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Filed Pursuant to Rule 424(b)(4)
Registration no. 333-38592
PROSPECTUS
7,700,000 SHARES
[INRANGE LOGO]
INRANGE TECHNOLOGIES CORPORATION
CLASS B COMMON STOCK
$16.00 PER SHARE
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We are selling 7,700,000 shares of our Class B common stock. The
underwriters named in this prospectus may purchase up to 1,155,000 additional
shares of our Class B common stock to cover over-allotments.
This is an initial public offering of our Class B common stock. Our Class B
common stock has been approved for listing on the Nasdaq National Market under
the symbol INRG.
INVESTING IN OUR CLASS B COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ------------
<S> <C> <C>
Public Offering Price $16.00 $123,200,000
Underwriting Discount $ 1.12 $ 8,624,000
Proceeds to Inrange (before expenses) $14.88 $114,576,000
</TABLE>
The underwriters expect to deliver the shares to purchasers on or about
September 27, 2000.
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SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
CHASE H&Q
September 21, 2000
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INSIDE FRONT COVER
[GRAPHIC]
[THE GRAPHIC DEPICTS IMAGES AND LINES REPRESENTING STORAGE NETWORKING, DATA
NETWORKING AND TELECOMMUNICATIONS NETWORKING.]
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Cautionary Notice Regarding Forward-Looking Statements...... 17
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Combined Financial Data............................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 31
Management.................................................. 45
Relationships Between Our Company and SPX................... 56
Principal and Management Stockholders....................... 61
Description of Capital Stock................................ 63
Shares Eligible for Future Sale............................. 67
United States Tax Consequences to Non-United States
Holders................................................... 68
Underwriting................................................ 72
Legal Matters............................................... 74
Experts..................................................... 74
Change in Principal Accountants............................. 74
Where You Can Find More Information......................... 75
Index to Financial Statements............................... F-1
</TABLE>
THROUGH AND INCLUDING OCTOBER 16, 2000, ALL DEALERS THAT BUY, SELL OR TRADE
THE CLASS B COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT 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.
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
about our company and our Class B common stock elsewhere in this prospectus,
especially the risks of investing in our Class B common stock discussed under
"Risk Factors."
INRANGE TECHNOLOGIES CORPORATION
We design, manufacture, market and service switching and networking
products for storage, data and telecommunications networks. Our products provide
fast and reliable connections among networks of computers and related devices.
We serve Fortune 1000 businesses and other large enterprises that operate
large-scale systems where reliability and continuous availability are critical.
Our products are designed to be compatible with various vendors' products and
multiple communication standards and protocols. Our solutions for the three
networks include:
- Storage Networks. We offer a family of directors, switches, channel
extenders and optical products for storage networks, which are networks
used to manage the storage of information. We market these products under
our IN-VSN brand name. Our storage networking products are critical to
storage networks because they direct, or facilitate the transport of,
data between storage devices, computers and other networks. Our products
are compatible with popular storage network communication standards,
including the ESCON and Fibre Channel standards. ESCON and Fibre Channel
are computer communication standards that permit information to be
transferred among products developed by different manufacturers. The
flagship of our IN-VSN product family is our FC/9000. We believe that our
FC/9000, with 64 ports, is the largest storage network switch available
that operates under the Fibre Channel communication standard.
- Data Networks. We offer a family of switches, control systems and
management applications used in data networks, which are networks used
for data transmission and processing. We market these products under our
Universal Touchpoint brand name. These products provide real-time test,
access and monitoring functions that are critical to maintaining a data
network's high level of service. Our solutions are tailored to very large
complex data networks as evidenced by our Mega-Matrix switch, which, with
24,000 ports, is the industry's largest switch.
- Telecommunications Networks. We offer a family of products for
monitoring telecommunications networks, which are networks used primarily
for voice communication. We market these products under our 7-View brand
name. Our 7-View surveillance system monitors telecommunications networks
in order to permit the network operators to provide functions such as
call tracing, fraud detection and billing verification and enhances
carriers' ability to operate advanced billing, sales and marketing
programs, fraud prevention and call routing.
During 1999, we generated approximately 50% of our total revenue from the
sale of storage networking products, 19% from the sale of data networking
products and 14% from the sale of telecommunications networking products. In
addition, in 1999, we generated approximately 17% of our total revenue from
consulting services and product support. We distribute and support our products
through a combination of our direct sales and service operations and indirect
channels.
OUR COMPETITIVE STRENGTHS
We believe that the following attributes of our products and our company
position us to take advantage of market opportunities:
- Experience with High-End Storage, Data and Telecommunications
Networks. Our focus on providing high-end, large-scale, fault-tolerant
products for storage, data and telecommunications networks allows us to
apply our expertise across networks and architectures.
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- Leadership in High-End Fibre Channel Products. Within the storage
network industry, we are the leading provider of high-end storage network
switches, commonly known as director-class switches, that are intended to
provide the highest levels of reliability, availability and scalability.
In April 2000, we began shipping the industry's first 64-port Fibre
Channel director-class switch, our IN-VSN FC/9000.
- Extensive Installed Customer Base. We have installed our products at
over 2,000 sites in over 90 countries.
- Research and Development Expertise. As of June 30, 2000, we employed 160
personnel in our research and development department. We believe that
this investment has led to our development of hardware and software that
positions us to capitalize on emerging technologies and standards, such
as Fibre Channel, FICON and Infiniband, while continuing to accommodate
legacy technologies, such as ESCON.
- Significant Direct Sales Resources. As of June 30, 2000, we employed 165
personnel in our sales and systems engineering department. Our large
direct sales force maintains close relationships with our customers and
provides comprehensive pre- and post-sales support.
- Service and Support Capabilities. As of June 30, 2000, we employed 163
personnel in our customer service and support department. Our service
organization provides our customers with resources that help them address
often complex and challenging technical issues.
- Established International Presence. We use our direct sales channel,
alliances and an established network of distributors and resellers to
provide sales and support in over 90 countries worldwide.
OUR STRATEGY
We intend to capitalize on our competitive strengths by pursuing the
following strategies:
- leveraging our intellectual capital across storage, data and voice
networks;
- cross-selling to our existing customer base;
- expanding our consulting business;
- driving enhanced features and functions through software; and
- expanding alliances and indirect channels of distribution and pursuing
strategic acquisitions.
OUR RELATIONSHIP WITH SPX
We are currently an indirect wholly owned subsidiary of SPX Corporation.
After the completion of this offering of Class B common stock, SPX will own
about 90.8% of the total number of outstanding shares of our common stock. SPX
will beneficially own 100% of the outstanding Class A common stock, which will
represent about 98.0% of the combined voting power of all classes of our voting
stock.
------------------------
Our 32-year history began in 1968 with the formation of Spectron Corp. Our
current corporate entity, which traces its history to Spectron, was incorporated
in Delaware in 1977 under the name Data/Switch Corporation. We changed our name
to Inrange Technologies Corporation in July 1998. In October 1998 SPX acquired
us and our parent, General Signal Corp. Our principal executive office is
located at 13000 Midlantic Drive, Mt. Laurel, New Jersey 08054, and our
telephone number is (856) 234-7900.
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THE OFFERING
Class B common stock offered by
us.................................. 7,700,000 shares
Common stock to be outstanding after
this offering:
Class A common stock.............. 75,633,333 shares
Class B common stock.............. 7,700,000 shares
Total............................. 83,333,333 shares
Use of proceeds..................... We intend to use a portion of the net
proceeds of this offering to repay the
amounts that we borrowed from SPX to
pay for our recent acquisitions and the
remaining amounts for general corporate
purposes. Pending their use, we intend
to invest $15 million, including our
cash on hand before this offering, in
investment grade securities and lend
any remaining net proceeds to SPX.
Voting and conversion rights........ Our Class A common stock and our Class
B common stock generally have identical
rights, except for voting and
conversion rights. The holders of Class
A common stock are entitled to five
votes per share and the holders of
Class B common stock are entitled to
one vote per share. Holders of Class B
common stock have no conversion rights.
Prior to a tax-free distribution,
holders of Class A common stock may
convert some or all of their shares
into the same number of shares of Class
B common stock at any time. In
addition, prior to a tax-free
distribution, shares of Class A common
stock will automatically convert into
the same number of shares of Class B
common stock if transferred to anyone
other than SPX or its affiliates,
except in connection with a tax-free
distribution.
Nasdaq National Market symbol....... INRG
------------------------
Unless otherwise indicated, all information contained in this prospectus:
- assumes that the underwriters do not exercise their option to purchase up
to 1,155,000 additional shares of our Class B common stock to cover
over-allotments; and
- excludes 1,331,000 shares of our Class B common stock issuable upon the
exercise of options granted in June 2000 at an exercise price of $13.00
per share and 7,170,500 shares issuable upon the exercise of options to
be granted upon the completion of this offering at an exercise price
equal to the initial public offering price.
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front cover of
this prospectus.
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The tables on the following page present our summary historical and pro
forma combined financial data. The data presented in these tables are from our
historical combined financial statements and the notes to those statements and
from our pro forma combined financial statements and the notes to those
statements included elsewhere in this prospectus. You should read those
statements along with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a further explanation of the financial
data summarized below. Our combined financial statements include our own assets,
liabilities, revenue and expenses as well as the assets, liabilities, revenue
and expenses of various other units of SPX comprising the storage networking,
data networking and telecommunications networking business of SPX. All of the
operations, assets and liabilities of these units have been transferred to us.
The unaudited pro forma combined statement of operations data give effect
to our recent acquisitions of Computerm Corporation and Varcom Corporation as if
these acquisitions were completed on January 1, 1999. The pro forma basic and
diluted earnings per share also reflect the sale of 3,691,465 shares of Class B
common stock at the initial public offering price of $16.00 per share, net of
underwriting discount, in order to repay $54.9 million of debt due to SPX. The
unaudited pro forma combined balance sheet data assume that on June 30, 2000 we
completed the acquisitions of Computerm and Varcom, received $112.5 million of
anticipated net proceeds from this offering, used a portion of these proceeds to
repay the debt due to SPX and loaned a portion of the net proceeds to SPX.
Following our acquisition by SPX and beginning in the fourth quarter of
1998, we implemented several initiatives to rationalize revenue, streamline
operations and improve profitability. As part of this process, we discontinued
sales of non-strategic, low volume product lines and products that were at the
end of their life cycles. We also closed two manufacturing facilities and
consolidated all of our operations into one manufacturing location, consolidated
duplicative selling and administration functions into one location, and reduced
headcount in non-strategic areas. These actions were substantially completed by
July 1999. In connection with these initiatives, we recorded special charges of
$7.0 million in 1998 and $10.6 million in 1999.
Our other income (expense) for 1999 includes a gain of $13.9 million
realized upon the sale of common stock of a public company that we received upon
the exercise of warrants.
As used in the tables, Adjusted EBITDA represents earnings before interest,
taxes, depreciation and amortization, other income (expense), special charges,
and gain on sale of real estate. We believe that Adjusted EBITDA is an important
indicator of the liquidity and operating performance of technology companies.
You should not consider Adjusted EBITDA to be a substitute for operating income,
net income, cash flow and other measures of financial performance prepared in
accordance with generally accepted accounting principles.
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<TABLE>
<CAPTION>
PRO FORMA,
PRO FORMA, SIX MONTHS ENDED SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED JUNE 30, ENDED
--------------------------------------- DECEMBER 31, ------------------------- JUNE 30,
1997 1998 1999 1999 1999 2000 2000
----------- ----------- ----------- ------------ ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue........................ $ 218,971 $ 225,669 $ 200,622 $ 223,087 $ 102,383 $ 98,428 $ 111,821
Cost of revenue................ 108,541 115,316 99,641 104,330 54,264 50,463 53,178
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin............ 110,430 110,353 100,981 118,757 48,119 47,965 58,643
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Research, development and
engineering................. 21,225 25,067 18,928 23,726 10,618 10,060 12,763
Selling, general and
administrative.............. 56,382 62,449 48,269 57,972 24,230 24,534 29,040
Amortization of goodwill and
other intangibles........... 1,277 1,068 1,068 3,885 534 534 1,944
Special charges............... -- 6,971 10,587 10,587 9,687 (190) (190)
Gain on sale of real estate... -- -- (2,829) (2,829) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 78,884 95,555 76,023 93,341 45,069 34,938 43,557
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income............... 31,546 14,798 24,958 25,416 3,050 13,027 15,086
Interest expense............... 1,509 1,391 925 1,212 497 316 294
Other income (expense)......... 18 (178) 13,726 13,960 7,757 111 255
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes.... 30,055 13,229 37,759 38,164 10,310 12,822 15,047
Income taxes................... 12,198 5,873 15,459 15,647 4,228 5,129 6,018
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income..................... $ 17,857 $ 7,356 $ 22,300 $ 22,517 $ 6,082 $ 7,693 $ 9,029
=========== =========== =========== =========== =========== =========== ===========
Basic and diluted earnings per
share......................... $ 0.24 $ 0.10 $ 0.29 $ 0.28 $ 0.08 $ 0.10 $ 0.11
=========== =========== =========== =========== =========== =========== ===========
Shares used in computing basic
and diluted earnings per
share......................... 75,633,333 75,633,333 75,633,333 79,324,798 75,633,333 75,633,333 79,324,798
=========== =========== =========== =========== =========== =========== ===========
OTHER OPERATING DATA:
Depreciation and
amortization.................. $ 14,528 $ 13,160 $ 10,534 $ 5,164 $ 6,111
Capital expenditures, net...... 5,565 7,394 5,469 2,742 2,663
Cash flows from operating
activities.................... 40,221 17,083 13,318 8,292 8,817
Cash flows from investing
activities.................... (11,195) (19,969) 3,730 (670) (15,763)
Cash flows from financing
activities.................... (29,026) 4,746 (18,225) (7,721) 7,774
Adjusted EBITDA................ 46,074 34,929 43,250 17,901 18,948
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------
ACTUAL PRO FORMA
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(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash........................................................ $ 2,234 $ 15,000
Demand loan due from SPX.................................... -- 45,291
Working capital............................................. 39,488 102,697
Total assets................................................ 149,255 255,242
Total debt (including short-term borrowings, current portion
of long-term debt and debt due to SPX)..................... 6,136 7,715
Stockholder's investment.................................... 92,343 194,843
</TABLE>
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RISK FACTORS
Investing in our Class B common stock involves significant risks. You
should carefully consider the risks described below and the other information in
this prospectus, including our combined financial statements and the related
notes, before you purchase any shares of our Class B common stock.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF OUR CUSTOMERS.
Our success depends upon our ability to address the rapidly changing
markets in which we operate, including changes in relevant industry standards
and the changing needs of our customers. To address this risk, we must develop
and introduce high-quality, technologically advanced, cost-effective products
and product enhancements on a timely basis. If we are not able to develop and
introduce new products successfully in the timeframe we expect or prior to the
time our competitors do, our future revenue and earnings growth will be impaired
and our reputation for producing technologically-advanced products could be
damaged.
WE MAY EXPERIENCE DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS.
Given the relatively short product life cycles in the market for our
products, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could significantly harm our future
revenue and earnings growth. Product development delays may result from numerous
factors, including:
- failure to develop or license the necessary technology on a timely basis;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with independent contractors and suppliers;
- failure to obtain regulatory approvals;
- changing original equipment manufacturer product specifications; and
- unanticipated engineering complexities.
Since developing new products on a timely basis is critical to our success,
any delay we experience in developing new products could reduce our revenue and
profitability.
WE MAY OVERESTIMATE THE DEMAND FOR, AND MARKET ACCEPTANCE OF, THE NEW OR
ENHANCED PRODUCTS THAT WE DEVELOP.
We attempt to continuously bring new products to market. There is a risk
that some of these products will not be accepted by the market. We undertake
significant research and development expense prior to marketing any new product.
As a result, if the new products that we introduce do not gain acceptance, not
only will we lose sales as a result of not having developed a product that the
market accepts, but we will have used our resources ineffectively.
OUR FINANCIAL SUCCESS DEPENDS ON OUR ABILITY TO MANAGE THE PHASING OUT OF OLD
PRODUCTS AND THE INTRODUCTION OF NEW PRODUCTS.
We must successfully predict when one of our products has reached the end
of its life cycle and when it has to be updated, replaced or phased out. If a
product is not technologically advanced, customers will frequently delay
purchasing that product in the expectation that a more advanced product will be
developed by us or one of our competitors, particularly near the end of a
product's life cycle. In addition, selling a number of products that are at the
end of their life cycle may harm our reputation as being technologically
advanced. We must manage the introduction of new or enhanced products in order
to
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minimize disruption in our customers' ordering patterns, avoid excessive levels
of older product inventories and ensure that adequate supplies of new products
can be delivered to meet our customers' demands.
WIDESPREAD ADOPTION OF STORAGE AREA NETWORKS, AND THE FIBRE CHANNEL PROTOCOL ON
WHICH THESE NETWORKS ARE BASED, IS CRITICAL TO OUR FUTURE SUCCESS. IF OTHER
TECHNOLOGIES BECOME PREDOMINANT OR READILY ACCEPTED, OUR BUSINESS WILL BE
SIGNIFICANTLY HARMED.
The market for storage area networks has only recently begun to develop and
is rapidly evolving. Our FC/9000, which operates using the Fibre Channel
protocol, is used exclusively in storage area networks. In addition, our FC/9000
switching products are designed to operate in corporate datacenters. Currently,
there are only limited Fibre Channel storage area network products operating in
these datacenters and potential end users may seek to adopt networks with
different protocols. Potential end-users, particularly those who have invested
substantial resources in their existing data storage and management systems, may
be reluctant or slow to adopt a new approach, like storage area networks, or may
want to adopt a more advanced solution such as gigabit ethernet. If other
technologies become predominant or readily accepted, our business will be
significantly harmed. Because of this, it is difficult to predict the potential
size or future growth rate of products using the Fibre Channel protocol. Our
success in penetrating this emerging market will depend on, among other things,
our ability to:
- educate potential original equipment manufacturers, distributors and
end-users about the benefits of Fibre Channel storage area network
technology and overcoming its limitations; and
- predict and base our products on standards that ultimately become
industry standards.
In addition, storage area networks are often implemented in connection with
deployment of new storage systems and servers. Accordingly, our future success
is also substantially dependent on the market for new storage systems and
servers.
IF SALES OF OUR FC/9000 DO NOT GROW AS WE ANTICIPATE, OUR REVENUE AND EARNINGS
GROWTH COULD BE LESS THAN WE ANTICIPATE.
We began shipping the FC/9000 in April 2000. Our future sales growth and
financial results are highly dependent on the growth of sales of the FC/9000.
Sales of the FC/9000 may not grow as quickly as we expect for various reasons,
including:
- storage networks that are used in applications that are critical to a
business' operations may not convert to switches using Fibre Channel
protocol;
- we or our customers may discover problems in the FC/9000 that we may not
be able to fix quickly and cost-effectively, if at all;
- we may experience problems in manufacturing the FC/9000; and
- other companies may produce products with similar or greater capabilities
which may have more attractive pricing.
WE WILL BE UNABLE TO MANUFACTURE OR SELL OUR FC/9000 IF OUR SOLE PRODUCT
MANUFACTURER IS UNABLE TO MEET OUR MANUFACTURING NEEDS.
We have selected Sanmina Corporation, one of the largest third-party
providers of customized integrated electronic manufacturing services, to
manufacture our FC/9000 for us. Sanmina has not previously produced any products
for us. Sanmina is not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order which has been accepted by Sanmina Corporation. If Sanmina
Corporation experiences delays, disruptions, capacity constraints, quality
control problems in its manufacturing operations or financial difficulties,
product shipments to our customers could be delayed. These delays could
materially negatively impact our revenue and earnings growth as well as our
competitive position and reputation.
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WE RELY ON SOLE SOURCES OF SUPPLY FOR SOME KEY COMPONENTS OF OUR PRODUCTS. ANY
DISRUPTION IN OUR RELATIONSHIPS WITH THESE SOURCES COULD INCREASE OUR PRODUCT
COSTS AND REDUCE OUR ABILITY TO SUPPLY OUR PRODUCTS ON A TIMELY BASIS.
We purchase microchips that are specifically designed for the FC/9000 from
Ancor Communications, Inc. under a technology license agreement. These
microchips are referred to as applications specific integrated circuits, or
ASICs. Since we anticipate that a significant amount of our revenue growth will
come from sales of our FC/9000, any dispute with respect to this license
agreement or other circumstance that results in the failure of Ancor to perform
under the agreement could have a material adverse effect on our revenue and
earnings growth. In addition, we and Ancor have agreed to treat Ancor's
next-generation ASIC as an ASIC governed by the terms of the license agreement,
provided we pay Ancor $4 million and we and Ancor reach agreement as to the
royalties that would be payable for both the current ASIC and the next
generation ASIC. We intend to use the next-generation ASIC in our future
products. We may not be able to reach agreement with Ancor on a timely or
favorable basis regarding the next generation ASIC. If we do not reach agreement
with Ancor regarding the next-generation ASIC, we may not be able to produce
future products on a timely and cost-effective basis, if at all. If this
happens, it would have a material adverse effect on our revenue and earnings
growth. Ancor has recently been acquired by QLogic Corp. and we do not know
whether our relationship with Ancor will be affected by this acquisition.
WE HAVE RECENTLY ENTERED INTO AN AGREEMENT WITH A SUPPLIER OF OPTICAL NETWORKING
PRODUCTS. WE DO NOT HAVE EXPERIENCE ON WHICH TO BE CERTAIN THAT THIS SUPPLIER
WILL BE ABLE TO MANUFACTURE THE NUMBER OF PRODUCTS THAT WE REQUIRE, WITH THE
QUALITY THAT WE REQUIRE, AND IN THE TIME FRAMES REQUIRED TO MAINTAIN AND
INCREASE OUR SALES OF THESE PRODUCTS.
We recently signed an agreement with Sorrento Networks, Inc. under which
Sorrento will be a supplier for our optical networking products. Under this
agreement, Sorrento has appointed us exclusive worldwide distributor to sell
Sorrento's optical networking products for the storage networks of enterprise
customers. Because Sorrento has only recently begun supplying us with this
product, we do not have sufficient experience on which to be certain that
Sorrento will be able to supply the number of products that we require, with the
quality that we require, and in the time frames required to maintain and
increase our sales of these products. If Sorrento is unable to meet our sales
volumes or if our contract with Sorrento is terminated, we may not be able to
secure another source of supply without a significant delay, increase in costs
or decrease in quantity. Because sales of optical networking products, supplied
by a different vendor, represented 8% of our revenue in 1999, this could have a
material adverse effect on our revenue and earnings growth.
DUE TO THE NATURE OF OUR PRODUCTS, OUR LARGEST CUSTOMERS IN ANY GIVEN PERIOD MAY
NOT CONTINUE THEIR LEVELS OF PURCHASES IN FUTURE PERIODS, AND, ACCORDINGLY, OUR
RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED IF WE DO NOT DEVELOP
SIGNIFICANT ADDITIONAL CUSTOMERS.
Our ten largest customers accounted for approximately 33% of our 1999
revenue. Because our products represent significant capital purchases by our
customers, we do not generally expect that customers who make substantial
purchases in any given fiscal period will continue to make comparable purchases
in subsequent periods. Accordingly, if we do not replace these customers, our
revenue may decrease significantly and quickly. For example, our largest
customer in 1999 accounted for substantially all of the sales of our Network
Channel Office Equipment product and our Integrated Monitor and Test System
product in 1999. These sales represented 63% of our telecommunications product
sales in 1999 and 8.5% of our total 1999 revenue. This customer has scaled back
its purchases of this product to nominal levels and we do not know if we will
sell additional products to this customer. We also do not know if one or more
new customers will purchase sufficient quantities of our telecommunications
products in the future to enable us to maintain or expand our telecommunications
product revenue on a period-by-period basis.
