Stock Award Plan. Each Stratos employee who forfeits Methode restricted stock
will receive Stratos restricted stock in replacement of his forfeited Methode
restricted stock. The value of the replacement Stratos restricted stock shall be
substantially equal to the value of his forfeited Methode restricted stock as
determined by Stratos immediately before the record date for the spin-off. The
replacement Stratos restricted stock will maintain the original conditions and
vesting provisions applicable to the corresponding Methode restricted stock.
BONUS AWARDS. We have assumed a portion of the contingent bonuses granted
to our employees under various Methode bonus plans. The portion we assumed was
allocated by Methode based on the services performed by these employees on
behalf of Stratos. These assumed bonuses will remain subject to the same
forfeiture provisions. Any contingent bonuses owed to our employees which are
not assumed by Stratos will be paid in full by Methode on or before the spin-off
date.
NON-SOLICITATION. We have agreed with Methode not to solicit or recruit
each other's employees for a period of one year following the spin-off date.
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. This
declaration is not expected to be made until several 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 several covenants in this agreement which will be
binding on us as long as Methode owns at least 50% of our outstanding common
stock or
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until Methode has provided us notice that it no longer intends to proceed with
the proposed spin-off. Some of these covenants are described below:
- We will not take any action which would have the effect of limiting
Methode's ability to freely sell, pledge or otherwise dispose of shares of
our common stock or limiting the legal rights of or denying any benefit to
Methode as our stockholder in a manner not applicable to our stockholders
generally;
- 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 this
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 purchase price paid and other costs it incurred
in making this 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 this 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 statements and
other 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, and their respective directors, officers and employees, against all
losses arising out of:
- any breach by us or our affiliates of any of the provisions of the
agreement;
- any incorrect or incomplete financial or other information provided by us
or our affiliates to Methode as required by the agreement; and
- any actual or alleged 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 this offering and the proposed spin-off.
Methode has agreed to indemnify us and our affiliates, and their respective
directors, officers and employees, against all losses 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 actual or alleged 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 this offering
and the proposed 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 reasonable attorneys' fees and
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for other 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. 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 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 in connection with our
separation from Methode and this offering incurred on or after May 28, 2000 and
the fees payable to the investment banking firm engaged by Methode and Stratos
in connection with the proposed spin-off. Methode will pay the costs, fees and
expenses in connection with the separation and this offering incurred prior to
May 28, 2000 and all costs, fees and expenses in connection with the spin-off
other than the fees payable to the investment banking firm described above.
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 become effective when
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 other registration rights for Methode. Whenever we propose to register
any of our securities under the Securities Act for ourselves or others, subject
to some 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
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outside counsel retained in connection with this 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 this 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; or
- those shares cease to be outstanding.
The registration rights agreement will terminate as of the date of the
completion of the proposed spin-off.
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 several 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 contribution date, 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 contribution date. 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 these actions. In addition, other events over
which we do not have control may also give rise to our indemnification
obligation.
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 86.1% of the outstanding shares of our common stock, or
approximately 84.3% 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
200,000,000 shares of common stock, $.01 par value, and 5,000,000 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 54,029,807 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 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 these proposals because negotiation of these 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. These 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 some circumstances. The rights issued pursuant
to these 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 a stockholders
rights 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 rights
plan. These 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 this 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 several 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 this 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
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corporation outstanding at the time the transaction commenced, excluding
for purposes of 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 that 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 this 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 these
business activities or to receive and share in any income or proceeds
derived from these activities; and
- we will have no interest or expectancy, and specifically renounce any
interest or expectancy, in these 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, this 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 this person pursues or acquires that corporate opportunity for itself,
directs, sells, or assigns that corporate
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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 this corporate
opportunity is expressly offered to this 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 this corporate opportunity is expressly offered to this 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 this
position, unless this person is a full time employee of our company.
The corporate opportunity provisions in our restated certificate of
incorporation will no longer be in effect or operative when 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 ChaseMellon
Shareholder Services, L.L.C.
NASDAQ NATIONAL MARKET LISTING
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the trading symbol "STLW."
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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 these shares for sale, could adversely affect the price of
our common stock.
Upon completion of this offering, we will have 62,779,807 outstanding shares
of our common stock, or 64,092,307 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 this sale. Sales under
Rule 144 also are subject to 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 contractual lockup provisions described below and the
applicable requirements of Rule 144. We have granted 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 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. Notwithstanding the foregoing, Methode will
be permitted, without the prior written consent of Lehman Brothers, to effect
the proposed spin-off. See "Underwriting."