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WE ARE MOVING TO A NEW FACILITY AND IF WE FAIL TO PROPERLY MANAGE THIS MOVE OUR
REVENUE AND EARNINGS GROWTH COULD SUFFER.
We are planning to move our headquarters and manufacturing operation to a
new facility having larger space beginning in December 2000. This move could
disrupt our business, resulting in reduced revenue and earnings growth.
FAILURE TO EXPAND AND MANAGE OUR DISTRIBUTION CHANNELS INCLUDING OUR
RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS COULD LIMIT OUR ABILITY TO
INCREASE REVENUE AND EARNINGS GROWTH.
We have historically sold the majority of our products through our direct
sales force. However, to expand our sales, particularly in the storage area
network market, we will need to sell our products to manufacturers who resell
our product using their own brand name, referred to as original equipment
manufacturers, and through other indirect sales channels. If we fail to develop
and manage relationships with original equipment manufacturers or if they fail
to sell our products, our revenue and earnings growth will be significantly
lower than we plan. We have only recently marketed our products to original
equipment manufacturers. We are currently in negotiations with a number of other
original equipment manufacturers, which may result in agreements shortly, any of
which agreements may be significant. However, we may not be able to reach any
agreements. Even if we do reach agreement with other original equipment
manufacturers, it may take time before we start to deliver products to them. In
addition, they may not continue to develop, market and sell products that
incorporate our technology and we will not be able to control their ability or
willingness to do so. We intend to sell our products to original equipment
manufacturers which are active in highly competitive markets, and our success
will depend on the success of these customers. If we enter into an agreement
with an original equipment manufacturer whose reputation or sales are adversely
affected, our sales could be significantly lower than we plan. If we enter into
a relationship with an original equipment manufacturer, we may not be able to
enter into an agreement with other manufacturers of comparable products, and,
even if we are able to, we may not be able to do so on a timely basis or on
similar terms. Also, sales through indirect sales channels have lower gross
margins than sales through direct sales channels.
THE PRICES WE CHARGE FOR OUR PRODUCTS MAY DECLINE, WHICH MAY RESULT IN A
REDUCTION IN OUR PROFITABILITY.
We anticipate that as products in the storage area network market become
more prevalent, the average unit price of our products may decrease in response
to changes in product mix, competitive pricing pressures, the maturing life
cycle of our products, new product introductions by us or our competitors or
other factors. If we are not successful in our efforts to reduce the cost of our
products through manufacturing efficiencies, design improvements and cost
reductions, as well as through increased sales of higher margin products, our
profitability will decline significantly.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR SUCCESS, OUR REVENUE AND
EARNINGS GROWTH WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
Because our products rely on proprietary technology and will likely
continue to rely on technological advancements for market acceptance, we believe
that the protection of our intellectual property rights is critical to the
success of our business. To protect these rights, we rely on a combination of
patent, copyright, trademark and trade secret laws. We also enter into
confidentiality or license agreements with our employees, consultants and
business partners, and control access to and distribution of our software,
documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties
may copy or otherwise obtain and use our products or technology. It is difficult
for us to monitor unauthorized uses of our products. The steps we have taken may
not prevent unauthorized use of our technology, particularly in foreign
countries where the laws may not protect our proprietary rights as fully as in
the United States. If we are unable to protect our intellectual property from
infringement, other companies may be able to use our intellectual property to
offer competitive products at lower prices. We may not be able to effectively
compete against these companies.
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COMPETITION IN NETWORK MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE.
Each of the areas in which we produce products are highly competitive. Some
of the companies with which we compete have substantially greater resources,
greater name recognition and access to larger customer bases than we do. Our
competitors may succeed in adapting more rapidly and effectively to changes in
technology or the market. If we fail to compete effectively, it could materially
adversely affect our revenue and earnings growth.
In particular, the business of providing products and related services to
the storage area network market is highly competitive. Our future growth is
highly dependent on this business. Our primary competitors in the Fibre Channel
switch market are Brocade Communications and McData, both of which currently
sell more Fibre Channel switches than we do. The perception by some that these
companies are early leaders in the storage area network market may materially
adversely affect our ability to develop new customer relationships. Other
companies are also providing Fibre Channel switches and other products in our
markets, and their products could become more widely accepted than ours. In
addition, a number of companies are developing, or have developed, Fibre Channel
products other than switches, such as adapters or hubs, that compete with our
products in some applications. These competitors may develop products that are
more advanced than our products. We anticipate that other companies will
introduce additional Fibre Channel products, including switches, in the near
future. To the extent that these companies have current supplier relationships
with our potential customers, it will be more difficult for us to win business
from these potential customers. If Fibre Channel technology gains wider market
acceptance, it is likely that an increasing number of competitors will begin
developing and marketing Fibre Channel products.
The segment of the data networking market in which we compete is highly
competitive and subject to continual technological changes. In the data
networking market we face competition from major systems integrators and other
established and emerging companies.
In the telecommunications industry, the market for the Signaling System
Seven monitoring system, which captures and provides information about
telecommunications traffic, is relatively new, highly competitive and subject to
rapid technological change, evolving industry standards and regulatory
developments. We compete with a number of U.S. and international suppliers. As
the market for these products grows, we will face competition from other
emerging telecommunications networking providers.
UNDETECTED SOFTWARE OR HARDWARE DEFECTS IN OUR PRODUCTS COULD RESULT IN LOSS OF
OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS AND COULD INCREASE OUR COSTS OR
REDUCE OUR REVENUE.
Our products may contain undetected software or hardware errors when first
introduced or when new versions are released. Our products are complex, and we
have from time to time detected errors in existing products, and we may from
time to time find errors in our existing, new or enhanced products. In addition,
our products are combined with products from other vendors. As a result, should
problems occur, it may be difficult to identify the source of the problem. These
errors could result in a loss of or delay in market acceptance of our products
and would increase our costs, reduce our revenue, harm our reputation and cause
significant customer relations problems.
INDUSTRY STANDARDS AFFECTING OUR BUSINESS EVOLVE RAPIDLY, AND IF WE DO NOT
DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE EVOLVING STANDARDS, OUR REVENUE
AND EARNINGS GROWTH WILL SUFFER.
All components of a storage area network must comply with the same
standards in order to operate efficiently together. However, there are often
various competing industry standards. We are not able to predict which industry
standard will become predominant. Whether a standard becomes predominant is
often due, in part, to the amount of support these standards receive from
industry leaders, which are generally larger and more influential than we are.
Often, our products are not compatible with all industry standards. If an
industry standard with which our products are not compatible becomes
predominant, sales of our products will suffer or we may have to incur
significant costs to adapt our products to new industry standards and to make
our products adaptable to a wide range of standards.
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CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND NEGATIVELY
AFFECT OUR SALES.
Recently, there has been increasing consolidation in the storage networking
industry. Consolidation in the storage networking industry may strengthen our
competitors' positions in our market, cause us to lose customers and hurt our
sales. In addition, acquisitions may strengthen our competitors' financial,
technical and marketing resources and provide access to potential customers,
which may harm our revenue and earnings growth.
THE LOSS OF THE SERVICES OF ANY OF OUR KEY PERSONNEL COULD HAVE A NEGATIVE
IMPACT ON OUR REVENUE AND EARNINGS GROWTH.
Our success depends to a significant degree upon the continued
contributions of our key personnel in engineering, research, sales, marketing,
finance and operations. In particular, we believe that our future success is
highly dependent on Gregory R. Grodhaus, our President and Chief Executive
Officer, Charles A. Foley, our Executive Vice President and Chief Technology
Officer, and Anthony J. Fusarelli, our Executive Vice President of Sales. We do
not maintain key person life insurance on our key personnel and do not have
employment contracts with any of our key personnel. If we lose the services of
any of our key personnel, it could have a negative impact on our business.
IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL, ENGINEERING,
RESEARCH, SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS MAY
SUFFER.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, research,
sales, marketing, finance and operations personnel. Competition for
professionals in our industry is intense and increasing. We may not be able to
attract and retain qualified personnel. If we are unable to attract or retain
qualified personnel in the future, or if we experience delays in hiring required
personnel, particularly qualified engineers and sales personnel, our ability to
develop, introduce and sell our products could be materially harmed. If our
stock price declines or does not increase significantly or options in our
company are not perceived as highly valuable, we may have difficulty in
attracting and retaining qualified personnel, because a portion of our
employees' compensation is stock based.
OUR NON-COMPETITION AGREEMENTS WITH OUR EMPLOYEES MAY NOT BE ENFORCEABLE. IF ANY
OF THESE EMPLOYEES LEAVES OUR COMPANY AND JOINS A COMPETITOR, OUR COMPETITOR
COULD BENEFIT FROM THE EXPERTISE OUR FORMER EMPLOYEE GAINED WHILE WORKING FOR
US.
We currently have non-competition agreements with some of our employees.
These agreements prohibit our employees, in the event they cease to work for us,
from directly competing with us or working for our competitors. Under current
U.S. law, we may not be able to enforce some of these non-competition
agreements. In the event that we are unable to enforce any of these agreements,
our competitors that employ our former employees could benefit from the
expertise our former employees gained while working for us.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We have experienced significant fluctuations in sales, revenue and
operating results from quarter to quarter as a result of a combination of
factors. We expect these fluctuations to continue in future periods. Because we
sell high-end products with relatively high costs for each product, our
financial results for each quarter may be materially affected by the timing of
particular orders, and we anticipate that our largest customers in one period
may not be our largest customers in future periods. Numerous other factors that
may cause our results of operations to vary significantly from quarter to
quarter are discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Quarterly Financial Information."
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MANY OF OUR SALES ARE MADE IN CONJUNCTION WITH SALES BY OTHER VENDORS OF RELATED
PRODUCTS. IF OUR CUSTOMER'S RELATIONSHIP WITH THE VENDOR TERMINATES, OR OUR
RELATIONSHIP WITH THE VENDOR TERMINATES, THE CUSTOMER MAY TERMINATE ITS
RELATIONSHIP WITH US.
We sell components of complicated network systems. Many vendors sell
components related to our products that customers purchase when they purchase
our products. If the relationship between the customer and the other vendor
deteriorates or terminates, or if the vendor's products are perceived as not
being state-of-the-art or cost-effective, our relationship with that customer
might be in jeopardy and may be terminated. For example, our 7-View product is
generally purchased in conjunction with network management software that is
often provided by third parties. If a customer decides for any reason to cease
purchasing network management software, that customer would cease to use our
7-View product.
In addition, many times a third party vendor is the prime contractor for
sales of products and related services to our customers. This third party may
not continue to bring sales opportunities to us and our relationships with these
vendors may not continue. If our relationships with these vendors are
terminated, we would lose these sales opportunities.
ACQUISITIONS THAT WE COMPLETE MAY BE DILUTIVE TO EARNINGS AND MAY NEVER GENERATE
INCOME.
Acquisitions that we have made and may make in the future may be dilutive
to our earnings since the prices being paid for technology companies are high
relative to their earnings. In addition, since we are in a high-technology
business, we are likely to acquire companies whose products are not yet proven
and may never become profitable. As a result, we may pay a high price for a
company that may never produce earnings. For example, some of Varcom's products
have not yet been brought to market and, as a result, Varcom may not produce the
earnings that we anticipate.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND
DIFFICULTIES ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD HARM OUR REVENUE
AND EARNINGS GROWTH.
We derived 39% of our 1999 revenue from customers located outside of the
United States. We believe that our continued growth and profitability will
require us to continue to penetrate international markets. If we are unable to
successfully manage the difficulties associated with international operations
and maintain and expand our international operations, our revenue and earnings
growth could be substantially lower than we anticipate. These difficulties are
heightened because we are in a highly technical industry and include:
- difficulties related to staffing for our highly technical industry;
- licenses, tariffs, taxes and other trade barriers imposed on products
such as ours;
- reduced or limited protections of intellectual property rights;
- difficulties related to obtaining approvals for products from foreign
governmental agencies which regulate networks; and
- compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment.
In addition, all of our manufacturing is currently performed in the United
States. As a result, an increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and less competitive
in foreign markets. A portion of our international revenue may be denominated in
foreign currencies in the future, which would subject us to risks associated
with fluctuations in those foreign currencies.
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RISKS RELATING TO OUR RELATIONSHIP WITH SPX
WE WILL BE CONTROLLED BY SPX SO LONG AS IT OWNS A MAJORITY OF THE VOTING POWER
OF OUR COMMON STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE
OUTCOME OF ANY STOCKHOLDER VOTE DURING THAT TIME.
After the completion of this offering of Class B common stock, SPX will
beneficially own approximately 90.8% of the total number of outstanding shares
of our common stock, or approximately 89.5% if the underwriters exercise their
over-allotment option in full. SPX will beneficially own 100% of the outstanding
Class A common stock, which will represent 98.0% of the combined voting power of
all classes of our voting stock, or 97.7% of the combined voting power of all
classes of our voting stock if the underwriters exercise their over-allotment
option in full. Because of SPX's control of our company, investors will be
unable to affect or change the management or the direction of our company. As a
result, some investors may be unwilling to purchase our Class B common stock. If
the demand for our Class B common stock is reduced because of SPX's control of
our company, the price of our Class B common stock could be materially
depressed.
Until SPX beneficially owns less than 50% of the combined voting power of
our stock, SPX will be able to elect our entire board of directors and generally
to determine the outcome of all corporate actions requiring stockholder
approval. As a result, SPX will be in a position to control all matters
affecting our company, including decisions as to:
- our corporate direction and policies;
- the composition of our board of directors;
- future issuances of our common stock or other securities;
- our incurrence of debt;
- amendments to our certificate of incorporation and bylaws;
- payment of dividends on our common stock; and
- acquisitions, sales of our assets, mergers or similar transactions,
including transactions involving a change of control.
THE LIMITED VOTING RIGHTS OF OUR CLASS B COMMON STOCK COULD IMPACT ITS
ATTRACTIVENESS TO INVESTORS AND ITS LIQUIDITY AND AS A RESULT, ITS MARKET VALUE.
The holders of our Class A and Class B common stock generally have
identical rights, except that holders of our Class A common stock are entitled
to five votes per share and holders of our Class B common stock are entitled to
one vote per share on all matters to be voted on by stockholders. We will be
selling our Class B common stock in the offering. The difference in the voting
rights of the Class A and Class B common stock could diminish the value of the
Class B common stock to the extent that investors or any potential future
purchasers of our Class B common stock ascribe value to the superior voting
rights of the Class A common stock. In addition, if SPX distributes our Class A
common stock to its stockholders, the existence of two separate classes of
publicly traded common stock could result in less liquidity for either class of
our common stock than if there were only one class of common stock and could
result in the market price of our Class B common stock being lower than the
market price of our Class A common stock.
WE MAY HAVE CONFLICTS WITH SPX WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS.
We may have conflicts with SPX after this offering in a number of areas
relating to our past and ongoing relationships, including:
- SPX's ability to control our management and affairs;
- the nature, quality and pricing of ongoing services which SPX has agreed
to provide us;
- business opportunities that may be attractive to both SPX and us;
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- litigation, labor, tax, employee benefit and other matters arising from
our no longer being a wholly owned subsidiary of SPX;
- the incurrence of debt and major business combinations by us; and
- sales or distributions by SPX of all or any portion of its ownership
interest in us.
We may not be able to resolve these conflicts and, even if we are able to
do so, the resolution of these conflicts may not be as favorable as if we were
dealing with an unaffiliated party. Our certificate of incorporation and bylaws
do not contain any special provisions setting forth rules governing these
potential conflicts.
THE AGREEMENTS BETWEEN US AND SPX WERE NOT MADE ON AN ARM'S-LENGTH BASIS, AND
MAY NOT BE FAIR TO US.
The contractual agreements we have with SPX for SPX to provide us with
various ongoing services were made in the context of an affiliated relationship
and were negotiated in the overall context of this offering. In addition, these
agreements may be amended from time to time upon agreement between the parties
and, as long as SPX is our controlling stockholder, it will have significant
influence over our decision to agree to any such amendments. As a result of
SPX's control of us when these agreements were negotiated or may be amended, the
prices and other terms under these agreements may be less favorable to us than
what we could obtain in arm's-length negotiations with unaffiliated third
parties for similar services.
WE ARE SUBJECT TO RESTRICTIONS CONTAINED IN SPX'S CREDIT AGREEMENT.
Under the terms of SPX's credit agreement, we will continue to be
considered a subsidiary of SPX after the offering for as long as SPX holds more
than 50% of the combined voting power of our common stock. As a result, we will
continue to be subject to the covenants contained in SPX's credit agreement that
restrict SPX and its subsidiaries, including covenants limiting acquisitions,
issuances of stock and options, indebtedness, liens, sale of assets and capital
expenditures. These covenants could restrict our ability to operate our
business; moreover, we may have conflicts with SPX as to our ability to take
advantage of baskets and other provisions contained in the credit agreement
which SPX may want to utilize for itself or its other subsidiaries.
WE INTEND TO LEND A PORTION OF THE NET PROCEEDS OF THIS OFFERING AND THE EXCESS
CASH WE GENERATE ON A DAILY BASIS TO SPX. SPX'S ABILITY TO REPAY THESE AMOUNTS
IS SUBJECT TO SPX'S FINANCIAL CONDITION.
We intend to use a portion of the net proceeds of this offering to repay
amounts that we borrowed from SPX to pay for our recent acquisitions and the
remaining amounts for general corporate purposes. Pending their use, we intend
to invest $15 million, including our cash on hand before this offering, in
investment grade securities and lend any remaining amounts to SPX. We also
intend, as part of our cash management system, to lend, on a daily basis, our
cash and cash equivalents in excess of $15 million to SPX. We will lend these
amounts to SPX under a loan agreement that will allow us to demand repayment of
outstanding amounts loaned under the agreement at any time. However, even after
SPX repays us the amount due under the loan agreement, as part of our cash
management system we will continue to be obligated to lend, on a daily basis,
all of our cash and cash equivalents in excess of $15 million to SPX until the
termination of the loan agreement. The loan agreement will terminate when SPX
owns less than 50% of our outstanding shares of Class A common stock and Class B
common stock or if there is an event of default under SPX's credit agreement.
Amounts loaned under the loan agreement will be unsecured. Loans made prior to
October 1, 2000, will accrue interest quarterly at a rate of 8 1/2% and, for
loans made on or after October 1, 2000, will accrue interest quarterly at the
weighted average rate of interest paid by SPX for revolving loans under its
credit agreement for the prior quarter. SPX's ability to repay the amounts that
we lend will be subject to SPX's financial condition and liquidity, including
its ability to borrow under its credit agreement or otherwise. SPX is more
leveraged than we are and, since it is in businesses that are different from
ours, is subject to different risks. Many of its businesses, such as its
automotive business, are cyclical and subject to pricing pressures and
environmental risks. In the event that SPX files for bankruptcy protection,
SPX's ability to repay the loans will be subject to bankruptcy
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laws as well as other applicable laws, and we cannot be certain that we would be
able to recover amounts loaned to SPX. In addition, any amounts paid or repaid
to us by SPX during the one-year period prior to any bankruptcy filing by SPX
may be subject to recovery by SPX or a trustee in SPX's bankruptcy case as a
preferential payment.
A NUMBER OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR EXECUTIVE OFFICERS OF SPX OR OWN SPX STOCK.
Five members of our board of directors are directors or executive officers
of SPX and all of our directors will be appointed by SPX prior to or upon
completion of this offering. Our directors who are also directors or executive
officers of SPX will have obligations to both companies and may have conflicts
of interest with respect to matters involving or affecting us, such as
acquisitions and other corporate opportunities that may be suitable for both us
and SPX. In addition, after this offering, a number of our directors, executive
officers and other employees will continue to own SPX stock and options on SPX
stock they acquired as employees of SPX. This ownership could create, or appear
to create, potential conflicts of interest when these directors and officers are
faced with decisions that could have different implications for our company and
SPX. Our certificate of incorporation and bylaws do not have special provisions
to deal with these potential conflicts and we intend to deal with conflicts on a
case-by-case basis.
WE WILL BE A MEMBER OF SPX'S CONSOLIDATED GROUP FOR FEDERAL INCOME TAX PURPOSES.
AS A RESULT, SPX'S ACTIONS MAY ADVERSELY AFFECT US.
For so long as SPX continues to own at least 80% of the combined vote and
value of our capital stock, we will be included in SPX's consolidated group for
federal income tax purposes. Under a tax sharing agreement with SPX that will
become effective upon completion of this offering, we will pay SPX the amount of
federal, state and local income taxes that we would be required to pay to the
relevant taxing authorities if we were a separate taxpayer not included in SPX's
consolidated, unitary or combined returns. In addition, by virtue of its
controlling ownership and the tax sharing agreement, SPX will effectively
control substantially all of our tax decisions. Under the tax sharing agreement,
SPX will have sole authority to respond to and conduct all tax proceedings,
including tax audits, relating to SPX's consolidated, unitary or combined income
tax returns in which we are included. Moreover, even though we have a tax
sharing agreement with SPX, federal law provides that each member of a
consolidated group is liable for the group's entire tax obligation. Thus, to the
extent SPX or other members of SPX's consolidated group fail to make any federal
income tax payments required of them by law, we could be liable for the
shortfall. Similar principles may apply for state or local income tax purposes.
RISKS RELATING TO THIS OFFERING
SINCE OUR CLASS B COMMON STOCK HAS NOT TRADED PUBLICLY, THE INITIAL PUBLIC
OFFERING PRICE MAY NOT BE INDICATIVE OF THE MARKET PRICE OF OUR CLASS B COMMON
STOCK AFTER THIS OFFERING, AND THE MARKET PRICE OF OUR CLASS B COMMON STOCK MAY
FLUCTUATE WIDELY AND RAPIDLY.
The initial public offering price was determined through negotiation
between us and representatives of the underwriters and may not be indicative of
the market price for our Class B common stock after this offering.
The market price of our Class B common stock could fluctuate significantly
as a result of:
- changes in and failures to meet financial estimates and recommendations
by securities analysts following our stock;
- changes in business or regulatory conditions affecting companies in the
networking industry; and
- announcements or implementation by us or our competitors of technological
innovations or new products.
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The securities of many companies, particularly those in the high-technology
industry, have experienced extreme price and volume fluctuations in recent
months, 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. Even if the market price of our Class B
common stock reaches an elevated level following this offering, it may
materially and rapidly decline.
THE ACTUAL OR POSSIBLE SALE OF OUR SHARES BY SPX, WHICH WILL OWN NEARLY 90% OF
OUR OUTSTANDING SHARES FOLLOWING THIS OFFERING, COULD DEPRESS OR REDUCE THE
MARKET PRICE OF OUR CLASS B COMMON STOCK OR CAUSE OUR SHARES TO TRADE BELOW THE
PRICES AT WHICH THEY WOULD OTHERWISE TRADE.
The market price of our Class B common stock could drop as a result of
sales by SPX of a large number of shares of our common stock in the market after
this offering or the perception that these sales could occur. These factors also
could make it more difficult for us to raise funds through future offerings of
our Class B common stock.
SPX is not obligated to retain its shares of our Class A common stock,
except that, subject to limited exceptions, it has agreed not to sell or
otherwise dispose of any shares of our Class A common stock for 180 days after
the completion of this offering without the written consent of the underwriters.
The underwriters may waive this restriction at any time without public notice.
After the expiration of this 180-day period, unless earlier waived, SPX could
dispose of its shares of our Class A common stock through a public offering,
sales under Rule 144 of the Securities Act of 1933 or other transaction. Upon
such sale, each share of Class A common stock will be converted into one share
of Class B common stock. We have entered into a registration rights agreement
with SPX that grants it registration rights to facilitate its sale of our shares
in the market.
In addition, after this offering, there will be outstanding options to
acquire 8,592,700 shares of our Class B common stock. Subject to vesting
restrictions, these options may be exercised and the underlying shares of our
Class B common stock sold; however, our executive officers and directors and
those of SPX have agreed to not sell or otherwise dispose of any shares of our
common stock for 180 days after the completion of this offering without the
written consent of the underwriters. The underwriters may waive this restriction
at any time without public notice.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
THE DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE OF OUR CLASS
B COMMON STOCK, OR DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR US.
Our certificate of incorporation and our bylaws and various provisions of
the Delaware General Corporation Law may make it more difficult to effect a
change in control of our company, even if SPX were no longer our controlling
stockholder. Our certificate of incorporation, our bylaws, and the various
provisions of Delaware General Corporation Law may materially adversely affect
the price of our Class B common stock, discourage third parties from making a
bid for our company or reduce any premium paid to our stockholders for their
Class B common stock. For example, our certificate of incorporation authorizes
our board of directors to issue blank check preferred stock. The authorization
of this preferred stock will enable us to create a poison pill and otherwise may
make it more difficult for a third party to acquire control of us in a
transaction not approved by our board. Our certificate of incorporation also
provides for the division of our board of directors into three classes as nearly
equal in size as possible with staggered three-year terms. This classification
of our board of directors could have the effect of making it more difficult for
a third party to acquire our company, or of discouraging a third party from
acquiring control of our company.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical fact in this prospectus, including statements
regarding our competitive strengths, business strategy, future financial
position, budgets, projected costs and plans and objectives of management are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as may, will,
expect, should, intend, estimate, anticipate, believe, continue or similar
terminology. We can give no assurance that the expectations reflected in
forward-looking statements will prove to have been correct. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of factors including those set forth under the "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections, and elsewhere in this
prospectus. All written and oral forward-looking statements attributable to us
are expressly qualified in their entirety by the factors we disclose that could
cause our actual results to differ materially from our expectations.
USE OF PROCEEDS
We estimate that, based on the initial public offering price of $16.00 per
share of Class B common stock, the net proceeds from our sale of 7,700,000
shares of Class B common stock will be approximately $112.5 million, after
deducting the underwriting discount and estimated expenses of this offering. If
the underwriters exercise their over-allotment option in full, we estimate that
the net proceeds will be approximately $129.7 million.
In June 2000 we acquired TCS and STI, which are two European systems
integration businesses. In August 2000 we acquired Varcom Corporation, which is
a provider of advanced local area network and wide area network monitoring and
management tools, and Computerm Corporation, which is a provider of storage area
network channel extension products.
The total purchase price for TCS, STI, Varcom and Computerm was $61.4
million, with $54.9 million paid at the closings of the transactions and the
remaining $6.5 million payable at specified dates if we have not made claims
against the sellers by those dates. We borrowed the $54.9 million from SPX under
three notes. Each of the notes bears interest at the prime rate plus one-half
percent, matures six months from the date of issuance, and may be prepaid by us
without penalty. We intend to use a portion of the net proceeds of this offering
to repay the amounts due under each of the notes and the remaining amount of the
proceeds for general corporate purposes. Pending their use, we intend to invest
$15 million, including our cash on hand before this offering, in investment
grade securities and lend any remaining net proceeds to SPX.
DIVIDEND POLICY
Since we have always been a wholly owned subsidiary of a larger
corporation, we have paid intercompany dividends in the past. However, we do not
expect to pay any cash dividends in the foreseeable future. Payment of future
cash dividends, if any, will be at the discretion of our board of directors
after taking into account various factors, including applicable Delaware law,
contractual restrictions, our financial condition, operating results, current
and anticipated cash needs and plans for expansion.
17
<PAGE> 21
CAPITALIZATION
The following table sets forth our cash, debt and capitalization as of June
30, 2000:
- on an actual basis;
- on a pro forma basis to give effect to the acquisitions of Varcom
Corporation and Computerm Corporation, borrowings from SPX to fund these
acquisitions and the recording of a $10.0 million in-process research and
development charge in connection with the acquisition of Varcom; and
- on a pro forma basis to give further effect to this offering, the
repayment of the debt due to SPX and our loan of a portion of the net
proceeds of this offering to SPX.
You should read the information provided below together with our historical
combined financial statements and the notes to those statements included
elsewhere in this prospectus and the information in the "Selected Combined
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" sections of this prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------------------------------------
PRO FORMA
ACTUAL FOR ACQUISITIONS PRO FORMA
---------- ------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents....................... $ 2,234 $ 2,720 $ 15,000
======= ======== ========
Short-term borrowings and term debt............. $ 1,707 $ 7,715 $ 7,715
Debt due to SPX................................. 4,429 54,929 --
------- -------- --------
Total debt................................. 6,136 62,644 7,715
------- -------- --------
Stockholder's equity:
Preferred stock, par value $0.01 per share,
20,000,000 shares authorized and none
outstanding................................ -- -- --
Class A common stock, par value $0.01 per
share, 150,000,000 shares authorized,
75,633,333 shares issued and outstanding... 756 756 756
Class B common stock, par value $0.01 per
share, 250,000,000 shares authorized, none
outstanding (actual) and 7,700,000
outstanding (as adjusted).................. -- -- 77
SPX's other net investment.................... 91,283 81,283 193,706
Accumulated other comprehensive income........ 304 304 304
------- -------- --------
Total stockholder's equity...................... 92,343 82,343 194,843
------- -------- --------
Total capitalization............................ $98,479 $144,987 $202,558
======= ======== ========
</TABLE>
18
<PAGE> 22
DILUTION
Our net tangible book value as of June 30, 2000 was approximately $85.2
million or $1.13 per share. Net tangible book value per share is equal to our
total tangible assets minus our total liabilities divided by the aggregate
number of shares of common stock outstanding prior to this offering. Assuming we
had also sold the shares of Class B common stock offered hereby at the initial
public offering price of $16.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, our net tangible book value at June 30, 2000 would have been
approximately $197.7 million, or $2.37 per share. This represents an immediate
increase in net tangible book value of $1.24 per share to SPX and an immediate
dilution of $13.63 per share to new investors in this offering. Dilution is
determined by subtracting net tangible book value per share after the offering
from the amount of cash paid by a new investor for a share of Class B common
stock. The following table illustrates the substantial and immediate per share
dilution to new investors:
<TABLE>
<CAPTION>
PER SHARE
----------------------
<S> <C> <C>
Initial public offering price.................... $16.00
Net tangible book value as of June 30, 2000.... $ 1.13
Increase attributable to new investors......... 1.24
------
Net tangible book value after giving effect to
the offering................................... 2.37
------
Dilution to new investors........................ $13.63
======
</TABLE>
The following table sets forth as of June 30, 2000 the number of shares of
common stock purchased from us, the total consideration paid and the average
price per share paid by SPX and by new investors purchasing shares of our Class
B common stock in this offering. The calculations with respect to the SPX
consideration reflects SPX's net investment minus retained earnings as of June
30, 2000. The calculations with respect to shares purchased by new investors in
this offering reflect the offering price of $16.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
SPX....................... 75,633,333 90.8% $ 3,451,000 2.7% $ 0.05
New investors............. 7,700,000 9.2 123,200,000 97.3 $16.00
---------- ----- ------------ -------
Total........... 83,333,333 100.0% $126,651,000 100.0%
========== ===== ============ =======
</TABLE>
If the underwriters exercise their over-allotment option in full, the net
tangible book value per share of common stock as of June 30, 2000 would have
been $2.54 per share, which would result in dilution to the new investors of
$13.46 per share, and the number of shares of Class B common stock held by the
new investors would increase by 1,155,000 or 10.5% of the total number of shares
to be outstanding after this offering.
19
<PAGE> 23
SELECTED COMBINED FINANCIAL DATA
The tables on the following pages present our selected combined financial
data. You should read the information in the tables together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical combined financial statements and the notes to those statements
included elsewhere in this prospectus. The combined statement of operations data
set forth below for the year ended December 31, 1997 are derived from our
audited combined financial statements included in this prospectus which have
been audited by Ernst & Young LLP, independent auditors, whose report is
included in this prospectus. The combined statement of operations data set forth
below for the years ended December 31, 1998 and 1999 and combined balance sheet
data as of December 31, 1998 and 1999 are derived from our audited combined
financial statements included in this prospectus which have been audited by
Arthur Andersen LLP, independent public accountants, whose report is also
included in this prospectus.
The combined statement of operations data for the years ended December 31,
1995 and 1996 and the combined balance sheet data as of December 31, 1996 and
1997 are derived from our audited combined financial statements that are not
included in this prospectus. The combined balance sheet data as of December 31,
1995 are derived from our unaudited combined financial statements that are not
included in this prospectus. The combined statement of operations data for the
six months ended June 30, 1999 and 2000 and the combined balance sheet data as
of June 30, 2000 are derived from our unaudited combined financial statements
included in this prospectus and, in the opinion of management, include all
adjustments, consisting only of normal recurring entries, that are necessary for
a fair presentation of our financial position and results of operations for
these periods. Our combined financial statements include our own assets,
liabilities, revenue and expenses as well as the assets, liabilities, revenue
and expenses of various other units of SPX comprising the storage networking,
data networking and telecommunications networking business of SPX. All of the
operations, assets and liabilities of these units have been transferred to us.
Following our acquisition by SPX and beginning in the fourth quarter of
1998, we implemented several initiatives to rationalize revenue, streamline
operations and improve profitability. As part of this process, we discontinued
sales of non-strategic, low volume product lines and products that were at the
end of their life cycles. We also closed two manufacturing facilities and
consolidated all of our operations into one manufacturing location, consolidated
duplicative selling and administration functions into one location, and reduced
headcount in non-strategic areas. These actions were substantially completed by
July 1999. In connection with these initiatives, we recorded special charges of
$7.0 million in 1998 and $10.6 million in 1999. Special charges in 1995 and 1996
reflect merger and restructuring costs related to the acquisition of Data Switch
Corporation, which was accounted for as a pooling of interest under Accounting
Principles Board Opinion No. 16.
Our other income (expense) for 1999 includes a gain of $13.9 million
realized upon the sale of common stock of a public company that we received upon
the exercise of warrants.
As used in the tables, Adjusted EBITDA represents earnings before interest,
taxes, depreciation and amortization, other income (expense), special charges,
and gain on sale of real estate. We believe that Adjusted EBITDA is an important
indicator of the liquidity and operating performance of technology companies.
You should not consider Adjusted EBITDA to be a substitute for operating income,
net income, cash flow and other measures of financial performance prepared in
accordance with generally accepted accounting principles.
20
<PAGE> 24
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
------------ ----------- ----------- ----------- ------------ ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue................ $ 202,686 $ 214,433 $ 218,971 $ 225,669 $ 200,622 $ 102,383 $ 98,428
Cost of revenue........ 100,992 108,037 108,541 115,316 99,641 54,264 50,463
------------ ----------- ----------- ----------- ------------ ----------- -----------
Gross
margin...... 101,694 106,396 110,430 110,353 100,981 48,119 47,965
------------ ----------- ----------- ----------- ------------ ----------- -----------
Operating expenses:
Research, development
and engineering.... 19,666 20,191 21,225 25,067 18,928 10,618 10,060
Selling, general and
administrative..... 52,873 51,772 56,382 62,449 48,269 24,230 24,534
Amortization of
goodwill........... 1,232 1,207 1,277 1,068 1,068 534 534
Special charges...... 12,671 731 -- 6,971 10,587 9,687 (190)
Gain on sale of real
estate............. -- -- -- -- (2,829) -- --
------------ ----------- ----------- ----------- ------------ ----------- -----------
Total
operating
expenses.... 86,442 73,901 78,884 95,555 76,023 45,069 34,938
------------ ----------- ----------- ----------- ------------ ----------- -----------
Operating income....... 15,252 32,495 31,546 14,798 24,958 3,050 13,027
Interest expense....... 1,966 497 1,509 1,391 925 497 316
Other income
(expense)............ 75 (149) 18 (178) 13,726 7,757 111
------------ ----------- ----------- ----------- ------------ ----------- -----------
Income before income
taxes.............. 13,361 31,849 30,055 13,229 37,759 10,310 12,822
Income taxes........... 7,208 13,497 12,198 5,873 15,459 4,228 5,129
------------ ----------- ----------- ----------- ------------ ----------- -----------
Net income............. $ 6,153 $ 18,352 $ 17,857 $ 7,356 $ 22,300 $ 6,082 $ 7,693
============ =========== =========== =========== ============ =========== ===========
Basic and diluted
earnings per share... $ 0.08 $ 0.24 $ 0.24 $ 0.10 $ 0.29 $ 0.08 $ 0.10
============ =========== =========== =========== ============ =========== ===========
Shares used in
computing basic and
diluted earnings per
share................ 75,633,333 75,633,333 75,633,333 75,633,333 75,633,333 75,633,333 75,633,333
============ =========== =========== =========== ============ =========== ===========
OTHER OPERATING DATA:
Depreciation and
amortization......... $ 9,806 $ 12,468 $ 14,528 $ 13,160 $ 10,534 $ 5,164 $ 6,111
Capital expenditures,
net.................. 6,077 4,062 5,565 7,394 5,469 2,742 2,663
Cash flows from
operating
activities........... 11,446 29,222 40,221 17,083 13,318 8,292 8,817
Cash flows from
investing
activities........... (10,378) (16,532) (11,195) (19,969) 3,730 (670) (15,763)
Cash flows from
financing
activities........... (8,825) (12,690) (29,026) 4,746 (18,225) (7,721) 7,774
Adjusted EBITDA........ 37,729 45,694 46,074 34,929 43,250 17,901 18,948
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
----------- -------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash........................................ $ -- $ -- $ -- $ 2,461 $ 1,023 $ 2,234
Working capital............................. 7,131 31,893 21,142 33,970 35,315 39,488
Total assets................................ 111,403 118,281 105,452 126,458 132,350 149,255
Total debt (including short-term borrowings,
current portion of long-term debt and debt
due to SPX)............................... 35,117 12,694 16,285 5,322 4,131 6,136
Stockholder's investment.................... 36,921 64,857 49,827 74,453 78,498 92,343
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our historical combined financial statements and the notes to those statements
included elsewhere in this prospectus.
OVERVIEW
We design, manufacture, market and service switching and networking
solutions for storage, data and telecommunications networks. Our products
provide fast and reliable connections among networks of computers and related
devices and are used in large-scale, systems that are critical to the operations
of Fortune 1000 businesses and other large enterprises.
Our 32-year history began in 1968 with the formation of Spectron Corp., an
early provider of data transmission testing equipment. In 1983, Telenex
Corporation acquired Spectron's business. In 1986, General Signal Corp.
purchased Telenex. In 1996, General Signal consolidated several of its
subsidiaries specializing in the communications industry into General Signal
Networks, a wholly owned subsidiary of General Signal. In July 1998, General
Signal Networks was renamed Inrange Technologies Corporation in order to create
a new brand name for the combined businesses. In October 1998, SPX acquired
General Signal, including its Inrange subsidiary.
The historical combined financial statements contained in this prospectus
include our own assets, liabilities, revenue and expenses as well as the assets,
liabilities, revenue and expenses of various other units of SPX, comprising the
storage, data and telecommunications networking business of SPX. All of the
operations, assets and liabilities of these units have been transferred to us.
Following our acquisition by SPX and beginning in the fourth quarter of
1998, we implemented several initiatives to rationalize revenue, streamline
operations and improve profitability. As part of this process, we discontinued
sales of non-strategic, low volume product lines and products that were at the
end of their life cycles. We also closed two manufacturing facilities and
consolidated all of our operations into one manufacturing location, consolidated
duplicative selling and administration functions into one location, and reduced
headcount in non-strategic areas. These actions were substantially completed by
July 1999. In connection with these initiatives, we recorded special charges of
$7.0 million in 1998 and $10.6 million in 1999.
On June 30, 2000, we acquired two European systems integration firms, TCS
and STI. This acquisition will serve to expand our direct sales and customer
service presence in France, Switzerland, Belgium and Luxembourg. On August 4,
2000, we acquired selected assets of Varcom Corporation. Varcom is a provider of
advanced local area network and wide area network monitoring and management
tools. On August 14, 2000, we acquired substantially all of the assets of
Computerm Corporation. Computerm is a provider of storage area network channel
extension products. The aggregate purchase price for these three acquisitions
was $61.4 million, subject to purchase price adjustments. Of this amount, $54.9
million was paid at the closing of the acquisitions and up to $6.5 million is
payable at specified dates if we have not made claims against the sellers by
those dates. We have accounted for all three acquisitions using the purchase
method of accounting.
The following is a discussion of the factors affecting our results of
operations:
Revenue
We derive our revenue from the sale of our storage, data and
telecommunications networking products and from the sale of our services
relating primarily to the maintenance of our products. We generally recognize
product revenue upon shipment. We accrue for warranty costs, sales returns, and
other allowances at the time of shipment. We defer service revenue and recognize
it over the terms of the contracts or when the service has been performed.
22
<PAGE> 26
During 1999, approximately 50% of our revenue was derived from the sale of
storage networking products, approximately 19% from the sale of data networking
products, approximately 14% from the sale of telecommunications products and
approximately 17% from the sale of services. During 1999, sales to customers
outside the United States accounted for approximately 39% of our revenue. We
expect this percentage to increase as we continue to focus our efforts on
international sales. To the extent we generate revenue in currencies other than
the U.S. dollar, our revenue will be affected by currency fluctuations.
Cost of Revenue
Our cost of revenue consists primarily of the costs of materials and
components used in the assembly and manufacture of our products. Other
components of cost of revenue include labor costs for those engaged in the
assembly and maintenance of our products, overhead costs, licensing fees and
amortization of software development costs. Our gross margins fluctuate as a
result of changes in our product mix, competitive pressures, manufacturing
volumes and components cost. In addition, our gross margins may be affected by
increased sales of our Fibre Channel products through indirect sales channels
because these channels, particularly the original equipment manufacturer
channel, typically have lower gross margins than the direct sales channel.
Historically, we have sold our products primarily through the direct sales
channel.
Research, Development and Engineering Expenses
Research, development and engineering expenses consist primarily of
salaries and related personnel expenses and prototype expenses related to the
design, development, testing and enhancement of our products. Research and
development costs are charged to expense as incurred until technological
feasibility of a product is established. After technological feasibility is
established, additional software development costs are capitalized until the
product is available for general release. The capitalized costs are amortized
over the lesser of three years or the economic life of the related products and
the amortization is included in cost of revenue. Although research, development
and engineering expenses decreased during 1999 and through the first quarter of
2000 as a result of our restructuring initiatives, we expect these expenses to
increase in the future as we continue to develop new products and product lines
and enhance existing products. We believe that continued investment in research
and development is important to attaining our strategic objectives.
Selling, General and Administrative Expenses
Selling expenses consist primarily of salaries, commissions and related
personnel expenses for those engaged in the sales, marketing and support of our
products. We intend to pursue sales and marketing campaigns aggressively.
Therefore, we expect selling expenses to increase in the future. However, we
expect selling expenses as a percentage of revenue to decrease as we increase
our use of indirect sales channels, which involve lower selling expenses than
direct selling channels. General and administrative expenses consist primarily
of salaries and related personnel expenses for executive, accounting,
information technology and administrative personnel, professional fees and other
general corporate expenses. As we add personnel and incur additional costs
related to the growth of our business and our becoming a public company, we
expect our general and administrative expenses to increase.
23
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
operating data as a percentage of revenue:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- --------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin....................................... 50.4% 48.9% 50.3% 47.0% 48.7%
Research, development and engineering.............. 9.7% 11.1% 9.4% 10.4% 10.2%
Selling, general and administrative................ 25.7% 27.7% 24.1% 23.7% 24.9%
Operating income................................... 14.4% 6.6% 12.4% 3.0% 13.2%
Net income......................................... 8.2% 3.3% 11.1% 5.9% 7.8%
</TABLE>
Comparison of six months ended June 30, 1999 and 2000
Revenue. Revenue for the six months ended June 30, 2000 was $98.4 million,
a decrease of $4.0 million or 3.9% from $102.4 million for the six months ended
June 30, 1999. Foreign currency fluctuations accounted for $2.0 million of the
revenue decline. We believe that the remainder of the decrease resulted from the
slowdown in purchases from major accounts in the first quarter of 2000 following
their accelerated purchases during the first half of 1999 in preparation for the
year 2000 transition. We do not expect future sales to be affected by the year
2000 transition.
Sales of our storage networking products increased by $5.7 million,
primarily as a result of $3.7 million in revenue from our FC/9000, which we
introduced in April 2000. This was offset by lower sales of our data networking
products, which decreased $6.2 million, and of our telecommunications monitoring
products, which decreased $1.7 million. The reduction in sales of the
telecommunications monitoring products resulted from reduced sales to a single
customer. We do not expect sales to this customer to decrease from their current
level.
We believe that the decrease in sales of our data networking product line
is a result of a maturing market. Our strategy for this product line is to
reposition its core technology into the area of physical network management with
our newly announced Universal Touchpoint Architecture that we began shipping in
the first quarter of 2000, to expand the applications of, and market for, this
product.
Cost of Revenue. Our cost of revenue for the six months ended June 30,
2000 was $50.5 million, a decrease of $3.8 million, or 7.0%, from $54.3 million
for the six months ended June 30, 1999. As a percentage of revenue, cost of
revenue decreased to 51.3% for the six months ended June 30, 2000 from 53.0% for
the six months ended June 30, 1999. This represented an increase in gross margin
to 48.7% for the six months ended June 30, 2000 from 47.0% for the six months
ended June 30, 1999. The decrease in cost of revenue was related primarily to a
reduction in manufacturing overhead as a result of the consolidation of
manufacturing plants and reduced manufacturing headcount.
Research, Development and Engineering. Research, development and
engineering expenses for the six months ended June 30, 2000 were $10.1 million,
a decrease of $0.6 million, from $10.6 million for the six months ended June 30,
1999. As a percentage of revenue, research, development and engineering expenses
was 10.2% for the six months ended June 30, 2000 as compared to 10.4% for the
six months ended June 30, 1999. The decrease was a result of our 1999
restructuring initiatives which included consolidating certain engineering
overhead functions into one location and canceling non-strategic engineering
programs in order to focus new product development in selected key growth areas.
Including capitalized software, research development and engineering spending
was $13.0 million for the six months ended June 30, 2000, or 13.2%, of revenue,
compared to $13.5 million, or 13.2% of revenue, for the six months ended June
30, 1999. We anticipate that total research, development and engineering
expenses will increase in the second half of 2000 compared to the same period in
1999.
24
<PAGE> 28
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended June 30, 2000 were $24.5 million, an increase
of $0.3 million, from $24.2 million for the six months ended June 30, 1999. As a
percentage of revenue, selling, general and administrative expenses were 24.9%
for the six months ended June 30, 2000, compared to 23.7% for the six months
ended June 30, 1999. The increase resulted from the hiring of additional
personnel to support the expected sales levels for the FC/9000, from spending
related to our e-commerce initiatives and from hiring additional key management
personnel.
Amortization of Goodwill. Amortization of goodwill for the six-month
periods ended June 30, 2000 and 1999 was $0.5 million.