An aggregate of 4,500,000 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 registration
rights. For a description of these rights, see "Arrangements between Methode
Electronics and Stratos Lightwave--Registration Rights Agreement."
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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
Incorporated 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 Incorporated.................................
Fidelity Capital Markets, a division of National Financial
Services Corporation......................................
---------
Total..................................................... 8,750,000
</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 1,312,500 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 1,312,500 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.
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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 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 shares for the period ending 180 days
after the date of this prospectus. All of the shares of our common stock held by
Methode and by our executive officers and directors will be subject to this
agreement. Notwithstanding the foregoing, Methode will be permitted, without the
prior written consent of Lehman Brothers, to effect the proposed spin-off. 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 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 "STLW."
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 $2.5 million, $1.0 million of
which is payable by Methode and $1.5 million of which is payable by Stratos.
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 accounts over which the underwriters have discretionary authority 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.
79
<PAGE>
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.
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 700,000 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 and following
effectiveness of the registration statement. The number of shares available for
sale to the general public will be reduced to the extent these persons purchase
the reserved shares. To the extent that reserved shares are purchased by our
executive officers and directors, those reserved shares will also be subject to
the lock up agreements signed by these persons.
Fidelity Capital Markets, a division of National Financial Services
Corporation, is acting as an underwriter of this offering, and will be
facilitating electronic distribution of information through the Internet.
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 and schedule as of April 30, 1999 and 2000 and for the
fiscal years ended April 30, 1998, 1999 and 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 and schedule 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 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.
80
<PAGE>
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. Please refer to the copy of the relevant contract,
agreement or other document filed as an exhibit to the registration statement
for further information regarding statements in this prospectus regarding any
contract, agreement or other document.
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.
81
<PAGE>
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-19
Balance Sheets............................................ F-20
Statements of Income...................................... F-21
Statements of Shareholders' (Deficit) Equity.............. F-22
Statements of Cash Flows.................................. F-23
Notes to Financial Statements............................. F-24
Optoelectronics (a Division of Spire Corporation)
Independent Auditors' Report.............................. F-26
Balance Sheets............................................ F-27
Statements of Operations.................................. F-28
Statements of Shareholder's Equity........................ F-29
Statements of Cash Flows.................................. F-30
Notes to Financial Statements............................. F-31
</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, 1999 and 2000, and the related
combined statements of operations, net stockholder's investment, and cash flows
for each of the three fiscal years in the period ended April 30, 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, 1999 and 2000, and the results of its operations and its cash flows
for each of the three fiscal years in the period ended April 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Chicago, Illinois
May 30, 2000
F-2
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $24,158 $46,458 $71,785
Costs of sales.............................................. 17,656 29,543 48,064
------- ------- -------
Gross profit................................................ 6,502 16,915 23,721
------- ------- -------
Operating expenses:
Research and development.................................. 2,353 3,301 7,045
Sales and marketing....................................... 2,945 4,514 6,724
General and administrative................................ 2,820 3,518 5,361
------- ------- -------
Total operating expenses................................ 8,118 11,333 19,130
------- ------- -------
Income (loss) from operations............................... (1,616) 5,582 4,591
Other income................................................ 188 50 1,459
------- ------- -------
Income (loss) before income taxes........................... (1,428) 5,632 6,050
Income taxes (benefit)...................................... (570) 2,130 2,260
------- ------- -------
Net income (loss)........................................... $ (858) $ 3,502 $ 3,790
======= ======= =======
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1999 2000
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 550 $ 537
Accounts receivable, less allowance (1999--$184;
2000--$261)............................................. 9,031 12,127
------- -------
Inventories:
Finished products....................................... 371 764
Work in process......................................... 483 991
Materials............................................... 6,062 9,417
------- -------
6,916 11,172
Current deferred income taxes............................. 579 1,166
Prepaid expenses.......................................... 99 201
------- -------
Total current assets.................................. 17,175 25,203