Special Charges. Special charges for the six months ended June 30, 2000
were ($0.2) million, compared to $9.7 million for the six months ended June 30,
1999. The charges in 1999 were to cover the cost of restructuring initiatives.
These actions included consolidation of all general and administrative functions
into one location and reductions in sales, marketing and engineering headcount
in selected non-strategic product areas. We recorded charges of $5.8 million for
cash severance, $1.8 million for field sales and service office closures and
$2.1 million for product line discontinuance.
We have revised our estimates of the remaining costs expected to be
incurred in our restructuring, resulting in special charges of ($0.2) million in
the six months ended June 30, 2000. As of June 30, 2000, we maintained $1.3
million of restructuring charges and disposition related accruals. These
accruals include $0.4 million from the December 1998 charge for facility holding
costs which we expect to use by May 2002, and $0.9 million for the remaining
lease obligations of our existing manufacturing facility, which will be used
through February 2002.
Interest Expense. Interest expense for the six months ended June 30, 2000
was $0.3 million, compared to $0.5 million for the six months ended June 30,
1999.
Other Income (Expense). Other income for the six months ended June 30,
2000 was $0.1 million, compared to $7.8 million for the six months ended June
30, 1999. This change resulted primarily from a gain on the sale of an
investment in the six months ended June 30, 1999.
Income Taxes. Our effective tax rate for the six months ended June 30,
2000 was 40%, compared to 41% for the six months ended June 30, 1999.
Comparison of Years Ended December 31, 1999 and 1998
Revenue. Revenue for 1999 was $200.6 million, a decrease of $25.0 million,
or 11.1%, from $225.7 million for 1998. The revenue decline was primarily
attributable to lower sales of certain telecommunications products to a single
account. For 1999, the revenue from the sale of these telecommunications
products was $17.9 million, compared to $38.8 million for 1998. This decrease
was offset by an increase in revenue from our wave division multiplexing and
channel extension products, which are used in virtual storage networks, of $9.6
million in 1999. In addition, the discontinuance of non-strategic product lines
resulted in a decrease in revenue of $7.4 million. We believe that the balance
of the revenue decline was a result of the impact of year 2000 transition which
resulted in reduced product purchases during the second half of 1999.
Cost of Revenue. Our cost of revenue for 1999 was $99.6 million, a
decrease of $15.7 million, or 13.6%, from $115.3 million in 1998. As a
percentage of revenue, cost of revenue decreased to 49.7% for 1999 from 51.1%
for 1998. This represented an increase in gross margin to 50.3% for 1999 from
48.9% in 1998. This increase was attributable primarily to reduced labor and
overhead associated with the plant consolidation. This was offset by lower
revenue from higher margin telecommunications products.
Research, Development and Engineering. As a result of our restructuring
initiatives, which included ceasing research and development on products that we
were discontinuing, our research, development and engineering expense decreased
to $18.9 million for 1999 from $25.1 million for 1998. Including capitalized
25
<PAGE> 29
software, research, development and engineering spending was $24.0 million in
1999 or 12.0% of revenue versus $30.1 million or 13.3% of revenue in 1998.
Selling, General and Administrative. Selling, general and administrative
expenses for 1999 were $48.3 million, down $14.2 million, or 22.7%, from $62.4
million in 1998. As a percentage of revenue, selling, general and administrative
expenses were 24.1% for 1999, compared to 27.7% for 1998. The decrease resulted
from restructuring initiatives taken in 1999 and reflects the consolidation of
duplicate selling and administrative functions into one location and the
reduction of sales and marketing efforts associated with the cancellation of
non-strategic product lines.
Amortization of Goodwill. Amortization of goodwill was $1.1 million in
1999 and 1998.
Special Charges. We incurred special charges of $10.6 million in 1999,
compared to $7.0 million in 1998. The $10.6 million was comprised primarily of
$5.8 million for cash severance payments to approximately 215 hourly and
salaried employees, $1.8 million for field sales and service office closings and
$2.1 million for product line discontinuance. The $7.0 million for 1998
consisted of $4.6 million for cash severance payments to approximately 200
hourly and salaried employees, $0.5 million for closing costs of two facilities
and $1.9 million for product line discontinuance.
Gain on Sale of Real Estate. During 1999, we sold one of our facilities
for $6.4 million and recognized a gain on sale of real estate of $2.8 million.
We did not sell any real estate in 1998.
Interest Expense. Interest expense in 1999 was $0.9 million, down $0.5
million or 33.5% from $1.4 million in 1998. This decrease was primarily
attributable to repayment of $7.5 million of Industrial Revenue Bonds in 1998.
Other Income (Expense). During 1999 other income was $13.7 million,
compared to an expense of $0.2 million for 1998. This increase was attributable
to the $13.9 million gain we recognized on the sale of an investment.
Income Taxes. Our effective tax rate was 41% in 1999, compared to 44% in
1998. The effective tax rate in 1999 decreased from 1998 as the impact of
non-deductible goodwill and state and local taxes decreased due to the
significant increase in pretax income in 1999 from 1998.
Comparison of Years Ended December 31, 1998 and 1997
Revenue. Revenue in 1998 was $225.7 million, an increase of $6.7 million,
or 3.1%, from $219.0 million in 1997. The increase was attributable primarily to
higher sales of our newly introduced ESCON storage director and the wave
division multiplexing product. These increases were partially offset by a
decline in sales of certain telecommunications products.
Cost of Revenue. Our cost of revenue for 1998 was $115.3 million, an
increase of $6.8 million, or 6.2%, from $108.5 million in 1997. As a percentage
of revenue, cost of revenue increased to 51.1% for 1998 from 49.6% in 1997. This
represented a decrease in gross margin to 48.9% in 1998 from 50.4% in 1997. This
decrease resulted from a decrease in sales of higher margin telecommunications
products and additional service costs associated with our ESCON storage
director.
Research, Development and Engineering. Research, development and
engineering expenses for 1998 were $25.1 million, an increase of $3.8 million,
or 18.1%, from $21.2 million in 1997. As a percentage of revenue, research,
development and engineering expenses were 11.1% in 1998, compared to 9.7% in
1997. This increase reflects expenses related to the development and testing of
new products across all three networking product lines. Including capitalized
software, research, development and engineering spending was $30.1 million in
1998, or 13.3% of revenue, compared to $25.2 million or 11.5% of revenue in
1997.
Selling, General and Administrative. Selling, general and administrative
expenses for 1998 were $62.4 million, an increase of $6.1 million, or 10.8%,
from $56.4 million in 1997. As a percentage of revenue, selling, general and
administrative expenses were 27.7% in 1998, compared to 25.7% in 1997. This
increase was a result of our expansion of sales, technical support and marketing
organizations, both
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domestically and internationally, in order to support introductions of our wave
division multiplexing products and to expand the market for our ESCON storage
director. In addition, this increase resulted from the hiring of senior
management personnel in contemplation of our spin-off from General Signal in
1998. As a result of SPX's acquisition of General Signal, this spin-off was
canceled.
Amortization of Goodwill. Amortization of goodwill was $1.1 million in
1998, compared to $1.3 million in 1997.
Special Charges. As part of our restructuring initiatives in 1998, we
incurred special charges of $7.0 million. The $7.0 million was comprised of $4.6
million for cash severance payments, $0.5 million for closing costs of two
facilities and $1.9 million for product line discontinuance. We did not incur
any special charges in 1997.
Interest Expense. Interest expense was $1.4 million in 1998, compared to
$1.5 million in 1997.
Income Taxes. Our effective tax rate was 44.4% in 1998, compared to 40.6%
in 1997. The effective tax rate increased in 1998 from 1997 primarily due to the
impact of non-deductible goodwill on a lower amount of pretax income in 1998
versus 1997, along with higher state and local taxes.
QUARTERLY FINANCIAL INFORMATION
The following table presents our unaudited quarterly statement of
operations data for 1998, 1999 and the first and second quarter of 2000. This
information has been derived from our unaudited financial statements. In the
opinion of management, this unaudited information has been prepared on the same
basis as the annual financial statements and includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for a full
fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1998 1999 1999 1999 1999 2000 2000
-------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA (IN
THOUSANDS)
Revenue.................... $58,542 $59,968 $53,002 $49,158 $53,225 $50,221 $48,018 $46,153 $52,275
Cost of revenue............ 28,839 30,041 30,035 26,926 27,338 21,879 23,498 23,353 27,110
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin............. 29,703 29,927 22,967 22,232 25,887 28,342 24,520 22,800 25,165
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research, development and
engineering............ 6,294 6,515 6,521 6,452 4,166 3,818 4,492 4,963 5,097
Selling, general and
administrative......... 15,262 15,003 16,930 13,207 11,023 10,606 13,433 12,137 12,397
Amortization of
goodwill............... 267 267 267 267 267 267 267 267 267
Special charges.......... -- -- 6,971 9,687 -- -- 900 -- (190)
Gain on sale of real
estate................. -- -- -- -- -- (2,829) -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses......... 21,823 21,785 30,689 29,613 15,456 11,862 19,092 17,367 17,571
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss).... 7,880 8,142 (7,722) (7,381) 10,431 16,480 5,428 5,433 7,594
Interest expense........... 298 437 364 254 243 213 215 177 139
Other income (expense)..... -- 134 (312) (181) 7,938 6,156 (187) 94 17
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 7,582 7,839 (8,398) (7,816) 18,126 22,423 5,026 5,350 7,472
Income taxes............... 3,366 3,481 (3,729) (3,197) 7,425 9,177 2,054 2,140 2,989
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)........... $ 4,216 $ 4,358 $(4,669) $(4,619) $10,701 $13,246 $ 2,972 $ 3,210 $ 4,483
======= ======= ======= ======= ======= ======= ======= ======= =======
COMBINED STATEMENT OF
OPERATIONS DATA
(PERCENTAGE OF REVENUE):
Revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin............... 50.7 49.9 43.3 45.2 48.6 56.4 51.1 49.4 48.1
Research, development and
engineering.............. 10.8 10.9 12.3 13.1 7.8 7.6 9.4 10.8 9.8
Selling, general and
administrative........... 26.1 25.0 31.9 26.9 20.7 21.1 28.0 26.3 23.7
Net income (loss).......... 7.2 7.3 (8.8) (9.4) 20.1 26.4 6.2 7.0 8.6
</TABLE>
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Because we sell high-end products with relatively high costs for each
product, our financial results for each quarter may be materially affected by
the timing of particular orders, and we anticipate that our largest customers in
one period may not be our largest customers in future periods. Other factors
that may cause our results of operations to vary significantly from quarter to
quarter include:
- the timing and market acceptance of product introductions or enhancements
by us or our competitors;
- the size, timing, terms and fluctuations of customer orders;
- customer order deferrals in anticipation of new products;
- technological changes in the networking industry;
- competitive pricing pressures;
- seasonal fluctuations in customer buying patterns;
- changes in our operating expenses;
- personnel changes;
- policies by our suppliers;
- regulatory changes;
- capital spending;
- one-time gains or losses;
- delays of payments by customers; and
- general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $8.8 million for the six months
ended June 30, 2000, $13.3 million for 1999, $17.1 million for 1998 and $40.2
million for 1997. During these periods, cash flow from operations was
principally generated from net income and increases in accounts payable and
deferred revenue, offset by increases in accounts receivable and inventories.
For the six months ended June 30, 2000, operating cash flow was impacted by an
increase in receivables and inventories. In 1999, operating cash flow was offset
by the payment of special charges associated with our restructuring initiatives.
In 1997, operating cash flow benefited from a large amount of year-end 1996
product shipments that were collected in 1997 and was offset by a reduction in
accrued expenses.
From time to time, we have supplemented our operating cash flows with
capital contributions from SPX, borrowings under foreign lines of credit and
capital leases. For the six months ended June 30, 2000, net cash generated by
financing activities was $7.8 million, primarily consisting of net cash inflows
from our parent partially offset by the repayment of debt. Cash flow used in
financing activities was $18.2 million in 1999, primarily consisting of net
payments to our parent of $17.0 million. Cash flow generated by financing
activities in 1998 was $4.7 million, consisting of net cash inflows from our
parent of $15.7 million, partially offset by the repayment of debt of $11.0
million. Cash flow used in financing activities in 1997 was $29.0 million,
primarily consisting of net cash payments to our parent of $32.6 million. We
have borrowed funds for the working capital and business expansion needs of our
foreign operations from local financial institutions. As of June 30, 2000, our
credit facilities consisted of $5.2 million in lines of credit in the United
Kingdom, Germany and Italy that were guaranteed by SPX. As of June 30, 2000,
approximately $1.7 million was outstanding under these facilities. The weighted
average interest rate on
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borrowings under the foreign lines of credit was 5.93% for the six months ended
June 30, 2000 and 6.14% for 1999. These borrowings are reflected on our balance
sheets as short-term borrowings.
We lease our primary manufacturing and office facilities under long-term
non-cancelable operating leases. We also have operating leases for some of our
manufacturing equipment. Our rent expense was approximately $1.5 million for the
six months ended June 30, 2000, $3.1 million for 1999, $3.0 million for 1998 and
$2.7 million for 1997. As of June 30, 2000, total future minimum rental payments
were approximately $21.0 million.
Cash flow used for investing activities was $15.8 million for the six
months ended June 30, 2000, $20.0 million for 1998 and $11.2 million for 1997.
Of the $15.8 million used for the six months ended June 30, 2000, $3.0 million
represented an equity investment in a private company and $4.4 million was used
in connection with the TCS and STI acquisition. Cash flows generated by
investing activities was $3.7 million for 1999. Investing expenditures included
payments for technology licenses and pre-paid royalties, capitalized expenses
associated with software development, investments in demonstration equipment and
investments in manufacturing equipment, all of which were required to support
the expansion of our business. In 1999, investment expenses were offset by $6.4
million in proceeds from the sale of real estate and $14.7 million from the sale
of an investment.
For 2000, we estimate that capital expenditures will total approximately
$8.0 million, of which $2.7 million was spent in the first six months of 2000.
In 1999, we spent $5.5 million on capital expenditures.
We intend to use a portion of the net proceeds of this offering to repay
amounts that we borrowed from SPX to pay for our recent acquisitions and the
remaining amounts for general corporate purposes. Pending their use, we intend
to invest $15 million, including our cash on hand before this offering, in
investment grade securities and lend any remaining amounts to SPX. We also
intend, as part of our cash management system, to lend, on a daily basis, our
cash and cash equivalents in excess of $15 million to SPX. We will lend these
amounts to SPX under a loan agreement that will allow us to demand repayment of
outstanding amounts at any time. However, even after SPX repays us the amount
due under the loan agreement, as part of our cash management system we will
continue to be obligated to lend, on a daily basis, all of our cash and cash
equivalents in excess of $15 million to SPX until the termination of the loan
agreement. The loan agreement will terminate when SPX owns less than 50% of our
outstanding shares of Class A common stock and Class B common stock or if there
is an event of default under SPX's credit agreement. Amounts loaned under the
loan agreement will be unsecured. Loans made prior to October 1, 2000, will
accrue interest quarterly at a rate of 8 1/2% and, for loans made on or after
October 1, 2000, will accrue interest quarterly at the weighted average rate of
interest paid by SPX for revolving loans under its credit agreement for the
prior quarter. SPX's ability to repay the amounts that we lend will be subject
to SPX's financial condition and liquidity, including its ability to borrow
under its credit agreement or otherwise.
We believe that the net proceeds from this offering, together with our
current cash balances, foreign credit facilities and cash provided by future
operations, will be sufficient to meet our working capital, capital expenditure
and research and development requirements for the foreseeable future. However,
if we require additional funds to support our working capital requirements or
for other purposes, we may seek to raise such additional funds through
borrowings from SPX, public or private equity financings or from other sources.
Our ability to issue equity may be limited by SPX's desire to preserve its
ability in the future to effect a tax-free spin-off and by limitations under
SPX's credit agreement. In addition, our ability to borrow money may be limited
by restrictions under SPX's credit agreement. Additional financing may not be
available, or, if it is available, it may be dilutive or may not be obtainable
on terms acceptable to us.
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RECENT ACCOUNTING PRONOUNCEMENTS
In 1999, the Securities and Exchange Commission's staff issued SAB No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
revenue recognition and has been consistently applied by us as reflected in our
combined financial position, combined results and liquidity.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will become effective January 2001, establishes accounting
and reporting standards for derivative instruments and hedging contracts. It
also requires all derivatives to be recognized as either assets or liabilities
in the balance sheet at fair value and changes in fair value to be recognized in
operating results. Our management is currently analyzing the impact of this
statement, but does not anticipate that the effect on our results of operations
and financial position will be material.
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<PAGE> 34
BUSINESS
OVERVIEW
We design, manufacture, market and service switching and networking
products for storage, data and telecommunications networks. Our products provide
fast and reliable connections among networks of computers and related devices.
We serve Fortune 1000 businesses and other large enterprises that operate
large-scale systems where reliability and continuous availability are critical.
This is highlighted by the FC/9000, which is the flagship of our IN-VSN product
family. We believe that our FC/9000, with 64 ports, is the largest storage
network switch available that operates under the Fibre Channel communication
standard. The FC/9000 provides a platform from which enterprises can build
storage networks that can be used in systems where reliability and continuous
availability are critical. Our products are designed to be compatible with
various vendors' products and multiple communication standards and protocols. We
have installed our products at over 2,000 sites in over 90 countries. We
distribute and support our products through a combination of our direct sales
and service operations and indirect channels.
MARKET OPPORTUNITY
Over the last decade, the volume of information that is transmitted,
captured, processed and stored over storage, data and telecommunications
networks has increased as a result of a number of factors, including:
- the emergence of the Internet and the growth of e-commerce;
- the increased use of data-intensive applications such as enterprise
resource planning, data warehousing and data mining;
- the decreasing cost of on-line data storage;
- the growth of wireless communication; and
- the availability of lower cost, higher bandwidth communications.
As enterprises have become more dependent on storage, data and
telecommunications networks, the demands on the networks have intensified, with
enterprises requiring constantly available communication, immediate access to
information and fast, complex data processing. Today, many enterprises operate
their networks 24 hours a day, 7 days a week, with limited time for maintenance
and upgrades. Given the cost to a business from the disruption caused by the
failure of a network that is critical to a business' operations, enterprises are
committing substantial financial resources and personnel to reduce network
failures. The cost and complexity associated with maintaining networks are
significantly increased as networks become larger and by the fact that most
enterprises manage three separate networks: a storage network, a data network
and a telecommunications network. Many enterprises are seeking ways to reduce
the costs of, and improve the efficiency and manageability of, their networks.
We believe that the trend towards increasing the efficiency and manageability of
these networks will eventually result in their convergence into a single
network.
Storage Networks
According to International Data Corporation, the amount of information that
enterprises are capturing and storing has approximately doubled annually over
the past several years and is projected to increase at a compound annual growth
rate of 82% through 2003. As a result, enterprises are faced with unprecedented
challenges for managing this information and transmitting it at increasingly
fast speeds. Storage networks have developed to help meet these needs by more
easily and efficiently permitting several computers to share access to
information storage devices.
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Storage networks may be separated into two categories:
- networks within a single location or small area, which are referred to as
storage area networks; and
- networks that extend across multiple locations or a wider area that
combine multiple storage area networks, which are referred to as virtual
storage networks.
The emerging industry standard protocol for storage networks is called
Fibre Channel. Fibre Channel is a standard for transmitting large amounts of
information at speeds in excess of one billion bits, or one gigabit, per second.
Fibre Channel was developed in 1988 and since then has been increasingly
endorsed by the storage industry because it can connect to different platforms
and operates with greater functionality and speed than many other protocols.
Many enterprises have not yet converted their storage networks to Fibre
Channel protocol because the large amounts of the information they store on
storage systems connected to mainframe computers are not currently compatible
with Fibre Channel. In fact, according to a report issued in November 1999 by
International Data Corporation, approximately 70% of the information stored by
enterprises resides on mainframe systems. As a result of the benefits of the
Fibre Channel protocol, we believe that the conversion of these storage networks
to Fibre Channel will drive growth of high-end Fibre Channel switches, referred
to as directors. As compared to other switches, directors are more scalable and
are capable of simultaneously connecting a large number of ports without
interfering with one another. Furthermore, directors are highly reliable, with
no single point of failure. We believe that there is a need in the market for
Fibre Channel directors that demonstrate the reliability, availability and
scalability to manage storage applications that are critical to a business'
operations and that have previously been performed within a mainframe
environment.
In a report issued in April 2000, International Data Corporation estimated
that the Fibre Channel market for storage area network hubs and switches will
increase from $236 million in 1999 to $2.8 billion by 2003, a compound annual
growth rate of 85%. International Data Corporation also projected that the
market for director-class switches will be the fastest growing segment of the
Fibre Channel market, increasing from $52 million in 1999 to $1.4 billion by
2003, representing a compound annual growth rate of 129%. Furthermore,
information from an International Data Corporation report indicates that
director-class switches will maintain a 300% -- 500% price premium over the next
lower segment of Fibre Channel switches for the foreseeable future. We believe
that this price premium is a result of the enhanced scalability, functionality
and reliability of director-class switches.
As the amount of information that is being stored and transmitted
increases, it is becoming more important for enterprises to create virtual
storage networks so that the stored information can be accessed by users spread
over large distances. Channel extenders and optical networking platforms are
components of virtual storage networks. Channel extenders increase the distances
over which information in a storage network can travel. Optical networking
platforms reduce the costs of sending information over long distances by
combining up to 32 channels of information onto a single fiber. International
Data Corporation estimates that the market for all mainframe and client server
storage area network components will grow from approximately $3.4 billion in
1999 to approximately $13.8 billion by 2003, representing a compound annual
growth rate of 42%.
Data Networks
The increasing amount of information being processed, combined with user
demands for enhanced computing performance, have led to the creation of data
networks. A data network consists of computers connected to each other for the
purpose of sharing information and applications. Switches, known as matrix
switches, allow the computers in a data network to communicate. Two common types
of data networks are:
- local area networks, which are networks of computers that are located in
a small area; and
- wide area networks, which are networks of computers that are dispersed
geographically.
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As the demands for speed and reliability of local area networks and wide
area networks have increased, these networks have become more complex. Complex
networks require better management tools to maintain and raise their performance
and to increase their reliability. Network managers use many tools to test and
efficiently manage networks. The deployment and use of these tools is still
largely a manual task, requiring highly paid personnel to be present at
geographically dispersed network sites in order to attach, configure and run
these tools. We believe that enterprises are looking for products that will
permit centralized network management, thereby reducing the amount of time which
their personnel must devote to maintaining their networks. The market for
enterprise data network management products is large and stable. International
Data Corporation estimates that in 2000, the market for these products will be
$1.8 billion, essentially unchanged from 1999.
Telecommunications Networks
Over the past decade there has been tremendous growth in the use of
telecommunications networks. This growth, as well as increased access to capital
and significant global deregulation, has led to intensified competition and the
emergence of many new telecommunications carriers. Greater competition and new
technology have reduced prices for basic telecommunications service and resulted
in carriers seeking to differentiate themselves and generate profits through
advanced, value-added services. These services include caller ID, call
forwarding and sophisticated monitoring and billing systems.
The introduction of additional value-added services, the transition from
analog to digital traffic, and the increase in telecommunications network
traffic have all increased the complexity of telecommunications networks. All of
these factors increase the need for better network management and diagnostic
systems that can reliably test and monitor telecommunications networks without
impacting their performance. International Data Corporation estimates that the
market for telecommunications network management products will grow from
approximately $1.8 billion in 1999 to $3.1 billion in 2003, representing a
compound annual growth rate of 15%.
Network Challenges
The fundamental challenge facing network administrators of all three
network types is the same: networks must be increasingly more reliable,
accessible and scalable. Networking costs are increasing and qualified
information technology personnel are becoming more scarce and costly. As a
result, an efficient network management solution is needed. In addition, as
networks begin to converge and network complexity increases, there is a need for
vendors that can provide products and expertise that bridge these disparate
networks.
OUR SOLUTIONS
We provide high-end networking products and related services for storage,
data and telecommunications networks. We design our products to provide
reliability, accessibility and scalability to address the challenges facing
network managers. We believe that we have differentiated ourselves from our
competitors through our technological expertise and by offering networking
products and related services that are compatible with both emerging industry
standards and proprietary legacy technologies. The following are the products
and services that we provide for the three networks:
- Storage Networks. Our IN-VSN family of directors, switches, channel
extenders and optical networking products are critical to storage
networks because they direct, or facilitate the transport of, data
between storage devices, computers and other networks. We focus on
applications where reliability and continuous availability are essential.
Our products are compatible with popular storage network communication
standards, including ESCON and Fibre Channel.
- Data Networks. Our Universal Touchpoint family consists of switches,
control systems and management applications used in data networks. These
products provide real-time test, access and monitoring functions that are
critical to maintaining a data network's high level of service. Our
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products and related services are tailored to very large data networks as
evidenced by our 24,000-port Mega-Matrix switch, the industry's largest
switch.
- Telecommunications Networks. We offer our 7-View family of products for
monitoring telecommunications networks. Our 7-View surveillance system
monitors telecommunications networks in order to permit the network
operators to provide functions such as call tracing, fraud detection and
billing verification and enhances carriers' ability to operate advanced
billing, sales and marketing programs, fraud prevention and call routing.
OUR COMPETITIVE STRENGTHS
We believe that the following attributes of our products and our company
position us to take advantage of market opportunities:
Experience with High-End Storage, Data and Telecommunications Networks
Our focus on providing high-end, large-scale, fault-tolerant products for
storage, data and telecommunications networks allows us to apply our expertise
across networks and architectures. This enables us to design our products to be
compatible with various vendors' products and multiple communication standards
and protocols. For example, we used our experience with the ESCON protocol to
employ a technology in our IN-VSN Fibre Channel products that allows both Fibre
Channel and ESCON storage network protocols to be switched and managed by a
single director.
Leadership in High-End Fibre Channel Products
We are a leading provider of director-class switches that operate under the
Fibre Channel communication standard. In April 2000, we began shipping the
industry's first Fibre Channel director-class switch with 64 ports, the IN-VSN
FC/9000. The FC/9000 and identical units we produce for original equipment
manufacturers are the largest Fibre Channel switches currently available. The
FC/9000 provides a platform from which enterprises can establish storage
networks that have the scalability, flexibility and reliability to manage
applications that are critical to a business' operations.
Extensive Installed Customer Base
We have installed our products at over 2,000 sites in over 90 countries,
primarily in Fortune 1000 businesses and other large enterprises. Our long
relationships and close collaboration with our customers provide us with direct
insight into their changing requirements and enable us to remain abreast of
market developments.
Research and Development Expertise
Our research and development program is focused on the development of new
and enhanced systems and products that can accommodate emerging information
transmission protocols while continuing to accommodate legacy technologies. As
of June 30, 2000, we employed 160 personnel in our research and development
department. We believe that this investment has led to our development of
hardware and software that positions us to capitalize on emerging technologies
and standards, such as Fibre Channel, FICON and Infiniband, while continuing to
accommodate legacy technologies, such as ESCON.
Significant Direct Sales Resources
As of June 30, 2000, we employed 165 personnel in our sales and systems
engineering department. Our large direct sales force maintains close
relationships with our customers and provides comprehensive pre- and post-sales
support.
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Service and Support Capabilities
As of June 30, 2000, we employed 163 personnel in our customer service and
support department. Our service organization provides our customers with
resources that help them address often complex and challenging technical issues.
We provide assistance in network design, site surveys, preventive maintenance,
repair and training. In 1999, 93% of our expiring service contracts were
renewed.
Established International Presence
We currently have 111 internationally based sales and service
professionals. In conjunction with our indirect sales channels, our
internationally based sales and service professionals generated sales to
international customers that represented approximately 39% of our total revenue
during 1999. Our international presence allows us to meet the broad geographic
needs of our customers. We use our direct sales channel, alliances and an
established network of distributors and resellers to provide sales and support
in over 90 countries worldwide.
OUR STRATEGY
We intend to capitalize on our competitive strengths by pursuing the
following strategies:
Leverage Our Intellectual Capital Across Storage, Data and Voice Networks
We seek to leverage our intellectual capital and intellectual property
across the storage, data and telecommunications networks. In the short term,
this allows us to share common competencies in scalable, complex systems across
these networks. We believe that, over the long-term, the three networks will
converge, and that we will be well-positioned to identify, establish and
capitalize on current and emerging technologies, such as optical networking,
internet protocol, gigabit ethernet and asynchronous transfer mode by applying
them across the three networks.
Cross-sell to Existing Customer Base
We believe that there are significant opportunities for selling additional
products and providing additional services to our existing customer base. For
example, we believe that our large ESCON customer base has a significant need
for Fibre Channel storage networks. We believe that this presents an attractive
targeted customer base for our FC/9000. In addition, these customers are also
creating virtual storage networks to implement more effective disaster recovery
and business continuance procedures. We believe that this presents an attractive
targeted customer base for our channel extender and optical networking products.
In addition, customers are also faced with managing data networks of increasing
scale and complexity, and we intend to target this base of customers with our
Universal Touchpoint offerings.
Expand Our Consulting Business
To expand and improve upon our maintenance and support service business, we
are making significant investments in expanding our consulting business. We
provide value-added consulting services to enable turnkey deployments of our
products. These consulting services include storage area network assessment and
design and disaster recovery planning and implementation. We believe that there
is a significant opportunity for us to grow and expand our consulting business
as a result of the scarcity of skilled information technology personnel and the
high cost of maintaining internal information technology departments.
Drive Enhanced Features and Functions Through Software
We consistently allocate a majority of our research and development budget
to software development. By introducing features and functions through new
versions of software, we reduce our time-to-market for new products and for
enhancements of current products. Software applications also enhance the
functions of our products, which, we believe, distinguish them from those of our
competitors.
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Expand Alliances and Indirect Channels of Distribution and Pursue Strategic
Acquisitions
We pursue a multi-tiered strategy to leverage our market presence and
resources with the activities of other industry leaders. In addition, we
actively participate in standard-setting organizations to remain at the
forefront of industry developments and emerging technologies. These alliances
help us design our products and management systems to function seamlessly with
key offerings from other industry leaders. For example, our storage networking
products are compatible with storage products produced by leaders such as EMC,
Hitachi, and IBM, and our storage management control systems operate with major
software platforms from vendors such as Tivoli and Veritas. To extend the reach
of our sales channels, we intend to continue to recruit resellers worldwide. We
are investing in an original equipment manufacturer sales channel in order to
increase sales of our products to high-volume sellers of networking solutions
where we believe we bring value to their core offerings. We believe that we will
enter into one or more agreements with original equipment manufacturers shortly.
In addition, we may pursue strategic acquisitions to add economies of scale and
technical expertise, to reduce time to market and increase our access to target
markets.
OUR PRODUCTS AND TECHNOLOGY
Our products are designed to address the explosive growth of the volume of
information that is captured, processed, stored and manipulated over storage,
data and telecommunications networks, and to enhance the management capabilities
of these networks as they become increasingly essential to business success. We
offer our customers product families in each of the key network environments to
provide comprehensive solutions to assist them in managing their networks. Our
key product families are:
- IN-VSN family of directors, switches, channel extenders and optical
networking products for storage networks;
- Universal Touchpoint family of matrix switches, control systems and
management applications used for management of data networks; and
- 7-View family of equipment for monitoring telecommunications networks.
Storage Networking Products
Our IN-VSN family of products provides a platform from which our clients
can build large and scalable storage networks. Storage networks that use our
IN-VSN products and related services are able to transmit information among
various manufacturers' products and can be managed from a central location. This
allows users of our IN-VSN products to increase the size of their networks as
their needs grow. Key aspects of our IN-VSN products are high reliability,
availability, and scalability with the design to operate across Fibre Channel,
FICON and ESCON technologies. Our IN-VSN director and switch products facilitate
large, storage networking for both the mainframe and client/server markets for
applications that are critical to a business' operations. Our channel extension
and wave division multiplexing products facilitate the transport of data over
extended distances.
Our FC/9000 Fibre Channel director, which we began shipping in April 2000,
expands storage area networks into applications that are critical to a business'
operations. Key features of the FC/9000 are:
- 64-port capability, currently the largest switch available;
- full duplex, 1 gigabit/second throughput;
- low switching delay available at less than 3.0 millionths of a second;
- redundancy of all critical systems to guarantee uptime for applications
which are critical or essential to a business' operations;
- modular design, which allows easy and flexible reconfiguration into a
larger switch;
- a graphical user interface control system to allow for easy configuration
and management; and
- a technology roadmap to increase the number of ports to 128 and
eventually to 256.
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<PAGE> 40
The CD/9000 director is our switching solution for mainframe systems and is
based on the established ESCON network protocol. Our CD/9000 permits customers
to scale their mainframe-based ESCON storage networks and transition them to
enable communication with emerging FICON and Fibre Channel standards. As a
result, customers can leverage their investments in their legacy network and
access and manage large amounts of information. We believe that our CD/9000 is
particularly well-positioned to address these trends and has significant
advantages over our competitors' ESCON directors, including:
- the largest connection capability available at 256 ports;
- the only ESCON director with the adaptability to switch Fibre Channel
networks;
- features that expand connectivity and increase utilization of fiber optic
port bandwidth; and
- a graphical user interface control system for easy configuration and
management.
Our 9801 Storage Networking System channel extender facilitates the
creation of virtual storage networks by extending the distances over which
information can travel. By geographically separating storage operations,
enterprises can execute such functions as offsite storage backup and recovery,
disaster situation business continuance, and cooperative business-to-business
information processing.
In March 2000, we entered into a multi-year strategic alliance with
Sorrento Networks, a leading provider of optical networking systems. We will
offer Sorrento's wave division multiplexing and dense wave division multiplexing
products, including Gigamux, as part of our IN-VSN family of storage networking
products. We have set revenue goals totaling $125 million over the first five
years of the contract and, if we do not achieve certain percentages of the
targeted revenue goals, Sorrento will have the right to terminate the agreement.
In addition, we have agreed to not sell products that compete with products that
are the subject of this alliance in designated markets. In return, Sorrento has
granted us exclusive worldwide rights to offer these products in the enterprise
storage networking market. This alliance will continue until March 9, 2005, and
will renew for additional two-year terms unless terminated by either party.
These products facilitate the creation of virtual storage networks by reducing
the costs of sending information over long distances. Wave division multiplexing
accomplishes this by combining up to 32 channels of information onto a single
fiber. In an environment where customers lease fiber-optic links between sites,
these offerings reduce the costs of transmitting information over large
distances.
During 1999, sales of our storage networking products represented
approximately 50% of total sales.
The following table provides information on our IN-VSN family of storage
networking products.
<TABLE>
<CAPTION>
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
FC/9000 FIBRE CHANNEL DIRECTOR
Fibre Channel storage area Storage area network - 64 ports
network switching and applications, including - 1 gigabit/sec per port
management server, data warehousing and - Scalable into a fabric of
tape backup multiple switches
CD/9000 ESCON DIRECTOR
ESCON switching Networking between mainframe - 256 ports
class computers and storage - Redundancy and fault
devices over fiber links tolerance
- Graphical user interface
GIGAMUX OPTICAL NETWORKING
PLATFORM
Wave Division Multiplexing Linking storage devices over - 32:1 multiplexing capability
solutions long distances - 4:1 ESCON multiplexing
9801 STORAGE NETWORKING SYSTEM
Channel extension High speed dual path extension - T1, T3, OC3 capability
- Dual path remote mirroring
applications
</TABLE>
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<PAGE> 41
Data Networking Products
Our data network products are management tools for large data networks. Our
matrix switches provide network managers with the real-time ability to switch
information streams between different computer processors and between different
network hubs, based on availability and performance. Our Universal Touchpoint
matrix switching platform provides network managers with the ability to
centrally monitor, diagnose, and manage their data networks, thereby reducing
the number of network technicians and amounts of test equipment that are
required to maintain data networks.
Our MD/9000 message director facilitates connectivity between legacy
mainframe and client/server systems. The MD/9000 demonstrates the benefit of our
expertise across multiple network environments, as some of the key technical
aspects of the MD/9000 are based on intellectual capital gained from our
experience in storage networking. The MD/9000 is in its early stages of
commercial availability.
During 1999, sales of our data networking products represented
approximately 19% of total sales.
The following table provides information on our data networking products.
<TABLE>
<CAPTION>
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
UNIVERSAL TOUCHPOINT 2700/2800
Versatile matrix switch; Datacenter communications - Scalable local area
physical network management management for disaster network/wide area network
platform recovery and test access; switch
central site management of - Up to 4,000 wide area
distributed data networks network ports and 3,000 10Mbps
Ethernet ports or 2000
megabyte per second Token
Ring ports
- Remote control from multiple
stations
MEGA-MATRIX SWITCH
High capacity matrix switch Disaster recovery - Scalable switch of up to
24,000 ports
MD/9000 MESSAGE DIRECTOR
Enterprise Application Allows legacy data and - Mainframe connects through a
Integration software applications to be accessed by standard input/output
various systems, including interface, while the network
client/server connects through a
middleware messaging
interface
- Permits legacy communication
without re-writing legacy
applications
</TABLE>
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<PAGE> 42
Telecommunications Networking Products
Our 7-View family of products permits both large and small
telecommunications carriers to enhance network availability and performance by
accessing the Signaling System Seven monitoring system, which captures and
provides information about telecommunications traffic. As a result, our 7-View
products enable carriers to provide telecommunications business applications
such as fraud detection, call tracing and billing verification.
During 1999, sales of our telecommunications networking products
represented approximately 14% of total sales.
The following table provides information on our telecommunications
networking products.
<TABLE>
<CAPTION>
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
----------------------------- ----------------------------- -----------------------------
<S> <C> <C>
7-VIEW SURVEILLANCE SYSTEM
Monitoring of telephone Early warning of network - Remote monitoring of 32
signaling systems outages. Call tracing and ports per unit and 10,000
fraud detection. Billing links per system
verification. - Local storage of recorded
data
NETWORK CHANNEL OFFICE
EQUIPMENT (NCOE)
Network probe for network In line performance - Format conversion
quality assurance monitoring for quality of - Alarm monitoring
service measurement - Measurement of error free
seconds
- Local data memory
NETWORK MANAGEMENT
System for network quality Bridged performance - Alarm monitoring
assurance monitoring for quality of - Performance monitoring
service measurement - T1/E1; T3/E3; OC3/SDH
</TABLE>
CONSULTING SERVICES AND PRODUCT SUPPORT
Our global services and support organization of approximately 189 customer
service and support personnel and systems engineers provide a variety of network
consulting services and product maintenance and technology support. Given the
rapid evolution of communication and networking technologies and the increasing
cost our customers face to develop adequate internal networking expertise, we
believe that there will be increasing demand for these services. We believe that
our expertise in advanced technologies across the three major networks, combined
with our installed, high-end customer base, positions us to effectively compete
for consulting services business. In connection with sales of our products we
offer:
- storage area network assessment, design and development services;
- datacenter audit and fiber infrastructure services; and
- disaster recovery and business continuance assessment, planning and
implementation.
Our product support business is comprised of our support staff in
conjunction with a network of international distributors that provide
supplemental product support in select international markets. Purchasers of our
equipment typically enter into service contracts with us and often use our
service organization in the assessment, planning, implementation, and
maintenance of their enterprise networking systems. In 1999, we achieved a
renewal rate of approximately 93% on our expiring service contracts.
During 1999, sales of consulting services and product support represented
approximately 17% of total sales.
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<PAGE> 43
RESEARCH AND DEVELOPMENT
In order to maintain and increase our position in the markets in which we
compete, we place considerable emphasis on research and development to expand
the capabilities of our existing products and to develop new products and
product lines. Because we are focused on large-scale products that are critical
to a business' operations, we believe that our future success will depend upon
our ability to maintain our technological expertise and to introduce, on a
timely basis, enhancements to our existing products and new commercially viable
products that will continue to address the needs of our customers. Although, as
a result of our restructuring initiatives, our research and development expense
decreased in 1999 and through the first quarter of 2000, we expect research and
development expenses to increase in the future.
During 1999, our total gross research and development expenditures were
$24.0 million, of which $18.9 million were charged to expense and $5.1 million
were capitalized. Our research and development program is focused on the
development of new and enhanced systems and products that can accommodate
emerging data transmission protocols while continuing to accommodate current and
legacy technologies.
RELATIONSHIP WITH ANCOR
Technology License Agreement. We are party to a technology license
agreement under which Ancor Communications, Inc. has licensed to us the right to
use technology that Ancor developed, including Applications Specific Integrated
Circuits, or ASICs, for use in our FC/9000. Under the agreement, Ancor has
agreed that it will not license the ASICs to any party for use in a product that
competes with our FC/9000 in the high-end mainframe environment as long as we
maintain the market share specified in the agreement. The agreement began on
September 24, 1998 and will continue until September 24, 2003. The agreement
will automatically renew thereafter for successive one-year terms unless
terminated by either party. The ASICs are currently produced on Ancor's behalf
by a third-party manufacturer, LSI Logic. After the agreement terminates, we
have the right, for an indefinite period of time, to purchase the ASICs from
Ancor. If Ancor is not manufacturing ASICs, Ancor will authorize a third party
manufacturer to supply the ASICs to us. In addition, Ancor will be bound by the
restriction on licensing to others discussed above until the later of the second
anniversary of the termination of the agreement or September 24, 2005.
Under the terms of the contract, we and Ancor have agreed to treat Ancor's
next-generation ASIC as an ASIC governed by the terms of the contract, provided
that we pay Ancor $4 million and we and Ancor reach agreement as to the
royalties that would be payable for both the current ASIC and the next-
generation ASIC. We intend to use the next-generation ASIC in our future
products.
Reseller Agreement. We are party to a Reseller Agreement with Ancor under
which we appointed Ancor as a non-exclusive reseller of the FC/9000 to original
equipment manufacturers who must sell the product under their own label. Under
the agreement, Ancor is an independent reseller and can sell the product at
prices and on terms it determines. We do not have to pay a royalty fee to Ancor
under the Technology License Agreement for sales made by Ancor under the
Reseller Agreement. The agreement was entered into on October 29, 1999 and will
remain in effect for an initial three-year term. The agreement will renew after
the initial term for additional one-year terms upon the mutual agreement of the
parties.
Original Equipment Manufacturer Agreement. We are party to an original
equipment manufacturer agreement with Ancor. In the agreement, Ancor appointed
us as a non-exclusive, worldwide reseller for certain Ancor products, including
its 8 and 16 port Fibre Channel switches. Under this agreement we have agreed to
purchase and license hardware equipment and software from Ancor at prices and
license fees negotiated between us and Ancor, with the understanding that
pricing for our purchases will be on a most favored customer basis. All software
is licensed to us by Ancor for our internal development and support purposes,
and through us to our end user customers. We have been granted the right by
Ancor to sublicense the software to our customers for use with the hardware
equipment purchased from us. This agreement was entered into on December 21,
1998 and will continue until December 21, 2003. The agreement will automatically
renew for additional one-year terms unless terminated by either party.
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<PAGE> 44
In August 2000 Ancor was acquired by QLogic Corp.
CUSTOMERS
We have installed our products at over 2,000 sites in over 90 countries,
including many of the largest public and private users of information
technology. We have a global diversified customer base, consisting primarily of
corporate enterprises such as telecommunications carriers, airlines, banks and
original equipment manufacturers. We believe that there are significant
opportunities for selling additional products and providing additional services
to our existing customer base. Our top 20 customers, based on revenue during the
six months ended June 30, 2000, are:
<TABLE>
<S> <C> <C> <C>
ADP Electronic Data Systems Info AG Sumitomo
Amdahl EMC Pacific Nevada Termial Co.
AT&T Ford Motors Sprint U.S. Department of
Defense
Colt Telecom Hitachi STI Systems VIAG Telecom
Comdisco IBM Storage Technology Wells Fargo
</TABLE>
During the six months ended June 30, 2000, our top 20 customers accounted
for 45% of our revenue. AT&T, Hitachi, IBM, Sprint, Storage Technology, Sumitomo
and the U.S. Department of Defense each accounted for between 2.0% and 7.6% of
total revenues and the other customers listed above each accounted for between
1.0% and 2.0% of total revenues.
INTELLECTUAL PROPERTY
We believe that our success and ability to compete depend in part upon our
ability to develop and protect the proprietary technology contained in our
products. To protect our proprietary rights, we rely on a combination of
patents, trademarks, copyrights, contractual rights, trade secrets, know-how and
understanding of the market. For example, proprietary information disclosed by
us in the course of our discussions with suppliers, distributors and customers
is generally protected by non-disclosure agreements.
As of June 30, 2000, we owned 18 U.S. patents, had nine additional pending
patent applications with the U.S. Patent and Trademark Office, and were in the
process of preparing six patent applications.
We have also been granted registration protection for a number of
trademarks such as Mega-Matrix and CD/9000 and have filed additional
applications for our newer product names such as Universal Touchpoint, FC/9000
and MD/9000.
MANUFACTURING AND OPERATIONS
In 1999, we consolidated our manufacturing facilities from three locations
to our ISO 9001 certified Mt. Laurel, New Jersey facility. We assemble printed
circuit boards and complete the assembly of most of our products at this
facility. Because most of our products are high cost, low volume, we believe
that it is more efficient for us to assemble them ourselves rather than have a
third party manufacture them. However, we have alternate sources of
manufacturing to meet capacity constraints. We carry out full system testing
prior to shipping products to customers.
We obtain materials for our manufacturing from suppliers and
subcontractors, with an emphasis on quality, availability and cost. For most
components, we have alternate sources of supply, although these products could
become difficult to obtain in the future, based on market conditions for those
items or technology changes. We have only a single source for the ASICs that are
used in our FC/9000 directors, and this reliance on a single source for these
devices could limit our flexibility and responsiveness to change with respect to
that product.
We have selected Sanmina Corporation, one of the largest third-party
providers of customized integrated electronic manufacturing services, to
manufacture the FC/9000 for us. In order to rapidly achieve volume production of
the FC/9000, we must coordinate our efforts with our suppliers and
41
<PAGE> 45
Sanmina Corporation. While we will use Sanmina for final product assembly, we
maintain key component expertise internally. We design and develop the key
components of the FC/9000, including software, as well as certain details in the
fabrication and enclosure of our products. In addition, we determine the
components that are incorporated in our products and select the appropriate
suppliers of the components.
SALES AND MARKETING
We bring our products to market via a multi-tiered approach, which includes
a global direct sales force, a global distribution network and sales to original
equipment manufacturers.
- Direct Sales. The majority of our current business is generated by our
direct sales organization, which has offices in the United States,
Canada, the United Kingdom, Germany and Italy. As of June 30, 2000, we
employed 165 personnel in our sales and systems engineering department.
- Distribution Sales. We manage a worldwide network of distributors,
resellers and alliance partners. This network allows us to
cost-effectively expand the reach of our sales and service channels.
- Original Equipment Manufacturers Sales. We have recently established a
team of employees dedicated to enhancing existing relationships with
original equipment manufacturers and expanding the number of
relationships we have with original equipment manufacturers. We have
agreements with a small number of original equipment manufacturers and
are currently in negotiations with a number of other original equipment
manufacturers, which we believe will result in one or more agreements
shortly. Although our sales through the original equipment manufacturer
channel have not been significant to date, we believe that these sales
could become a significant portion of our sales within the next six to
eighteen months. However, we are not certain that we will enter into any
additional agreements or that we will generate significant sales through
the original equipment manufacturer channel.