Other assets:
Goodwill, less accumulated amortization (1999--$15;
2000--$181)............................................. 1,570 10,563
Other..................................................... 247 436
------- -------
1,817 10,999
Property, plant and equipment:
Land...................................................... 392 652
Buildings and building improvements....................... 6,714 9,786
Furniture and fixtures.................................... 1,651 1,837
Machinery and equipment................................... 14,085 26,102
------- -------
22,842 38,377
Less allowances for depreciation.......................... 10,311 13,442
------- -------
12,531 24,935
------- -------
Total assets............................................ $31,523 $61,137
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,370 $ 4,389
Other accrued expenses.................................... 1,764 3,067
Income taxes.............................................. 47 --
------- -------
Total current liabilities............................. 5,181 7,456
Deferred income taxes....................................... 173 719
Stockholder's net investment................................ 26,169 52,962
------- -------
Total liabilities and stockholder's equity.............. $31,523 $61,137
======= =======
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
STRATOS LIGHTWAVE, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)........................................... $ (858) $ 3,502 $ 3,790
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization............... 1,362 1,756 3,214
Provision for losses on accounts receivable............... 138 200 77
Provision for deferred income taxes....................... (328) (170) 68
Changes in operating assets and liabilities:
Accounts receivable..................................... (1,424) (4,713) (3,172)
Inventories............................................. (788) (2,302) (4,186)
Prepaid expenses........................................ -- (63) (103)
Accounts payable and accrued expenses................... 965 1,838 2,243
------- ------- -------
Net cash provided by (used in) operating activities......... (933) 48 1,931
Investing activities:
Purchases of property, plant and equipment.................. (1,526) (4,456) (11,810)
Acquisitions, net of cash aquired........................... -- (2,505) (12,963)
Other....................................................... (56) (62) (49)
------- ------- -------
Net cash used in investing activities....................... (1,582) (7,023) (24,822)
Financing activities:
Repayments of notes assumed in acquisitions................. -- (50) --
Net cash transfers from Methode Electronics, Inc............ 2,515 7,575 22,878
------- ------- -------
Net cash provided by financing activities................... 2,515 7,525 22,878
Net increase (decrease) in cash and cash equivalents........ -- 550 (13)
Cash at beginning of period................................. -- -- 550
------- ------- -------
Cash at end of period....................................... $ -- $ 550 $ 537
======= ======= =======
</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, 1997................................... $12,939
Net loss.................................................... (858)
Net transactions with Methode Electronics, Inc.............. 2,515
-------
Balance at April 30, 1998................................... 14,596
Net income.................................................. 3,502
Net transactions with Methode Electronics, Inc.............. 8,071
-------
Balance at April 30, 1999................................... 26,169
Net income.................................................. 3,790
Net transactions with Methode Electronics, Inc.............. 23,003
-------
Balance at April 30, 2000................................... $52,962
=======
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
APRIL 30, 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).
As of May 28, 2000, Methode contributed and transferred to the Company all
of the capital stock and equity interests held by Methode in subsidiaries and
other entities that conducted its optical products business, pursuant to a
master separation agreement. The capital stock and equity interests contributed
and transferred to the Company were Bandwidth Semiconductor, LLC, Methode
Communication Modules, Inc., Stratos Lightwave, LLC, Methode's sixty percent
interest in MP Optical Communications, LLC and Stratos Limited. Prior to its
transfer of Stratos Lightwave, LLC to the Company, Methode transferred all of
the assets and liabilities of its optoelectronics and fiber optic divisions, the
properties associated with its optoelectronics research center and Methode's
corporate facilities occupied by these divisions to Stratos Lightwave, LLC.
After completion of the Company's initial public offering, it is anticipated
that Methode will own approximately 86.1% of the Company's outstanding shares,
or approximately 84.3% if the underwriters for the Company's initial public
offering exercise their over-allotment option in full. 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 issued 1,000 shares of common stock to
Methode in connection with its incorporation and organization and an additional
54,028,807 shares of common stock in connection with Methode's contribution and
transfer of its optical products business to the Company under the master
separation agreement with Methode.
A Methode subsidiary will make, if necessary, advances to the Company to pay
for capital transactions and/or liabilities arising in the normal course of
business prior and/or subsequent to the contribution date. It is expected that
these advances will continue until the proceeds are received from the initial
public offering and will be repaid with proceeds of the offering.
The financial statements reflect the historical combined financial position
and results of operations of the Company under the structure to be implemented
as of the contribution 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.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first-out method) or market.
F-7
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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, 3 to 15 years for machinery and equipment and 5 to 10 years
for furniture and fixtures 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 $1,074,000 in 2000, $961,000 in 1999 and
$488,000 in 1998.