We believe that selling our products through three channels allows us to
expand our sales by reaching customers we would not be able to reach with a
single sales channel. In addition, having multiple sales channels reduces the
adverse effect that weakness in any single sales channel may have on our
financial condition.
Our marketing strategy is to establish brand and product recognition and
maintain our reputation as a provider of technologically advanced, quality
products and related services for our customers needs. Our marketing efforts are
directed principally at developing brand awareness and include a number of
programs, including the following:
- participating in industry trade shows, technical conferences and
technology seminars;
- web site marketing;
- education and training;
- publishing technical and educational articles in industry journals;
- advertising; and
- distributing newsletters and other educational materials to our
customers.
COMPETITION
The markets in which we sell our products are highly competitive. We
believe that these markets will continue to be competitive and will be
continually evolving and subject to rapid technological change. We believe that
the principal competitive factors in each of the markets in which we compete
are:
- product performance, reliability, scalability and features;
- industry relationships;
- timeliness of product introductions;
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<PAGE> 46
- customer service and support;
- adoption of emerging industry standards;
- price;
- brand name; and
- size and scope of distribution network.
We believe that we compare favorably with our competitors with respect to
many of these competitive factors.
In the storage networking products market, we compete against a number of
larger server and storage providers in each of the market segments in which we
are active. Our principal competitor for ESCON storage switches is IBM. Our
principal competitor for channel extension products is CNT. Our principal
competitors for wave division multiplexing products are IBM/Nortel, Pandatel,
Finisar, and ONI. While the Fibre Channel switching market has yet to develop
fully, we believe that the market for our products will be highly competitive,
continually evolving and subject to rapid technological change. In the Fibre
Channel storage area network switch market, we compete against Brocade
Communications, IBM, and McData. We also face competition from manufacturers of
Fibre Channel hubs, including Gadzoox Networks and Vixel Corporation. As the
market for storage area network products grows, we may face competition from
traditional networking companies and other manufacturers of networking equipment
who may enter the storage area network market with their own switching products.
The data networking market is highly competitive and subject to continual
technological change. Our principal competitor for our matrix switches is
Cornet. We also face competition from major systems integrators and other
established and emerging companies.
The market for telecommunications network management equipment is
relatively new, but is highly competitive and is subject to rapid technological
change, evolving industry standards and regulatory developments. We compete with
a number of U.S. and international suppliers that vary in size and in the scope
and breadth of the products and services they offer. Our principal competitors
in this sector are Hewlett Packard, Inet, and Tekelec. The market for test,
access, and measurement products is similarly highly competitive. In this
sector, we compete with companies such as Hekimian, Applied Digital Access and
Dynatech. As the market for these products grows, we may face competition from
emerging telecommunications networking providers.
EMPLOYEES
As of June 30, 2000, we had 751 employees, including contract employees.
Our employees are not represented by any labor unions. We have experienced no
work stoppages and believe that our relationship with our employees is good.
Competition for qualified personnel in the storage, data and
telecommunications industries is intense. We have established a number of
programs in order to help us attract highly skilled employees. We have an active
college relations program with several universities for developing and
attracting talented technical personnel. We have three research and product
development centers which allow us to attract talent from different geographical
areas.
As part of our effort to retain our employees, all newly hired employees
undergo initial training to learn our business methods and understand our
baseline concepts and expectations regarding quality. We believe this training
is crucial to creating a unified culture throughout our organization. We provide
all employees with continual updates on the newest technologies and also
encourage employees to participate in training classes provided by software
partners and internally.
Our success in attracting and retaining highly skilled employees is
evidenced by the fact that the engineers in our research and development
department, on average, have been with us for more than seven years and over
one-fourth of them hold masters or higher degrees.
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<PAGE> 47
FACILITIES
Our corporate offices are currently located in Mt. Laurel, New Jersey,
where we lease 62,000 square feet of office space to accommodate our
headquarters, marketing and New Jersey-based research and development staffs. We
lease an additional 66,000 square feet of manufacturing space in the same
corporate park. We have entered into a ten-year lease for a 162,000 square foot
office, research and development and manufacturing facility to be built in
Lumberton, New Jersey. We have an option to expand this facility to up to
200,000 square feet. Completion of the Lumberton facility is scheduled for the
first quarter 2001, with initial occupancy expected in December 2000. The lease
continues through January 31, 2011. We believe that the Lumberton facility will
provide sufficient space for us for the foreseeable future. Our lease covering
55,000 square feet of our 62,000 square foot office space will expire thirty
days following substantial completion of the Lumberton facility. The lease
covering the remaining 7,000 square feet of our 62,000 square foot office space
will expire at the end of December 2000. The lease for our 66,000 square foot
manufacturing facility will continue through January 31, 2002.
We own a 94,000 square foot building in Shelton, Connecticut, of which we
use approximately 28,000 square feet for a research and development department,
a sales and service center and a product verification laboratory. We are
offering this building for sale, and after a sale, if it occurs, we expect to
lease 28,000 square feet for engineering and sales and service staff.
We lease approximately 3,300 square feet of office space in Westford,
Massachusetts for research and development efforts associated with some of our
telecommunications products.
We lease an aggregate of 6,120 square feet of office space in Fairfax,
Virginia for general office and training purposes to support our data networking
and telecommunications networking. We assumed this lease in our acquisition of
Varcom.
We own a 28,800 square foot building and lease 4,000 square feet in an
adjacent building in Pittsburgh, Pennsylvania. We use this space for
manufacturing, marketing and support of our channel extension products. We also
lease 3,108 square feet of warehouse space in Pittsburgh, Pennsylvania for
offsite warehouse storage purposes. We acquired the building and assumed the
leases in our acquisition of Computerm.
We lease office space for our sales centers. These leases typically provide
for an initial lease term with a number of successive renewal options. This
arrangement gives us the flexibility to pursue extension or relocation
opportunities that arise from changing market conditions. We believe that, as
current leases expire, we will be able to obtain either renewals at present
locations or leases for equivalent locations in the same area.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings that we believe will
materially impact our financial condition or results of operations.
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<PAGE> 48
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY MANAGEMENT
The following table sets forth information regarding our executive
officers, directors and key management. Ages are as of August 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
John B. Blystone.......................... 47 Chairman of the Board
Gregory R. Grodhaus....................... 52 President; Chief Executive Officer and Director
Charles A. Foley.......................... 38 Executive Vice President and Chief Technology
Officer
Anthony J. Fusarelli...................... 53 Executive Vice President-Sales
Jay Zager................................. 50 Executive Vice President and Chief Financial
Officer
Robert B. Foreman......................... 43 Director
Christopher J. Kearney.................... 45 Director
Lewis M. Kling............................ 55 Director
Patrick J. O'Leary........................ 43 Director
David L. Chapman.......................... 65 Director(1)
Bruce J. Ryan............................. 57 Director(1)
David B. Wright........................... 51 Director(1)
OTHER KEY MANAGEMENT
Ronald J. Bulin........................... 58 Vice President-Service
Donna M. Jack............................. 42 Director-Human Resources
Kenneth H. Koch........................... 45 Vice President, General Counsel and Secretary
J. Geoffrey Lapres........................ 43 Vice President-Finance
Eugene Levine............................. 58 Vice President-Business Management
Michael C. Sutter......................... 38 Vice President-Operations
Frederick E. Weber........................ 55 Vice President-Engineering
</TABLE>
---------------
(1) David L. Chapman, Bruce J. Ryan and David B. Wright will join our board of
directors effective upon the completion of this offering.
John B. Blystone. Mr. Blystone has been a member of our board of directors
since June 2000. He has been Chairman, President and Chief Executive Officer of
SPX Corporation since 1995. From September 1994 through November 1995, he served
as President and Chief Executive Officer of Nuovo Pignone, an 80% owned
subsidiary of General Electric Company. From November 1991 through August 1994
he served as Vice President, General Manager, GE Superabrasives of General
Electric Company.
Gregory R. Grodhaus. Mr. Grodhaus has been a member of our board of
directors since June 2000. Mr. Grodhaus has been our President and Chief
Executive Officer since August 1999. From September 1995 through March 1999, he
was Senior Vice President of Amdahl Corporation, a subsidiary of Fujitsu
Limited, a provider of Internet based information technology solutions. From
March 1993 through September 1995, he served as President and Chief Executive
Officer of IPL Systems, Inc., a manufacturer and distributor of
open-architecture storage systems.
Charles A. Foley. Mr. Foley has been our Executive Vice President and
Chief Technical Officer since February 2000. From April 1999 through February
2000, he was a partner of Catalysts Associates, a consulting firm. From November
1995 through March 1999 he was Vice President Systems Marketing of
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<PAGE> 49
Amdahl Corporation. From June 1993 through October 1995, he was Vice President
Worldwide Sales of IPL Systems.
Anthony J. Fusarelli. Mr. Fusarelli has been our Executive Vice President
of Sales since January 1999. He has served in various senior management
positions of increasing responsibility with us since 1983.
Jay Zager. Mr. Zager has been our Executive Vice President and Chief
Financial Officer since May 2000. From 1985 through 1998, Mr. Zager held several
senior management positions with Digital Equipment Corporation, including Vice
President and Chief Financial Officer, Worldwide Engineering and Research, and
Vice President, Business Development. From 1998 through 1999, Mr. Zager served
as a vice president in the Enterprise Solutions Group of Compaq Computer
Corporation.
Robert B. Foreman. Mr. Foreman has been a member of our board of directors
since June 2000. He has been Vice President, Human Resources of SPX Corporation
since May 1999. From 1991 through April 1999, he served as Vice President, Human
Resources at PepsiCo International, based in Asia-Pacific, where he worked for
both the Pepsi and the Frito-Lay International businesses.
Christopher J. Kearney. Mr. Kearney has been a member of our board of
directors since October 1998. He has been Vice President, Secretary and General
Counsel of SPX Corporation since February 1997. From April 1995 through January
1997, he served as Senior Vice President and General Counsel of Grimes Aerospace
Company. From September 1988 through April 1995, he was Senior Counsel at GE
Plastics business group of General Electric Company.
Lewis M. Kling. Mr. Kling has been a member of our board of directors
since June 2000. Since December 1998, Mr. Kling has been President,
Communications and Technology Systems, of SPX Corporation. From June 1997
through October 1998, he served as President, Dielectric Communications, a
subsidiary of General Signal Corp. From December 1994 to June 1997, he served as
Senior Vice President and General Manager of the Commercial Avionic Systems
business of Allied Signal Corporation.
Patrick J. O'Leary. Mr. O'Leary has been a member of our board of
directors since October 1998. He has been Vice President, Finance, Treasurer,
and Chief Financial Officer of SPX Corporation since September 1996. From 1994
through September 1996, he served as Chief Financial Officer and director at
Carlisle Plastics, Inc. From 1982 through 1994, he served at various managerial
capacities at Deloitte & Touche LLP, becoming a Partner in 1988.
David L. Chapman. Mr. Chapman will become a member of our board of
directors effective upon the completion of this offering. He has been Chief
Executive Officer of Northpoint Software Ventures, a developer of software tools
to perform risk and value assessments of information technology projects, since
1992. Prior to that time, he was a general partner in Landmark Venture Partners.
Bruce J. Ryan. Mr. Ryan will become a member of our board of directors
effective upon the completion of this offering. He has been Executive Vice
President and Chief Financial Officer of Global Knowledge Network, Inc., a
provider of information technology and computer software training programs and
certifications, since 1998. From 1994 to 1998, he was Executive Vice President
and Chief Financial Officer of Amdahl Corporation.
David B. Wright. Mr. Wright will become a member of our board of directors
effective upon the completion of this offering. He has been President and Chief
Executive Officer of Amdahl Corporation since 1997. From 1995 to 1997, he was
the Executive Vice President of the Amdahl Systems Group, and before 1995 served
in various other senior executive positions at Amdahl Corporation.
BOARD OF DIRECTORS
Our board of directors currently consists of six directors. Effective upon
the completion of this offering, we will increase the size of our board of
directors to include David L. Chapman, Bruce J. Ryan and David B. Wright.
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<PAGE> 50
Our certificate of incorporation divides our board of directors into three
classes: Class I, whose terms will expire at the annual meeting of stockholders
to be held in 2001, Class II, whose terms will expire at the annual meeting of
stockholders to be held in 2002, and Class III, whose terms will expire at the
annual meeting of stockholders to be held in 2003. Messrs. Foreman, Kearney and
Chapman are, or upon their appointment will be, in Class I. Messrs. Kling,
O'Leary and Ryan are, or upon their appointment will be, in Class II. Messrs.
Blystone, Grodhaus and Wright are, or upon their appointment will be, in Class
III. At each annual meeting of stockholders beginning in 2001, the successors to
directors whose terms will then expire will be elected to serve from the time of
election and qualification until the third annual meeting following election.
In addition, our certificate of incorporation provides that the authorized
number of directors may be changed only by resolution of the board of directors.
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Effective upon the completion of this offering we will establish an audit
committee and a compensation committee. The audit committee will recommend the
annual appointment of our auditors with whom the audit committee reviews the
scope of audit and non-audit assignments and related fees, accounting principles
we use in financial reporting, internal auditing procedures and the adequacy of
our internal control procedures. Bruce J. Ryan will be the chairman of the audit
committee and David L. Chapman and David B. Wright will be the other members of
the committee. The compensation committee will review and approve the
compensation and benefits for our key executive officers, administer our
employee benefit plans and make recommendations to the board of directors
regarding grants of stock options and other incentive compensation arrangements.
David L. Chapman will be the chairman of the compensation committee and Robert
B. Foreman and David B. Wright will be the other members of the committee.
COMPENSATION OF DIRECTORS
Directors who are also our employees or employees of SPX will receive no
additional compensation for their services as directors. Directors who are not
our employees or employees of SPX will receive an annual retainer of $14,000 and
will be granted, on an annual basis, an option to purchase 13,000 shares of our
Class B common stock. The per share exercise price of an option may not be less
than the fair market value of our Class B common stock on the date the option is
granted. The compensation committee may specify any period of time following the
date of grant during which options are exercisable, so long as the exercise
period is not more than ten years. We also expect that directors who are not our
employees will be reimbursed for travel expenses and other out-of-pocket costs
incurred in connection with attending meetings. In connection with this
offering, our directors who are not our employees or employees of SPX will be
granted an option to purchase 52,000 shares of our Class B common stock, which
represents a one-time grant covering four years of service.
EXECUTIVE OFFICERS
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
EXECUTIVE COMPENSATION
This table summarizes the compensation for our chief executive officer and
our other two most highly compensated executive officers for our most recent
completed fiscal year, which ended on December 31, 1999. This table also
includes the number of stock options to acquire shares of our Class B common
stock that we intend to grant to the named executive officers in connection with
the offering. The table excludes all executive officers whose total annual
salary and bonus for 1999 was $100,000 or less.
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<PAGE> 51
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITIONS YEAR ($) ($) ($) (#) ($)(1)
---------------------------- ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gregory R. Grodhaus(2).... 1999 83,942 86,196 86,339(3) 440,000(4) 24,060
President and Chief 6,000(5)
Executive Officer
Anthony J. Fusarelli...... 1999 294,239(6) -- -- 220,000(4) 15,432
Executive Vice 5,000(5)
President, Sales
Jayne A. Fitzgerald(7).... 1999 179,848 110,331 -- 0 15,540
Former Chief 2,000(5)(8)
Technology Officer
</TABLE>
---------------
(1) The amounts in the column All Other Compensation consist of car allowances
and matching contributions under SPX's defined contribution plan for these
executive officers and Ms. Fitzgerald, as follows:
<TABLE>
<CAPTION>
CAR MATCHING
ALLOWANCE CONTRIBUTIONS
--------- -------------
<S> <C> <C>
Gregory R. Grodhaus......................................... $5,000 $5,697
Anthony J. Fusarelli........................................ $7,200 $8,232
Jayne A. Fitzgerald......................................... $7,200 $8,340
</TABLE>
In addition, the amount for Mr. Grodhaus includes a $13,363 payment for
income taxes attributable to his relocation expenses.
(2) Mr. Grodhaus was hired on August 5, 1999. His annual base salary is
$245,000.
(3) This figure consists of a reimbursement to Mr. Grodhaus for relocation
expenses.
(4) These options are options to acquire shares of our Class B common stock. We
intend to grant these options prior to the completion of the offering.
(5) These options are options to acquire SPX common stock.
(6) This figure includes $117,700 paid to Mr. Fusarelli in commissions for 1999.
(7) Ms. Fitzgerald terminated her employment with us on February 4, 2000.
(8) These options were forfeited when Ms. Fitzgerald terminated employment.
SPX OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS INRANGE
GRANTED EMPLOYEES EXERCISE PRICE EXPIRATION GRANT DATE
NAME (#)(1) IN 1999 ($/SH) DATE PRESENT VALUE ($)(2)
---- ---------- ---------- -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Gregory R. Grodhaus........ 6,000 15.09 86.50 8/1/09 223,117
Anthony J. Fusarelli....... 2,000 5.03 64.875 1/4/09 56,432
3,000 7.55 81.81 8/9/09 106,747
Jayne A. Fitzgerald........ 2,000(3) 5.03 64.875 1/4/09 0
</TABLE>
---------------
(1) SPX granted the options to Mr. Grodhaus as of August 1, 1999, to Mr.
Fusarelli as of January 4 and August 9, 1999, and to Ms. Fitzgerald as of
January 4, 1999. All of the options were granted under SPX's 1992 stock
compensation plan for the named executive officers' services to be performed
for us. The options granted under the plan are non-qualified options with a
ten-year term. The exercise price for options granted under the plan equals
the fair market value of SPX stock on the date the options
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<PAGE> 52
were granted. The options vest as to half of the shares subject to the
option two years after the grant date and as to the remaining shares three
years after the grant date. Upon exercise, the executive officer may
surrender some of the shares of SPX stock received, or may surrender already
owned shares, in order to pay the exercise price and withholding tax
obligations, and receive a reload option for the number of shares
surrendered. A reload option has an exercise price equal to the then current
market value and expires at the same time that the exercised option would
have expired.
(2) The estimated present value of each option on the grant date is calculated
using the Black-Scholes model. The model assumes: (a) six years expected
until exercise of the option; (b) a 5.67% interest rate, which represents
the average interest rate during 1999 on a U.S. Treasury security with a
maturity date corresponding to the expected option term; (c) a 33.5%
expected stock volatility, based on six years of monthly price data; and (d)
a 0% dividend yield. The model does not adjust for vesting requirements,
non-transferability or forfeiture risk.
(3) These options were forfeited when Ms. Fitzgerald terminated employment.
AGGREGATE SPX OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
EXERCISE REALIZED OPTIONS AT 1999 YEAR-END (#) AT 1999 YEAR-END ($)(1)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Gregory R. Grodhaus........ -- -- --/6,000 --/ --
Anthony J. Fusarelli....... -- -- --/5,000 --/31,875
Jayne A. Fitzgerald........ -- -- --/2,000(2) --/31,875
</TABLE>
---------------
(1) The value of unexercised in-the-money options is calculated using the
difference between the option exercise price and $80.8125 (the price of SPX
common stock on December 31, 1999) multiplied by the number of shares
subject to the option. An option is in the money if the market value of the
common stock subject to the option is greater than the exercise price (and
if the market value of the common stock subject to the option is not greater
than the exercise price, the option is out of the money).
(2) These options were forfeited when Ms. Fitzgerald terminated employment.
SPX PENSION PLANS
Each of our named executive officers except Mr. Grodhaus participates in
SPX's cash balance pension plan and will continue to do so following this
offering. Mr. Grodhaus has not yet met the one-year-of-service requirement for
participation in the plan. Under the cash balance plan, SPX provides annual
principal credits under the plan in the amount of 4% of a participant's eligible
compensation up to the Social Security Taxable Wage Base and in the amount of 8%
of eligible compensation over the Social Security Taxable Wage Base. Eligible
compensation includes base salary and bonuses as reflected in the Summary
Compensation Table. In addition, SPX provides annual interest credits at a rate
equal to the interest paid on five-year U.S. Treasury Notes. Any eligible
compensation that the plan cannot take into account because of Internal Revenue
Code limitations for tax-qualified plans is taken into account under a
non-qualified supplemental retirement plan. Participants in these plans vest in
their accounts after five years of continuous service. The account balances of
our named executive officers who participated in these plans on December 31,
1999 were as follows: Mr. Fusarelli, $118,629; and Ms. Fitzgerald, $30,856.
The estimated monthly benefit payable at normal retirement age earned
through 1999 for each of the participating named executive officers, based on
present interest credits and annuity conversion rate, under these plans is as
follows: Mr. Fusarelli, $2,116; and Ms. Fitzgerald, $838. In addition, Mr.
Fusarelli is eligible for a transition benefit payable to certain employees who
formerly participated in the General Signal Corporate Benefits Plan if he should
elect early retirement after age 55. At normal retirement age there is no
transition benefit.
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<PAGE> 53
COMPENSATION AND EMPLOYEE BENEFIT PLANS
In connection with the offering, we will adopt certain employee benefit
plans and arrangements for the purpose of providing compensation and employee
benefits to our executive officers and other employees on and after the
offering. These plans and arrangements, described below, include a stock
compensation plan and an employee stock purchase plan. To the extent necessary
or advisable under applicable law, SPX, as our sole stockholder, will approve
these plans prior to the offering. As a general rule, after the offering, our
employees will continue to participate in SPX's plans and arrangements other
than pre-offering awards under SPX's stock compensation plan and participation
in SPX's employee stock purchase plan and economic value added incentive
compensation program. In addition, we expect that SPX will administer both its
plans and arrangements and our plans and arrangements, and we will reimburse SPX
for the services it provides for our employees and the benefits it provides to
them.
LONG-TERM INCENTIVES
In connection with this offering, we have adopted the Inrange 2000 stock
compensation plan, and SPX, as our sole stockholder has approved the plan. The
following summary describes the basic features of our plan.
Generally
Under the plan, our compensation committee may grant stock-based incentives
to our employees, including employees who are officers and members of our board
of directors, to our directors who are not our employees and to our consultants
and advisors. We may also grant stock-based incentives to employees, directors,
consultants and advisors of SPX and its subsidiaries. Awards under the plan may
be in the form of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock and performance units. The compensation
committee does not currently intend to award stock appreciation rights,
restricted stock or performance units under the plan but may do so in the
future. All awards granted under the plan will be subject to terms and
conditions that the compensation committee will establish and set forth in a
written award agreement.
Shares Available for the Plan
We have reserved 11,530,000 shares of Class B common stock for issuance
under the plan. The number of shares underlying awards made to any one person in
a fiscal year may not exceed 1,000,000 shares. Under SPX's credit agreement,
following the completion of this offering, we cannot grant options to acquire
more than 1,500,000 shares of Class B common stock in any fiscal year. The
number of shares that can be issued and the number of shares subject to
outstanding options may be adjusted in the event of a stock split, stock
dividend, recapitalization or other similar event affecting our Class B common
stock. In that event, the compensation committee may also make other appropriate
adjustments to options, stock appreciation rights, restricted stock and
performance units outstanding under the plan.
Plan Administration
Our compensation committee administers the plan. Subject to the specific
provisions of the plan, the committee determines award eligibility, timing and
the type, amount and terms of the awards. The committee also interprets the
plan, establishes rules and regulations under the plan and makes all other
determinations necessary or advisable for the plan's administration.
Stock Options
Options under the plan may be either incentive stock options, as defined
under the tax laws, or non-qualified stock options. The per share exercise price
of an option may not be less than the fair market value of our Class B common
stock on the date the option is granted. The compensation committee may specify
any period of time following the date of grant during which options are
exercisable, so long as the exercise period is not more than ten years.
Incentive stock options are subject to additional limitations
50
<PAGE> 54
relating to such things as employment status, minimum exercise price, length of
exercise period, maximum value of the stock subject to the options and a
required holding period for stock received upon exercise of the option.
Upon exercise, the option holder may pay the exercise price in several
ways. The option holder can pay:
- in cash;
- by tendering previously owned shares of our Class B common stock with a
fair market value equal to the exercise price;
- by directing us to withhold shares of our Class B common stock with a
fair market value equal to the exercise price;
- by delivering other approved property; or
- by a combination of these methods.
When a holder exercises options, the compensation committee may grant to
him or her replacement options under the plan to purchase additional shares of
our Class B common stock. The number of shares subject to the replacement option
would equal the number of shares delivered by the holder, or withheld by us, in
satisfaction of the exercise price and the tax withholding obligations of the
exercised option. Replacement options are non-qualified options and are subject
to the same terms and conditions as the exercised option, except that the per
share exercise price of the replacement option will equal the fair market value
of our Class B common stock on the grant date of the replacement option.
Stock Appreciation Rights
A stock appreciation right allows its holder to receive payment from us
equal to the amount by which the fair market value of a share of our Class B
common stock exceeds the exercise price of the right on the exercise date. At
the time of grant, we may establish a maximum amount per share payable upon
exercise of a right. Under the plan, the compensation committee can grant stock
appreciation rights in conjunction with the awarding of non-qualified stock
options or on a stand-alone basis. If a right is granted with a non-qualified
stock option award, then the holder can exercise the rights at any time during
the life of the related option, but the exercise will proportionately reduce the
number of the holder's related non-qualified stock options. The holder can
exercise stand-alone stock appreciation rights during a period no longer than
ten years, as determined by the compensation committee. Upon exercise of a
stand-alone right, we will pay the holder in cash.
Restricted Stock
Restricted stock refers to shares of our Class B common stock that are
subject to restrictions on ownership for a certain period of time. During that
time, the holder may not sell or otherwise transfer the shares, but the holder
may vote the shares and is entitled to any dividend or other distribution.
Shares of restricted stock become freely transferable when the restriction
period expires.
Performance Units
The compensation committee may grant performance units in cash units or
share units. Share units are equal in value to one share of our Class B common
stock. The compensation committee sets the terms and conditions of each award,
including the performance goals that its holder must attain and the various
percentages of performance unit value to be paid out upon full or partial
attainment of those goals. The compensation committee also determines the
payment that is due to the holder after the applicable performance period and
whether the payment of the cash units and share units will be made in cash, in
shares of our Class B common stock, or in a combination of cash and stock.
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<PAGE> 55
Options Granted
Upon completion of this offering, a total of 8,501,500 shares of our Class
B common stock will be issuable upon the exercise of options under our 2000
stock compensation plan.
On June 29, 2000, we granted options to purchase 1,331,000 shares of Class
B common stock to the SPX directors and a limited group of SPX employees with
supervisory authority over us. These options have a ten-year term and an
exercise price of $13.00 per share and are fully vested. These include options
to purchase a total of 1,110,000 shares that were granted to five of our
directors and are reflected in the table below.
We intend to grant options to purchase the remaining 7,170,500 shares of
Class B common stock upon completion of this offering to our directors who will
be appointed upon completion of this offering, to our executive officers and to
our other employees. These options will have a ten year term and an exercise
price equal to the initial public offering price. Generally, these options will
become exercisable over a six-year period as follows: 12 1/2% will become
exercisable on the second anniversary of the date of grant, 25% will become
exercisable on each of the third, fourth and fifth anniversaries of the date of
grant and the remaining 12 1/2% will become exercisable on the sixth anniversary
of the date of grant.
The following table sets forth the number of shares of our Class B common
stock subject to options that will be outstanding upon completion of this
offering to the persons set forth below:
<TABLE>
<CAPTION>
NUMBER OF
NAME INRANGE SHARES
---- --------------
<S> <C>
Gregory R. Grodhaus......................................... 440,000
Anthony J. Fusarelli........................................ 220,000
All of our current executive officers, as a group (4
persons).................................................. 1,100,000
All of our current directors who are not executive officers
and our three nominees for director, as a group (8
persons).................................................. 1,266,000
All of our employees other than current executive officers,
as a group (850 persons).................................. 5,914,500
</TABLE>
Because outstanding options may be forfeited upon the occurrence of certain
events, such as termination of employment, and because we intend to award
options on a discretionary basis in the future, we cannot determine the number
of shares that may be purchased under the plan by our executive officers.
Termination of Employment
As a general rule, the effect that termination of a person's employment
will have on the awards held by the person will be set forth in the person's
award agreement. We expect that some terminations, such as terminations upon
death or retirement, or for permanent disability, may result in the accelerated
vesting of options and other awards and the lapse of restrictions on shares of
restricted stock. We also expect that other terminations of employment will
result in the forfeiture of unvested options and other awards and the forfeiture
of shares of restricted stock on which the restrictions have not lapsed.
Transferability
The recipient of an award under the plan generally may not pledge, assign,
sell or otherwise transfer his or her stock options, stock appreciation rights,
restricted stock or performance units other than by will or by the laws of
descent and distribution. The compensation committee, however, may adopt rules
and procedures to allow holders of awards under the plan to transfer options to
immediate family members or to certain trusts or partnerships.
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<PAGE> 56
Plan Amendment and Termination
Generally, our board of directors may terminate, amend or modify the plan
at any time without stockholder approval. Without stockholder approval, however,
the board may not:
- increase the number of shares of our Class B common stock subject to the
plan;
- materially increase the cost of the plan;
- materially increase the benefits to the holders of awards;
- change the provisions of the plan relating to the option price;
- extend the period during which awards may be granted; or
- extend the maximum period during which a holder may exercise his or her
options or stock appreciation rights.
In addition, if any action that the board proposes to take will have a
significant adverse effect on any options outstanding under the plan, then the
affected option holders must consent to the action.
ANNUAL INCENTIVES
In 1999, our employees began to participate in SPX's economic value added
incentive compensation plans for Inrange employees. The economic value added
plans provide for bonuses based on improvements in economic value added.
Economic value added is equal to the net operating profit after tax minus a
charge for all capital employed in our business, including our equity capital.
The charge for capital is equal to our weighted average cost of debt and equity
at our targeted debt-to-equity ratio, times the total capital employed in our
business. In connection with the offering, we have assumed these plans as they
relate to our employees, and SPX, as our sole stockholder, has approved the
plans.
An economic value added plan bonus is based on three key components:
- a target bonus,
- the economic value added improvement in excess of expected economic value
added improvement (called excess EVA improvement, which may be negative),
and
- a bonus bank.
The bonus that may be earned by a participant for any fiscal year is the
sum of the participant's target bonus plus a fixed share of the excess EVA
improvement. Target bonuses are a percentage of salary. Excess EVA improvement
can be positive or negative without limitation.
The bonus earned by each participant will be determined by our compensation
committee following release of our financial statements for the applicable
fiscal year and then credited to each participant's bonus bank, which has an
initial balance of zero. The bonus available to be paid is the participant's
bonus bank balance up to the participant's target bonus, plus one-third of the
bonus bank balance in excess of the target bonus. The participant receives 80%
of that amount without further conditions and the remaining 20% if the
participant attains individual performance goals. None of our executive officers
currently has an amount credited to a bonus bank.
The bonus available to be paid to the participant is charged against the
participant's bonus bank balance to determine the beginning balance for the next
fiscal year. No bonus is paid when the bonus bank balance (following credits for
any economic value added bonus earned during the year) is negative, and negative
bonus bank balances are carried forward to offset future bonuses earned. For our
employees other than executive officers and certain selected personnel, bonuses
are capped at 10% of total year earnings.
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<PAGE> 57
EMPLOYEE STOCK PURCHASE PLAN
In connection with this offering, we will adopt the Inrange employee stock
purchase plan. The following summary describes the basic features of our plan.
Generally
We will adopt our employee stock purchase plan to provide our employees
with a convenient way to invest in our Class B common stock. The plan is not an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code.
Shares Available for the Plan
Upon the adoption of the plan, we will reserve 55,000 shares of Class B
common stock for issuance under the plan. The number of shares that can be
issued under the plan may be adjusted in the event of a stock split, stock
dividend, recapitalization or other similar event affecting our Class B common
stock.
Eligible Employees
All full-time employees who are at or above the age of majority will be
eligible to participate in the plan. As a general rule, participation may
commence with the first payroll period after the eligible employee's date of
hire.
Stock Purchases
The plan will permit participants to authorize periodic payroll deductions
of up to 10% of their compensation. For each dollar a participant contributes
under the plan, we will contribute an additional $0.15. These payroll deductions
and matching contributions are not contributed to a trust and will remain
general corporate assets. We will transmit these payroll deductions and matching
contributions on a monthly basis to a broker we have selected, and the broker
will purchase shares of our Class B common stock for participants' accounts. We
will bear all the brokerage commissions and other investment expenses of these
purchases. Participants may make contributions to the plan other than through
payroll deductions, but we would not match these contributions or bear the
expenses related to these contributions.
Transferability
Participants may sell the shares in their brokerage accounts at any time,
subject to compliance with applicable law and any trading policies we may
establish.
Termination of Employment
Participation in the plan ends upon termination of employment, and
participants who have terminated employment may maintain their brokerage
accounts and may hold or sell their shares in their discretion.
Amendment or Termination of the Plan
We may amend or terminate the plan at any time. We may also reduce or
suspend plan matching contributions at any time.
New Plan Benefits
Because the benefits under the plan will depend on elections to participate
and the fair market value of our Class B common stock or various future dates,
we cannot determine the benefits that our executive officers and other employees
may receive under the plan.
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<PAGE> 58
RETIREMENT BENEFITS
After the offering, we expect that our employees will continue to
participate in SPX's tax-qualified defined benefit and defined contribution
plans, and, if eligible, SPX's non-qualified supplemental retirement plans.
Currently, matching contributions under SPX's defined contribution plan are made
in SPX common stock, and SPX common stock is an investment alternative under
that plan. We expect that our Class B common stock will be substituted for SPX
common stock for these purposes as soon as administratively practicable
following the offering.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Most of our employees are at-will employees. Many of our employees have
signed non-competition and non-solicitation agreements with SPX. These
agreements also prohibit the employee from disclosing any confidential
information relating to SPX's business, including our business, and contain a
provision under which the employee agrees to assign to SPX all inventions
developed during the employee's employment. We expect that SPX will assign us
its rights under these agreements in connection with this offering, unless
prohibited to do so by law, and, to the extent the assignment is prohibited, we
may ask our employees to sign agreements with us containing substantially
similar protections. In addition, we expect that all of our employees whom we
hire in the future will sign non-competition and non-solicitation agreements
with us. We also intend to enter into change-in-control arrangements with some
key employees following the offering. These arrangements will provide for a cash
severance benefit, continued medical benefits and other ancillary payments and
benefits upon qualifying terminations of employment following a
change-in-control.
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<PAGE> 59
RELATIONSHIPS BETWEEN OUR COMPANY AND SPX
SPX IS OUR CONTROLLING STOCKHOLDER
We are currently an indirect wholly owned subsidiary of SPX. After the
completion of this offering of Class B common stock, SPX will beneficially own
about 90.8% of the outstanding shares of our common stock, or about 89.5% if the
underwriters exercise their over-allotment option in full. SPX will beneficially
own 100% of the outstanding Class A common stock, which will represent 98.0% of
the combined voting power of all classes of our voting stock, or 97.7% of the
combined voting power of all classes of our voting stock if the underwriters
exercise their over-allotment option in full. Until SPX beneficially holds less
than 50% of the combined voting power of our stock, SPX will be able to control
the vote on all matters submitted to our stockholders, including the election of
directors and the approval of extraordinary corporate transactions, such as
mergers.
SPX has not made any decision regarding whether or for how long it will
retain its stock ownership in our company. At present, SPX has no plan or
intention to dispose of its shares of our Class A common stock. If SPX decides
to divest itself of its entire stockholdings in our company, SPX may do so by
distributing all of its shares of our Class A common stock to the holders of
SPX's common stock, a process we refer to as a distribution. A distribution
could be accomplished through one of the following:
- Split-Off -- an exchange offer by SPX in which holders of its common
stock would be offered the opportunity to tender some or all of their SPX
shares in exchange for shares of our Class A common stock; or
- Spin-Off -- a distribution by SPX of its shares of our Class A common
stock to holders of its common stock based on the number of SPX shares
held by each holder.
SPX is free to dispose of all or some of its shares of our Class A common
stock through means other than a distribution. SPX has the sole discretion to
determine the timing, structure and all terms of any divestiture of its
stockholdings in our company. SPX has also advised us that it would not complete
a divestiture if its board of directors determines that a divestiture is not in
the best interests of SPX and its stockholders. SPX has further advised us that
it currently expects that the principal factors that it would consider in making
this determination, as well as the principal factors that it would consider in
making the determination as to the timing, structure and terms of a divestiture,
would be:
- the business prospects for us and SPX;
- the business reasons for a divestiture;
- the market price of our Class B common stock;
- the market price of SPX's common stock;
- SPX being satisfied that a divestiture by means of a distribution would
be tax-free to SPX and its stockholders and as to the other tax
consequences of the transactions; and
- the availability of other strategic alternatives.
Under current law, SPX will not be able to effect a distribution to its
stockholders on a tax-free basis before October 2003, which is five years from
the date SPX acquired General Signal.
ARRANGEMENTS WITH SPX
We have entered into various agreements with SPX that relate to our ongoing
relationship with SPX following completion of the offering. These agreements
include:
- a loan agreement;
- a management services agreement;
- a tax sharing agreement;
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<PAGE> 60
- a registration rights agreement;
- an employee matters agreement; and
- a trademark license agreement.
All of the foregoing agreements will become effective upon completion of
this offering. Because these agreements were entered into at a time when we are
an indirect wholly owned subsidiary of SPX, they are not the result of
arm's-length negotiations between the parties. These agreements were made in the
context of an affiliated relationship and negotiated in the overall context of
this offering. The prices and other terms of these agreements may be less
favorable to us than those we could obtain in arm's-length negotiations with
unaffiliated third parties for similar services. Because we did not negotiate
with a third party for any of the services provided for under our agreements
with SPX, however, it is difficult to determine whether the terms of those
agreements are more favorable or less favorable to us than those we could obtain
in arm's-length negotiations with an unaffiliated third party.
Forms of the agreements summarized below have been filed as exhibits to the
registration statement of which this prospectus forms a part. See "Where You Can
Find More Information."
Loan Agreement with SPX
We intend to use a portion of the net proceeds of this offering to repay
amounts that we borrowed from SPX to pay for our recent acquisitions and the
remaining amounts for general corporate purposes. Pending their use, we intend
to invest $15 million, including our cash on hand before this offering, in
investment grade securities and lend any remaining amounts to SPX. We also
intend, as part of our cash management system, to lend, on a daily basis, our
cash and cash equivalents in excess of $15 million to SPX. We will lend these
amounts to SPX under a loan agreement that will allow us to demand repayment of
outstanding amounts at any time. However, even after SPX repays us the amount
due under the loan agreement, as part of our cash management system we will
continue to be obligated to lend, on a daily basis, all of our cash and cash
equivalents in excess of $15 million to SPX until the termination of the loan
agreement. The loan agreement will terminate when SPX owns less than 50% of our
outstanding shares of Class A common stock and Class B common stock or if there
is an event of default under SPX's credit agreement. Amounts loaned under the
loan agreement will be unsecured. Loans made prior to October 1, 2000, will
accrue interest quarterly at a rate of 8 1/2% and, for loans made on or after
October 1, 2000, will accrue interest quarterly at the weighted average rate of
interest paid by SPX for revolving loans under its credit agreement for the
prior quarter. SPX's ability to repay the amounts that we lend will be subject
to SPX's financial condition and liquidity, including its ability to borrow
under its credit agreement or otherwise.
Management Services Agreement
Under the management services agreement, SPX will continue to provide
administrative and corporate support services to us. These include human
resources, accounting, treasury, tax, facilities, legal and information
services. SPX will charge us for these services at cost, including all
out-of-pocket, third-party costs and expenses incurred by SPX in providing the
services. If SPX incurs third-party expenses on behalf of us as well as an SPX
entity, SPX will be required to allocate these expenses in good faith between us
and the SPX entity, as SPX determines in the exercise of its reasonable
judgment. The agreement provides for monthly invoicing of service charges.
The management services agreement provides that the services provided by
SPX will be substantially similar in scope, quality and nature to those services
provided to us when we were an indirect wholly owned subsidiary of SPX prior to
this offering. SPX is also required to provide the services to us through the
same or similarly qualified personnel, but the selection of personnel to perform
the various services will be within the sole control of SPX. In addition, SPX is
not required to materially increase the volume, scope or quality of the services
provided beyond the level at which they were performed for us in the past. The
agreement provides that SPX may have a third party provide any service to us
rather than providing
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the service itself and that SPX will not be responsible for the performance of
services provided in this manner as long as it reasonably selects the provider.
SPX will not be required to provide any service to the extent the performance of
the service becomes impracticable due to a cause outside the control of SPX,
such as natural disasters, governmental actions or similar events of force
majeure. Similarly, SPX is not required to provide any service if doing so would
require SPX to violate any laws, rules or regulations. The agreement also
provides that SPX and we may agree to additional services to be provided by SPX.
The terms and costs of these additional services will be mutually agreed upon by
SPX and us. These additional services may include services that were not
provided to us when we were a wholly-owned subsidiary of SPX prior to this
offering.
The management services agreement will start upon the completion of this
offering and continues until SPX owns less than 50% of the aggregate amount of
our outstanding shares of Class A common stock and Class B common stock. We may
also terminate the management services agreement with respect to one or more of
the services provided under the agreement effective upon the date that is the
later of (1) the end of the fiscal year in which the notice of termination is
given and (2) six months from the date notice of termination is given. In
addition, either SPX or we will be able to terminate the management services
agreement with respect to one or more of the services provided under the
agreement if the other party has failed to perform any material obligation
relating to the services to be terminated and the failure continues for a period
of 30 days after the other party receives notice of the failure from the
terminating party.
Tax Sharing Agreement
We are, and after this offering will continue to be, included in SPX's
consolidated federal income tax group, and our federal income tax liability will
be included in the consolidated federal income tax liability of SPX. Pursuant to
the tax sharing agreement, the amount of tax to be paid by us to SPX or received
by us from SPX with respect to consolidated, unitary or combined returns of SPX,
in which we are included generally will be determined as though we file separate
federal, state, local and foreign income tax returns.
In general, we will be included in SPX's consolidated group for federal
income tax purposes for so long as SPX beneficially owns at least 80% of the
combined total voting power and value of our outstanding common stock. By law,
each member of a consolidated group is jointly and severally liable for the
federal income tax liability of each other member of the consolidated group.
Accordingly, although the tax sharing agreement allocates tax liabilities
between us and SPX during the period in which we are included in SPX's
consolidated group, we could be liable for any shortfall if any federal tax
liability is incurred, but not discharged, by any other member of SPX's
consolidated group. Similar principles may apply for state or local income tax
purposes.
Registration Rights Agreement
The registration rights agreement provides SPX with registration rights
relating to the shares of our Class A common stock which SPX will continue to
hold after this offering. SPX is 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 provides for
various piggyback registration rights for SPX. Whenever we propose to register
any of our securities under the Securities Act for ourselves or others, subject
to market cut-back exceptions, we are required to provide prompt notice to SPX
and include in that registration all shares of our stock which SPX owns and
requests to be included.
The registration rights agreement sets forth customary registration
procedures, including an agreement by us to make available our employees and
personnel for roadshow presentations. All registration expenses incurred in
connection with any registration, other than underwriting commissions, will be
paid by us. In addition, we are required to reimburse SPX for the fees and
disbursements of its outside counsel retained in connection with any such
registration. The registration rights agreement also imposes customary
indemnification and contribution obligations on us for the benefit of SPX and
any underwriters with respect to liabilities resulting from untrue statements or
omissions in any registration statement used in any
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such registration, although SPX must indemnify us for any liabilities resulting
from information provided by SPX.
SPX's rights under the registration rights agreement remain in effect with
respect to the shares covered by the agreement until:
- those shares have been sold under an effective registration statement
under the Securities Act;
- those shares have been sold to the public under to Rule 144 under the
Securities Act; or
- those shares have been transferred in a transaction where a subsequent
public distribution of those shares would not require registration under
the Securities Act.
Employee Matters Agreement
The employee matters agreement sets forth our mutual understanding with
respect to the responsibilities, obligations and liabilities relating to the
compensation and benefits of our employees in connection with this offering.
Under this agreement, with agreed upon exceptions, SPX will continue to
administer compensation programs for our employees, and our employees will
continue to participate in SPX's employee benefit plans, in each case on and
following the offering. In turn, we will pay SPX for providing these
administrative services and for these benefits. The principal exceptions to this
rule are our 2000 stock compensation plan and our employee stock purchase plan,
which we will adopt in connection with the offering to provide equity-based
compensation to our employees following the offering, and SPX's economic value
added incentive compensation plan, which we will assume as it relates to our
employees to provide cash-based incentive compensation to our employees
following the offering.
Trademark License Agreement
Most of the trademarks used in our business are owned by us or one of our
subsidiaries. We do not own the trademark "SPX," which we sometimes use in our
marketing materials. SPX owns the trademark "SPX" and has entered into a
trademark license agreement with us that governs our use of the trademark "SPX."
Under the agreement, SPX grants to us a worldwide royalty-free license to use
the trademark "SPX" solely in connection with the manufacture, sale or
distribution of products related to our business. The license includes the right
to use the term "SPX" as a trade name, either individually or in combination
with other terms. This license also includes the right to grant sublicenses to
our wholly owned subsidiaries, for so long as they remain wholly owned
subsidiaries. We may not transfer or assign the license without SPX's prior
written consent.
Under the agreement, we agree to refrain from various actions that could
interfere with SPX's ownership of the trademark "SPX". The agreement contains
provisions regarding:
- the creation of quality standards of our products;
- the ability of SPX to inspect our products and facilities; and
- our obligation to cease production of, and correct or properly destroy,
any products marketed under the licensed trademarks that fail to meet the
quality standards.
The trademark license agreement becomes effective upon completion of this
offering and will terminate one year from the date of this offering. Prior to
the scheduled termination date, our license to use the trademarks may be
terminated for various reasons, including our breach of the agreement or a
change in control of us.
We will indemnify SPX and its directors, officers and employees from claims
for personal injury or property damage if SPX is found liable to any third party
under any tort or products liability or similar action in connection with the
use by us of the licensed trademarks.
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OPTION GRANTS TO SPX EMPLOYEES
We have granted options to acquire 1,331,000 shares of our Class B common
stock under our 2000 stock compensation plan to the SPX directors and a limited
group of SPX employees with supervisory authority over us. See "Compensation and
Benefit Plans Long-Term Incentives -- Option Grants."
CORPORATE OPPORTUNITIES AND CONFLICTS OF INTEREST
All of our directors have fiduciary duties to our company and our
stockholders under Delaware law. Specifically, our directors are charged with a
duty of care and a duty of loyalty to our company and our stockholders. This
duty of care generally requires our directors to inform themselves of all
material information relevant to business decisions they make on behalf of our
company. This duty of loyalty generally requires our directors to act in the
best interests of our company and our stockholders and to refrain from conduct
that would injure our company or our stockholders or deprive our company of an
advantage or opportunity to which we are entitled.