REVENUE RECOGNITION: Revenue from product sales, net of trade discounts and
allowances, is recognized when title passes which is upon shipment (FOB shipping
point). The Company handles returns by replacing, repairing or issuing credit
for defective products when returned. Return costs were not significant in
fiscal years 2000, 1999 and 1998.
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 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)
APRIL 30, 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.
RECLASSIFICATION: Certain amounts in fiscal 1999 and 1998 have been
reclassified to conform to the classification in fiscal 2000.
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. The Company adopted SAB 101
effective February 1, 2000. Such adoption did not have an effect on the revenue
recognition policies of the Company.
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 29, 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 Micro Systems, Inc.,
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.
F-9
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
2. ACQUISITIONS (CONTINUED)
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.
The allocation of the cash purchase price to the net assets acquired is as
follows:
<TABLE>
<CAPTION>
OPTOELECTRONICS
DIVISION OF STRATOS STRATOS
AMOUNT ALLOCATED TO SPIRE CORPORATION MICRO SYSTEMS LIMITED
------------------- ----------------- ------------- --------
(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................................. -- -- 199
------ ---- -----
Total assets........................ 3,663 258 2,438
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 1,005
Excess purchase price................. 9,333 680 731
------ ---- -----
Purchase price........................ $12,963 $795 $1,736
====== ==== =====
</TABLE>
In February 1999, Methode formed MP Optical Communications LLC in which it
acquired a sixty percent ownership interest. In September 1999, MP Optical
Communications LLC formed the Chinese corporation MP Optical Communication
(Shenzhen) Co., Ltd. (MP Optical China). The Company has agreed to contribute a
total of $1,700,000 in capital to MP Optical China by October 2001. As of
April 30, 2000, 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. The results of
operations are included in the Company's combined financial statements.
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
F-10
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
2. ACQUISITIONS (CONTINUED)
made as of the beginning of fiscal 1998, unaudited, pro forma sales and
operating results would be as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales..................................... $36,548 $55,365 $74,670
Net income (loss)............................. $(1,177) $1,952 $2,994
</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 $180,000,
$98,100 and $75,700 to the Plan during fiscal 2000, 1999 and 1998, respectively.
Such contributions have been recorded as expenses by the Company. Contributions
were determined by the Board of Directors of Methode.
Methode has applied 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 their assets to an
Individual Retirement Account or transfer their assets to a new Company
401(k) Plan.
F-11
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
4. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------------
1999 2000
----------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities--
Accelerated tax depreciation....................... $ 315 $ 821
----- -------
Deferred tax assets:
Deferred compensation.............................. 349 502
Inventory valuation differences.................... 81 391
Investment basis differences....................... 142 102
Bad debt reserves.................................. 68 102
Vacation accruals.................................. 81 171
----- -------
Total deferred tax assets........................ 721 1,268
----- -------
Net deferred tax assets............................ $ 406 $ 447
===== =======
Net current deferred tax assets.................... $ 579 $ 1,166
Net non-current deferred tax liabilities........... (173) (719)
----- -------
$ 406 $ 447
===== =======
</TABLE>
F-12
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
4. INCOME TAXES (CONTINUED)
Income taxes (benefit) consisted of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal......................................... $(196) $1,833 $1,586
Foreign......................................... -- 47 257
State........................................... (46) 420 349
----- ----- -----
(242) 2,300 2,192
Deferred (credit)................................. (328) (170) 68
----- ----- -----
$(570) $2,130 $2,260
===== ===== =====
</TABLE>
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>
FISCAL YEAR ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at statutory rate................................ $(484) $1,916 $2,057
Effect of:
State income taxes........................................ (70) 257 239
FSC benefit............................................... (23) (50) (57)
Foreign operations with lower statutory rates............. -- -- (32)
Other--net................................................ 7 7 53
----- ----- -----
Income tax provision........................................ $(570) $2,130 $2,260
===== ===== =====
</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
$94,000 at April 30, 2000 which would be payable should undistributed net income
of $897,900 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.
The Company believes that future taxable income will be sufficient to allow
the Company to realize its deferred tax assets. Accordingly, the Company has not
established a valuation allowance related to its deferred tax assets.
5. TRANSACTIONS WITH METHODE
The Company's revenue from sales of products to Methode was $3,482,300 in
1998, $4,018,000 in 1999 and $5,897,800 in 2000.
F-13
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
5. TRANSACTIONS WITH METHODE (CONTINUED)
The Company's operations have historically been funded by Methode, as
reflected in the Combined Statement of Cash Flows. The intercompany payable to
Methode for this funding was $47.2 million, $24.2 million and $16.1 million at
April 30, 2000, 1999 and 1998, respectively, and is included in stockholder's
net investment in the Combined Balance Sheet.
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 have entered 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 is one year (provision for extension exists) unless earlier
terminated.
The Company's estimated expenses under its transitional service arrangements
with Methode would not differ significantly from the costs historically
allocated to us by Methode for similar arrangements and reflected in these
combined financial statements. The transitional services between Methode and the
Company will generally be in effect for one year following the spin-off.
Charges to the Company from Methode for allocations in the fiscal years
ended April 30, 1998, 1999 and 2000 were classified as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cost of sales............................................... $ 391 $ 823 $1,167
Research and development.................................... 281 462 755
Sales and marketing......................................... 958 1,974 2,686
General and administrative.................................. 2,230 2,585 3,068
----- ----- -----
Total..................................................... $3,860 $5,844 $7,676
===== ===== =====
</TABLE>
6. PENDING LITIGATION
Methode is a plaintiff in a lawsuit against Agilent Technologies, Inc.,
Finisar Corporation and Hewlett-Packard Companies, Inc. and in another lawsuit
against Infineon Technologies Corp. and Optical Communications Products, Inc.
Methode alleges that optoelectronic products sold by the defendants infringe
upon two or more of five Methode patents. Finisar has filed a counterclaim
asserting that it is the rightful owner or co-owner of the patents. Methode
seeks monetary damage and
F-14
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
6. PENDING LITIGATION (CONTINUED)
injunctive relief. Finisar seeks unspecified compensatory damages, restitution
and the correction of inventorship with respect to the five Methode patents. On
May 4, 2000, the Court granted Methode's motion to dismiss with prejudice
several of Finisar's counterclaims on the grounds that these claims are
preempted by federal patent laws. As part of the separation from Methode, the
five patents and Methode's rights and liabilities in this litigation have been
contributed to the Company. This litigation is in the preliminary stage, and the
Company cannot predict its outcome with certainty.
In addition, 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 fiscal year ended April 30, 2000, sales to Cisco Systems, Inc.,
Nortel Networks Corporation and Alcatel Network Systems and their respective
contract manufacturers amounted to 26%, 10% and 8%, respectively, of combined
net sales.
During the fiscal year ended April 30, 1999, sales to Nortel Networks
Corporation and Cisco Systems, Inc. and their respective contract manufacturers
amounted to 27% and 10% 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 one customer accounted for approximately
13% of the total outstanding balance at April 30, 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-15
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 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,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
United States.................................. $24,158 $44,516 $65,784
Europe......................................... -- 1,942 6,001
------ ------ ------
$24,158 $46,458 $71,785
====== ====== ======
Net income (loss):
United States.................................. $ (858) $3,419 $3,198
Europe......................................... -- 83 592
------ ------ ------
$ (858) $3,502 $3,790
====== ====== ======
Long-lived assets:
United States.................................. $8,824 $12,443 33,430
Europe......................................... -- 1,658 2,068
------ ------ ------
$8,824 $14,101 $35,498
====== ====== ======
</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 April 30, 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. Each Stratos employee who forfeits Methode restricted
stock will receive Stratos restricted stock in replacement of his forfeited
Methode restricted stock. The value of the replacement Stratos restricted stock
shall be substantially equal to the value of his forfeited Methode restricted
stock as determined by Stratos immediately before the record date for the
spin-off. The replacement Stratos restricted stock will maintain the original
conditions and vesting provisions applicable to the corresponding Methode
restricted stock.
Unvested Methode options held by the Company's employees will be forfeited
on the spin-off date pursuant to the terms of the Methode 1997 Stock Plan. The
Company will assume all unvested Methode options held by its employees on the
spin-off date. These Methode options will convert at the
F-16
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
10. STOCK AWARDS AND STOCK OPTIONS (CONTINUED)
spin-off date into options to purchase shares of the Company's common stock. The
number of shares and the exercise price of Methode options that convert into
Stratos options will be adjusted using a conversion formula. The conversion
formula will be based on the opening per-share price of shares of the Company's
common stock on the first trading day after the record date for the spin-off
relative to the closing per-share price of Methode Class A common stock on the
last trading day before the record date for the spin-off. The resulting Stratos
options will maintain the original vesting provisions and option period.
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........................................... 30,230 15.53
Cancelled......................................... --
------
April 30, 1998.................................... 30,230 15.53
Granted........................................... 26,268 15.00
Cancelled......................................... (5,000) 15.40
------
April 30, 1999.................................... 51,498 15.27 13,315 15.53
Granted........................................... 39,981 25.32
Exercised......................................... (21,883) 15.43
Cancelled......................................... (4,232) 17.75
------
April 30, 2000.................................... 65,364 $21.20 20,361 $15.30
====== ===== ====== =====
</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............................ 44,981 25.98
Exercised.......................... -- -- --
Cancelled.......................... (1,250) 23.78
------ ----- ------ -----
April 30, 2000..................... 43,731 $26.04 -- --
====== ===== ====== =====
</TABLE>
There were no options eligible for conversion to Company stock granted in 1998
and 1997.
F-17
<PAGE>
STRATOS LIGHTWAVE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 2000
10. STOCK AWARDS AND STOCK OPTIONS (CONTINUED)
Unvested options to purchase Methode Class A Common Stock that are potentially
eligible to be assumed by Stratos and converted into options to purchase Company
stock are summarized below:
OPTIONS OUTSTANDING AT APRIL 30, 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 9.1 $17.68
23.28-23.78 26,616 9.3 23.77
31.25 15,000 9.6 31.25
------ --- ------
43,731 9.4 $26.04
====== === ======
</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, 1998, 1999 and 2000 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999 2000
--------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported............................. $(858,000) $3,502,000 $3,790,000
Pro forma............................... (877,000) 3,398,000 3,525,000
</TABLE>
The weighted average estimated fair value of options granted during fiscal
1998, 1999 and 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% 5.9%
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-18
<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-19
<PAGE>
POLYCORE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 118,342 $ 61,286
Accounts receivable....................................... 32,256 29,663
Inventories, net of allowances of $55,000:
Finished products....................................... 24,702 21,937
Materials............................................... 26,115 78,277
--------- ---------
50,817 100,214
Prepaid expenses.......................................... 6,166 8,774
--------- ---------
Total current assets........................................ 207,581 199,937
MACHINERY AND EQUIPMENT
Machinery and equipment..................................... 240,570 260,278
Less allowance for depreciation............................. (127,777) (137,305)
--------- ---------
112,793 122,973
--------- ---------
Total assets............................................ $ 320,374 $ 322,910
========= =========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.......................................... $ 37,053 $ 95,271
Note payable.............................................. -- 50,000
Accrued expenses.......................................... 11,838 1,547
Capital lease obligation.................................. 19,526 15,125
Deferred revenue.......................................... 333,253 --
--------- ---------
Total current liabilities................................... 401,670 161,943
SHAREHOLDERS' (DEFICIT) EQUITY
Common stock (no par value; 2 shares authorized, issued and
outstanding).............................................. 37,899 37,899
Accumulated (deficit) equity................................ (119,195) 123,068
--------- ---------
(81,296) 160,967
--------- ---------
Total liabilities and shareholders' (deficit) equity.... $ 320,374 $ 322,910
========= =========
</TABLE>
See notes to financial statements.
F-20
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------------
(UNAUDITED)
<S> <C> <C>
Income:
Net sales............................ $ 800,673 $ 83,523
Other................................ 450,389 333,460
---------- ----------
1,251,062 416,983
Costs and expenses:
Cost of products sold................ 354,390 19,727
Selling and administrative
expenses........................... 863,387 154,993
---------- ----------
1,217,777 174,720
Net income............................. $ 33,285 $ 242,263
========== ==========
</TABLE>
See notes to financial statements.
F-21
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
COMMON STOCK, ACCUMULATED (DEFICIT)
CLASS A (DEFICIT) EQUITY EQUITY
------------- ---------------- -------------
<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)
Net income for the period
(unaudited)........................ -- 242,263 242,263
-------- --------- --------
Balance at March 31, 1999
(unaudited)........................ $ 37,899 $ 123,068 $160,967
======== ========= ========
</TABLE>
See notes to financial statements.
F-22
<PAGE>
POLYCORE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1998 1999
------------- ------------------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income.................................... $ 33,285 $ 242,263
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation................ 38,255 9,528
Net loss on disposal of equipment......... 762 --
Changes in operating assets and liabilities:
Accounts receivable......................... 152,194 2,593
Inventories................................. 43,086 (49,397)
Prepaid expenses............................ -- (2,608)
Accounts payable and accrued expenses....... (35,783) 43,526
Deferred revenue............................ (105,790) (333,253)
--------- ---------
Net cash provided by (used in) operating
activities.................................. 126,009 (87,348)
Investing activities:
Purchases of property, plant, and equipment... (62,362) (19,708)
--------- ---------
Net cash used in investing activities......... (62,362) (19,708)
Financing activities:
Shareholders' distributions................... (24,792) --
Borrowings under line of credit............... -- 50,000
--------- ---------
Net cash (used in) provided by financing
activities.................................. (24,792) 50,000
--------- ---------
Increase (decrease) in cash and cash
equivalents................................. 38,855 (57,056)
Cash and cash equivalents at beginning of
period...................................... 79,487 118,342
--------- ---------
Cash and cash equivalents at end of period.... $ 118,342 $ 61,286
========= =========
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 at
March 31, 1999 and December 31, 1998 of $15,125 and $19,526, respectively, are
classified as capital lease obligations in the balance sheet.
See notes to financial statements.
F-23
<PAGE>
POLYCORE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
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 three months ended March 31, 1999 and the year ended December 31, 1998
amounted to $11,800 and $40,000, respectively.
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.
INTERIM FINANCIAL INFORMATION: The interim financial information for the
three months ended March 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.
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, for the three months ended
March 31, 1999 and the year ended December 31, 1998 were approximately $2,800
and $12,000, respectively.
4. LINES OF CREDIT
As of March 31, 1999 and December 31, 1998, the Company had a line of credit
of $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. As of December 31, 1998 and
March 31, 1999, the unused portions of these lines of credit were $130,000 and
$80,000, respectively.
F-24
<PAGE>
POLYCORE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND MARCH 31, 1999
5. LEASES
Certain equipment and operating properties are rented under non-cancelable
and cancelable operating leases. Total rental expense under operating leases was
$9,000 and $37,000 for the three months ended March 31, 1999 and the year ended
December 31, 1998, respectively. At December 31, 1998, future minimum lease
payments under operating leases having initial lease terms in excess of one year
were $9,000 which were paid in the first quarter of 1999.
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 and the
previously deferred revenue was recorded as other income during the three months
ended March 31, 1999.
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 Company has no ongoing commitment associated with this payment
related to exclusivity. Therefore, the income related to this exclusivity has
been included in other income in the 1998 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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<PAGE>
[INSIDE BACK COVER]
Description of Back Cover Art:
The inside back cover contains a stylized diagram of a fiber optic cable and
an optical transceiver. The following text is included under the diagram:
"The Role of the Optical Transceiver
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."
<PAGE>
8,750,000 SHARES
[LOGO]
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 the costs and expenses, other than the
underwriting discounts and commissions, payable 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......... $ 48,576
NASD filing fee............................................. 19,400
Nasdaq National Market application and continued listing
fees...................................................... 125,000
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 300,000
Legal fees and expenses..................................... 750,000
Accounting fees and expenses................................ 682,250
Transfer agent and registrar fees........................... 20,000
Miscellaneous expenses...................................... 600,000
----------
Total....................................................... $2,537,766
==========
</TABLE>
Approximately $1,036,666 of the costs and expenses set forth above are
payable by Methode and approximately $1,501,100 are payable by the Registrant.
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 10.8) 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.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, on April 12, 2000,
the Registrant issued 1,000 shares of common stock to Methode Electronics, Inc.
for an aggregate of $1,000. Pursuant to the Master Separation Agreement dated as
of May 28, 2000 between Methode Electronics, Inc. and the Registrant, the
Registrant will issue an additional 54,028,807 shares of common stock to Methode
prior to this offering. The Registrant believes that both of these issuances
were 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 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 and Indemnification Agreement between
Methode Electronics, Inc. and Registrant
10.4 Master Transitional Services Agreement between Methode
Electronics, Inc. and Registrant
10.5 Employee Matters Agreement between Methode Electronics, Inc.
and Registrant
10.6 Form of Registration Rights Agreement between Methode
Electronics, Inc. and Registrant
10.7 General Assignment and Assumption Agreement between Methode
Electronics, Inc. and Stratos Lightwave, LLC
10.8 Form of Indemnity Agreement between Registrant and
Registrant's directors and officers
10.9 Stratos Lightwave, Inc. 2000 Stock Plan
21.1 Subsidiaries of the Registrant
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)
23.4 Consent of Person About to Become a Director for Michael P.
Galvin
23.5 Consent of Person About to Become a Director for Brian
Jackman
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
23.6 Consent of Person About to Become a Director for Edward J.
O'Connell
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
------------------------
* To be filed by amendment.
** Previously filed
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of Stratos Lightwave is filed as
part of this Registration Statement and should be read in conjunction with the
financial statements and related notes.
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C> <C>
II Report of Independent Auditors -- Ernst & Young LLP S-1
II Valuation and Qualifying Accounts and Reserves S-2
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
II-3
<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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on June 2, 2000.
<TABLE>
<S> <C> <C>
STRATOS LIGHTWAVE, INC.
By: /s/ JAMES W. MCGINLEY
-----------------------------------------
James W. McGinley
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned, being a
director or officer, or both of Stratos Lightwave, Inc., a Delaware corporation,
hereby constitutes and appoints James W. McGinley, William J. McGinley and David
A. Slack and both of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, including post-effective amendments and
registration statements filed pursuant to Rule 462 under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite, necessary or advisable to
be done, as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
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 June 2, 2000
William J. McGinley
/s/ JAMES W. MCGINLEY
------------------------------------------- President, Chief Executive June 2, 2000
James W. McGinley Officer and Director
/s/ DAVID A. SLACK Chief Financial Officer
------------------------------------------- (Principal Financial and June 2, 2000
David A. Slack Accounting Officer)
</TABLE>
II-5
<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 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 and Indemnification Agreement between
Methode Electronics, Inc. and Registrant
10.4 Master Transitional Services Agreement between Methode
Electronics, Inc. and Registrant
10.5 Employee Matters Agreement between Methode Electronics,
Inc.and Registrant
10.6 Form of Registration Rights Agreement between Methode
Electronics, Inc. and Registrant
10.7 General Assignment and Assumption Agreement between Methode
Electronics, Inc. and Stratos Lightwave, LLC
10.8 Form of Indemnity Agreement between Registrant and
Registrant's directors and officers
10.9 Stratos Lightwave, Inc. 2000 Stock Plan
21.1 Subsidiaries of the Registrant
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)
23.4 Consent of Person About to Become a Director for Michael P.
Galvin
23.5 Consent of Person About to Become a Director for Brian
Jackman
23.6 Consent of Person About to Become a Director for Edward J.
O'Connell
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
------------------------
* To be filed by amendment.
** Previously filed
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Shareholder and Directors of Stratos Lightwave, Inc.
We have audited the combined financial statements of Stratos Lightwave, Inc.
as of April 30, 1999 and 2000, and for each of the three years in the period
ended April 30, 2000, and have issued our report thereon dated May 30, 2000
(included elsewhere in this Registration Statement). Our audit also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young
Chicago, Illinois
May 30, 2000
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
STRATOS LIGHTWAVE, INC.
YEARS ENDED APRIL 30, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ---------------------------
BEGINNING OF CHARGED TO CHARGED TO BALANCE AT END
DESCRIPTION PERIOD EXPENSE OTHER ACCOUNTS DEDUCTIONS OF PERIOD
----------- ------------ ---------- -------------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESERVE FOR INVENTORY
OBSOLESCENCE:
April 30, 1998.................... $ 31 $ 449 $ 238(B) $ 242
April 30, 1999.................... 242 585 1,043(A) 656(B) 1,234
April 30, 2000.................... 1,234 1,281 954(B) 1,561
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
April 30, 1998.................... $ 50 $ 138 $ 13 $ 175
April 30, 1999.................... 175 200 $ 9(A) 200(C) 184
April 30, 2000.................... 184 77 261
</TABLE>
------------------------
(A)--Represents balance of Stratos LTD at date of acquisition.
(B)--Represents write-off of obsolete inventory and revisions to previously
established reserves.
(C)--Write-off of accounts receivable from customer that filed bankruptcy.
S-2