Five members of our board of directors are also directors or executive
officers of SPX, and have similar fiduciary duties to SPX. As a result of their
duties and obligations to both companies, these directors may have conflicts of
interest with respect to matters involving or affecting us, such as acquisitions
and other corporate opportunities that may be suitable for both us and SPX. Our
certificate of incorporation and bylaws do not contain any special provisions
setting forth rules governing these potential conflicts. In addition, after this
offering, a number of our directors and executive officers will continue to own
SPX stock and options on SPX stock they acquired as employees of SPX. This
ownership could create, or appear to create, potential conflicts of interest
when these directors and officers are faced with decisions that could have
different implications for our company and SPX.
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PRINCIPAL AND MANAGEMENT STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of common stock by SPX and as adjusted to reflect the sale of the
shares of Class B common stock offered by us in this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
OUTSTANDING PERCENTAGE OF
SHARES VOTING CONTROL
OF COMMON STOCK OF OUR COMPANY
SHARES OF -------------------- --------------------
NAME AND ADDRESS COMMON STOCK BEFORE AFTER BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING OFFERING OFFERING
------------------- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SPX Corporation................. 75,633,333 shares of 100% 90.8% 100% 98.0%
700 Terrace Point Drive Class A common stock
Muskegon, MI 49443-3301
</TABLE>
If the over-allotment option is exercised in full, SPX will own 89.5% of
our common stock and 97.7% of the voting control of our company.
MANAGEMENT
The following table sets forth information regarding beneficial ownership
of our outstanding common stock as of the date of the offering and the
outstanding common stock of SPX as of March 15, 2000 by (a) each of our
directors and each of the executive officers named in the summary compensation
table and (b) all of our directors and executive officers as a group.
As used in this table, beneficial ownership means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days upon the exercise of any option, warrant or right.
Shares of common stock subject to options, warrants or rights that are currently
exercisable or exercisable within 60 days are deemed outstanding for computing
the ownership percentage of the person holding such options, warrants or rights,
but are not deemed outstanding for computing the ownership percentage of any
other person. The options to acquire shares of our Class B common stock to be
granted to our executive officers will not vest for two years. Therefore, shares
represented by these options do not appear in the table. However, the options to
acquire shares of our Class B common stock that have been granted to our
non-executive officer directors are fully vested. Therefore, the shares
represented by these options appear in the table. The amounts and percentages
for SPX shares are based upon 31,399,172 shares of SPX common stock outstanding
as of March 15, 2000.
<TABLE>
<CAPTION>
SHARES OF OUR
CLASS B PERCENTAGE OF PERCENTAGE OF SHARES OF SPX
COMMON STOCK AGGREGATE VOTING CONTROL COMMON STOCK PERCENTAGE
BENEFICIALLY OUTSTANDING SHARES OF OUR BENEFICIALLY OWNERSHIP
NAME OWNED OF COMMON STOCK COMPANY OWNED OF SPX
---- ------------- ------------------ -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
John B. Blystone........... 700,000(1) * * 344,363(2) 1.1%
Robert B. Foreman.......... 70,000(1) * * 38 *
Christopher J. Kearney..... 70,000(1) * * 40,050(3) *
Lewis M. Kling............. 70,000(1) * * 9,205(4) *
Patrick J. O'Leary......... 200,000(1) * * 78,240(5) *
David L. Chapman (6)....... 0 * * 0 *
Bruce J. Ryan (6).......... 0 * * 0 *
David B. Wright (6)........ 0 * * 0 *
Gregory R. Grodhaus........ 0 * * 0 *
Anthony J. Fusarelli....... 0 * * 650 *
Jayne A. Fitzgerald (7).... 0 * * 0 *
All directors and executive
officers as a group (13
persons)................. 1,110,000 1.3 % * 464,866 1.5%
</TABLE>
---------------
* Denotes less than 1% beneficial ownership.
(1) Represents options to purchase shares of our Class B common stock that are
currently exercisable.
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(2) Includes 25,000 unvested shares of restricted stock granted to Mr. Blystone
as part of his initial employment contract, which will vest at December 1,
2000. Mr. Blystone has the right to vote these shares. Also includes 114,242
shares held by the John B. Blystone Investment Partners LP, a limited family
trust. Does not include 250 shares held by The Blystone Foundation as to
which Mr. Blystone disclaims beneficial ownership. Mr. Blystone, his wife
and Mr. Kearney are directors of The Blystone Foundation. Also includes
options to purchase 159,379 shares of common stock that are exercisable
within 60 days.
(3) Includes options to purchase 36,147 shares of common stock that are
exercisable within 60 days.
(4) Includes 180 shares held by Mr. Kling's wife and 7,500 shares of common
stock that are exercisable within 60 days.
(5) Includes options to purchase 56,362 shares of common stock that are
exercisable within 60 days.
(6) David L. Chapman, Bruce J. Ryan and David B. Wright will join our board of
directors effective upon completion of this offering.
(7) Ms. Fitzgerald terminated employment with us on February 4, 2000.
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<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
The following summarizes the terms and provisions of our capital stock upon
the closing of this offering.
Upon the completion of this offering, our authorized capital stock will
consist of:
- 150,000,000 shares of Class A common stock, par value $.01 per share;
- 250,000,000 shares of Class B common stock, par value $.01 per share; and
- 20,000,000 shares of preferred stock, par value $.01 per share.
COMMON STOCK
Upon completion of this offering, there will be 75,633,333 shares of our
Class A common stock outstanding and 7,700,000 shares of our Class B common
stock outstanding. In addition, upon completion of this offering there will be
outstanding options for the purchase of a total of 8,501,500 shares of our Class
B common stock. We are not offering for sale to the public any shares of our
Class A common stock. Shares of our Class A and Class B common stock have the
following rights, preferences and privileges:
- Voting Rights. Each outstanding share of Class A common stock entitles
its holder to five votes on all matters submitted to a vote of our
stockholders, including the election of directors. Each outstanding share
of Class B common stock entitles its holder to one vote on all matters
submitted to a vote of our stockholders, including the election of
directors. There are no cumulative voting rights. Our Class A common
stock and Class B common stock vote together as one class on all matters
except if required by law.
- Dividends. Subject to the rights of the holders of preferred stock, if
any, the holders of Class A and Class B common stock are entitled to
receive dividends at the same rate, as, when and if dividends are
declared by our board of directors out of assets legally available for
the payment of dividends. No dividends may be paid on or declared and set
apart for the shares of Class A or Class B common stock unless at the
same time an equal dividend is paid on or declared or set apart for the
shares of the other class of common stock.
- Liquidation. In the event of a liquidation, dissolution or winding up of
our affairs, whether voluntary or involuntary, after payment of our
liabilities and obligations to creditors and any holders of preferred
stock, our remaining assets will be distributed ratably among the holders
of shares of Class A common stock and Class B common stock on a per share
basis, regardless of class.
- Rights and Preferences. The Class A and Class B common stock have no
preemptive, redemption or subscription rights. The rights, powers,
preferences and privileges of holders of our common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of
any series of preferred stock that we may designate and issue in the
future.
CONVERSION OF CLASS A COMMON STOCK
Each share of Class A common stock is convertible while held by SPX or any
of its affiliates, excluding us, at the option of the holder thereof into one
share of Class B common stock. Other than in a distribution or similar
transaction, any shares of Class A common stock transferred to a person other
than SPX or any of its affiliates, will automatically be converted into shares
of Class B common stock upon such transfer. Shares of Class A common stock
transferred to stockholders of SPX in a distribution will not be converted into
shares of Class B common stock, and following such distribution, shares of Class
A common stock will be transferable as Class A common stock, subject to
applicable laws.
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PREFERRED STOCK
Our board of directors will be authorized to cause shares of preferred
stock to be issued in one or more series and to:
- determine the number of shares of each series;
- fix the rights, powers, preferences and privileges of each series;
- fix any qualifications, limitations or restrictions thereon; and
- increase or decrease the number of shares of each such series.
Among the specific matters that may be determined by the board of directors
are:
- the rate of dividends;
- the redemption price, if any;
- the terms of a sinking or purchase fund, if any;
- the amount payable in the event of any voluntary liquidation, dissolution
or winding up of the affairs of our company;
- conversion rights, if any; and
- voting powers, if any.
Depending upon the terms of the preferred stock established by our board of
directors, any or all series of preferred stock could have preferences over the
common stock with respect to dividends and other distributions and upon
liquidation and could have voting or conversion rights that could adversely
affect the holders of the outstanding common stock.
In addition, the preferred stock could delay, defer or prevent a change of
control of our company. We have no present plans to issue shares of preferred
stock.
LIMITATION ON DIRECTORS' LIABILITIES
Our certificate of incorporation limits the liability of our directors to
us and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability:
- for any breach of the directors' duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions; and
- for any transaction from which the director derived an improper personal
benefit.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Our certificate of incorporation, our bylaws and Section 203 of the
Delaware General Corporation Law contain provisions, summarized below, that may
delay, discourage or prevent the acquisition or control of our company by means
of a tender offer, open market purchase, proxy fight or otherwise, including
acquisitions that might result in a premium being paid over the market price of
the Class B common stock.
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Stockholder Action by Written Consent; Special Meetings
Our certificate of incorporation and our bylaws permit stockholder action
by written consent until the time that SPX and its affiliates cease to
beneficially own an aggregate of at least a majority of the voting power of our
then outstanding shares of voting stock. Thereafter, any action required or
permitted to be taken by our stockholders may be effected only at a duly called
annual or special meeting of stockholders and may not be effected by a written
consent in lieu of a meeting of stockholders. Prior to SPX and its affiliates
ceasing to beneficially own an aggregate of at least a majority of the voting
power of our then outstanding shares of voting stock, we will call a special
meeting of stockholders promptly upon the request of the holders of a majority
of the voting power of our then outstanding shares of voting stock. After SPX
and its affiliates cease to beneficially own an aggregate of at least a majority
of the voting power of our then outstanding shares of voting stock, subject to
the rights of the holders of any preferred stock, special meetings of
stockholders for any purpose may be called only by our board of directors or its
chairman and the power of stockholders to call a special meeting will be
specifically denied.
Advance Notice Procedures
Our bylaws require advance notice of the nomination, other than by or at
the direction of our board of directors, of candidates for election as
directors, as well as for other stockholder proposals, to be considered at
annual meetings of stockholders. Subject to some exceptions, notice of intent to
nominate a director or raise matters at these meetings will have to be received
in writing by us not less than 90 nor more than 120 days prior to the
anniversary of the previous year's annual meeting of stockholders, and must
contain specific information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal. If the chairman of a meeting determines that an
individual was not nominated, or other business was not brought before the
meeting, in accordance with the advance notice procedures, that individual will
not be eligible for election as a director, or that business will not be
conducted at such meeting, as the case may be.
Board of Directors
Our certificate of incorporation and our bylaws provide that, subject to
the rights of the holders of any class or series of Preferred Stock, the number
of directors will be determined from time to time by a resolution adopted by the
majority of our directors. Our certificate of incorporation and our bylaws will
also provide that the board of directors will be divided into three classes, as
nearly equal in number as possible. Each director will hold office until that
person's successor is duly elected and qualified. Vacancies on the board of
directors will be filled by a majority of the remaining directors, or by a sole
remaining director, or by our stockholders if the vacancy was caused by the
action of our stockholders.
Subject to the rights of the holders of any series of preferred stock to
elect additional directors under specified circumstances, any director may be
removed from office only for cause upon the affirmative vote of holders of at
least 50% of the voting power our then outstanding voting stock.
The provisions of our certificate of incorporation and bylaws described
above would preclude a third party from removing incumbent directors and
simultaneously gaining control of our board of directors by filling the
vacancies created by removal with its own nominees. Under the classified board
provisions described above, it would take at least two elections of directors
for any individual or group to gain control of our board of directors.
Adoption, Amendment or Repeal of Certificate or Bylaws
Our certificate of incorporation provides that the affirmative vote of
holders of at least 80% of the voting power of our then outstanding voting
stock, voting as a single class, is required to amend, repeal or adopt any
provision of our certificate of incorporation inconsistent with the provisions
of that certificate regarding amendments to our bylaws, stockholder action by
written consent, special meetings of stockholders, our board of directors and
the election and removal of directors. Our certificate of incorporation and
bylaws further provide that until the time that SPX and its affiliates cease to
beneficially
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own an aggregate of at least a majority of the voting power of our then
outstanding shares of voting stock, the bylaws may be amended or repealed by our
board of directors or by our stockholders having a majority of the voting power
of our then outstanding shares of voting stock and that after that time, the
affirmative vote of the holders of at least 80% of the voting power of our then
outstanding voting stock will be required to alter, amend or repeal our bylaws.
Section 203 of the Delaware General Corporation Law
We must comply with the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.
A business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and associates, owns, or,
in some cases, within three years prior, did own, 15% or more of the
corporation's voting stock. Under Section 203, a business combination between
our company and an interested stockholder is prohibited unless it satisfies one
of the following three conditions:
- our board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding, for purposes of determining the number of shares
outstanding, shares owned by (1) persons who are directors and also
officers and (2) employee stock plans, in some instances; or
- the business combination is approved by our board of directors and
authorized at an annual or special meeting of the stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
EquiServe Trust Company, N.A. will serve as the registrar and transfer
agent for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 7,700,000 shares of our Class B common
stock will be outstanding, or 8,855,000 shares if the underwriters exercise
their over-allotment option in full. All of these shares, constituting the
shares sold in this offering, will be freely tradable without restriction or
further registration under the Securities Act, unless held by an affiliate of
our company as that term is defined in Rule 144 under the Securities Act. This
prospectus may not be used in connection with any resale of shares of Class B
common stock acquired in this offering by our affiliates.
The shares of our Class A common stock that will be held by SPX after the
offering constitute restricted securities within the meaning of Rule 144.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person or
persons whose shares of common stock are aggregated, including persons who may
be deemed our affiliates, would be entitled to sell within any three-month
period a number of shares of common stock that does not exceed the greater of:
- one percent of the then-outstanding shares of common stock; and
- the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales under Rule 144 are also subject to restrictions as to the manner of
sale, notice requirements and the availability of current public information
about us.
Because SPX has held its shares of our Class A common stock for more than
one year, including the period SPX held our common stock prior to its conversion
into Class A common stock, SPX will be able to sell those shares in the open
market after the offering, subject to contractual lockup provisions and the
applicable requirements of Rule 144. In addition, we have granted SPX
registration rights to facilitate its sales of shares of our common stock. These
registration rights are described under "Relationships Between Our Company and
SPX -- Registration Rights Agreement." In connection with this offering, we, our
executive officers and directors and SPX and its executive officers and
directors have agreed that, subject to various exceptions, for a period of 180
days after the date of this prospectus, we and they will not, without the prior
written consent of Salomon Smith Barney Inc., dispose of or hedge any shares of
our common stock or any securities convertible into or exchangeable for common
stock. Salomon Smith Barney Inc. in its sole discretion may release any or all
of the securities subject to these lock-up agreements at any time without public
notice.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act to register 11,530,000 shares of Class B common
stock reserved or to be available for issuance under our 2000 stock compensation
plan. In addition, we intend to file a registration statement on Form S-8 to
register 55,000 shares of Class B common stock reserved or to be available for
issuance under our employee stock purchase plan. Shares of Class B common stock
issued under the 2000 stock compensation plan and the employee stock purchase
plan generally will be available for sale in the open market by holders who are
not our affiliates and, subject to the volume and other applicable limitations
of Rule 144, by holders who are our affiliates, unless those shares are subject
to vesting restrictions or the contractual restrictions described above.
Prior to this offering, there has been no public market for our Class B
common stock. No information is currently available and we cannot predict the
timing or amount of future sales of shares, or the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on the
market price of the Class B common stock prevailing from time to time. Sales of
substantial amounts of Class B common stock, including shares issuable upon the
exercise of stock options, in the public market after the lapse of the
restrictions described above, or the perception that these sales may occur,
could materially adversely affect the prevailing market prices for the Class B
common stock and our ability to raise equity capital in the future.
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UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States
federal income and estate tax consequences of the ownership and disposition of
our Class B common stock by a non-U.S. holder. As used in this discussion, the
term non-U.S. holder means a beneficial owner of our Class B common stock that
is not, for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States,
other than a partnership treated as foreign under U.S. Treasury
regulations;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
- a trust, in general, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes, instead of a nonresident,
by, among other ways, being present in the United States on at least 31 days in
that calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year. For purposes of this calculation,
you would count all of the days present in the current year, one-third of the
days present in the immediately preceding year and one-sixth of the days present
in the second preceding year. Residents are taxed for U.S. federal income
purposes as if they were U.S. citizens.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership or trust that the U.S. tax consequences of holding and
disposing of our Class B common stock may be affected by certain
determinations made at the partner or beneficiary level;
- the tax consequences for the stockholders, partners or beneficiaries of a
non-U.S. holder;
- special tax rules that may apply to particular non-U.S. holders, such as
financial institutions, insurance companies, tax-exempt organizations,
U.S. expatriates, broker-dealers, and traders in securities; or
- special tax rules that may apply to a non-U.S. holder that holds our
Class B common stock as part of a straddle, hedge, conversion
transaction, synthetic security or other integrated investment.
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and
administrative and judicial interpretations, all as in effect on the date of
this prospectus, and all of which are subject to change, retroactively or
prospectively. The following summary assumes that a non-U.S. holder holds our
Class B common stock as a capital asset. EACH NON-U.S. HOLDER SHOULD CONSULT A
TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND
OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR
CLASS B COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our Class B common stock in
the foreseeable future. See "Dividend Policy." In the event, however, that we
pay dividends on our Class B common stock, we will have to withhold a U.S.
federal withholding tax at a rate of 30%, or a lower rate under an applicable
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income tax treaty, from the gross amount of the dividends paid to a non-U.S.
holder. Non-U.S. holders should consult their tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct
of a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are taxed on a
net income basis at the regular graduated rates and in the manner applicable to
U.S. persons. In that case, we will not have to withhold U.S. federal
withholding tax if the non-U.S. holder complies with applicable certification
and disclosure requirements. In addition, a branch profits tax may be imposed at
a 30% rate, or a lower rate under an applicable income tax treaty, on dividends
received by a foreign corporation that are effectively connected with the
conduct of a trade or business in the United States.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000, a non-U.S. holder who claims the benefit of an applicable income tax
treaty rate generally will be required to satisfy applicable certification and
other requirements. However,
- in the case of Class B common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide certain
information;
- in the case of Class B common stock held by a foreign trust, the
certification requirement will generally be applied to the trust or the
beneficial owners of the trust depending on whether the trust is a
foreign complex trust, foreign simple trust, or foreign grantor trust as
defined in the U.S. Treasury Regulations; and
- look-through rules will apply for tiered partnerships, foreign simple
trusts and foreign grantor trusts.
A non-U.S. holder which is a foreign partnership or a foreign trust is
urged to consult its own tax advisor regarding its status under these U.S.
Treasury Regulations and the certification requirements applicable to it.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal
withholding tax under an income tax treaty may obtain a refund or credit of any
excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF CLASS B COMMON STOCK
A non-U.S. holder generally will not be taxed on gain recognized on a
disposition of our Class B common stock unless:
- the gain is effectively connected with the non-U.S. holder's conduct of a
trade or business in the United States or, alternatively, if an income
tax treaty applies, is attributable to a permanent establishment
maintained by the non-U.S. holder in the United States; in these cases,
the gain will be taxed on a net income basis at the regular graduated
rates and in the manner applicable to U.S. persons, unless an applicable
treaty provides otherwise, and, if the non-U.S. holder is a foreign
corporation, the branch profits tax described above may also apply;
- the non-U.S. holder is an individual who holds our Class B common stock
as a capital asset, is present in the United States for more than 182
days in the taxable year of the disposition and meets other requirements;
or
- we are or have been a U.S. real property holding corporation for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that the
non-U.S. holder held our Class B common stock.
Generally, a corporation is a U.S. real property holding corporation if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the sum of the fair market value of its worldwide real
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property interests plus its other assets used or held for use in a trade or
business. The tax relating to stock in a U.S. real property holding corporation
generally will not apply to a non-U.S. holder whose holdings, direct and
indirect, at all times during the applicable period, constituted 5% or less of
our Class B common stock, provided that our Class B common stock was regularly
traded on an established securities market. We believe that we are not
currently, and we do not anticipate becoming in the future, a U.S. real property
holding corporation.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax withheld
from those dividends. Copies of the information returns reporting those
dividends and withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder is a resident under the provisions of
an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional
information reporting and backup withholding at a rate of 31% on some payments
on common stock. Under currently applicable law, non-U.S. holders generally will
be exempt from these additional information reporting requirements and from
backup withholding on dividends paid prior to 2001 if we either were required to
withhold a U.S. federal withholding tax from those dividends or we paid those
dividends to an address outside the United States. After 2000, however, the
gross amount of dividends paid to a non-U.S. holder that fails to certify its
non-U.S. holder status in accordance with applicable U.S. Treasury regulations
generally will be reduced by backup withholding at a rate of 31%.
The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through the U.S. office of a broker or a non-U.S. office
of a U.S. broker generally will be reported to the U.S. Internal Revenue Service
and reduced by backup withholding at a rate of 31% unless the non-U.S. holder
either certifies its status as a non-U.S. holder under penalties of perjury or
otherwise establishes an exemption and the broker has no actual knowledge to the
contrary. The payment of the proceeds of the disposition of common stock by a
non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will not be
reduced by backup withholding or reported to the U.S. Internal Revenue Service
unless the non-U.S. broker is a U.S. related person. In general, the payment of
proceeds from the disposition of common stock by or through a non-U.S. office of
a broker that is a U.S. person or a U.S. related person will be reported to the
U.S. Internal Revenue Service and, after 2000, may in limited circumstances be
reduced by backup withholding at a rate of 31%, unless the broker receives a
statement from the non-U.S. holder, signed under penalty of perjury, certifying
its non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a U.S. related person is generally:
- a controlled foreign corporation for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business; or
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (B) the partnership is engaged
in a U.S. trade or business.
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Non-U.S. holders should consult their own tax advisors regarding the
application of the information reporting and backup withholding rules to them,
including changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information or
appropriate claim for refund is furnished to the U.S. Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to each underwriter, the number
of shares of our Class B common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Salomon Smith Barney Inc. .................................. 3,466,000
Bear, Stearns & Co. Inc. ................................... 1,732,500
Chase Securities Inc. ...................................... 1,732,500
Robertson Stephens, Inc. ................................... 91,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 91,000
PaineWebber Incorporated.................................... 91,000
Burnham Securities Inc. .................................... 62,000
The Chapman Company......................................... 62,000
John G. Kinnard & Company, Incorporated..................... 62,000
Morgan Keegan & Company, Inc. .............................. 62,000
Needham & Company, Inc. .................................... 62,000
The Robinson-Humphrey Company, LLC.......................... 62,000
Stephens Inc. .............................................. 62,000
Tucker Anthony Incorporated................................. 62,000
---------
Total............................................. 7,700,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc. and Chase Securities Inc. are acting as representatives, propose to offer
some of the shares directly to the public at the public offering price set forth
on the cover page of this prospectus and some of the shares to dealers at the
public offering price less a concession not in excess of $0.67 per share. The
underwriters may allow, and these dealers may re-allow, a concession not in
excess of $0.10 per share on sales to other dealers. If all of the shares are
not sold at the initial offering price, the representatives may change the
public offering price and the other selling terms. The representatives have
advised us that the underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,155,000 additional shares of
Class B common stock at the public offering price less the underwriting
discount. The underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent this option is exercised, each underwriter will be obligated, subject to
various conditions, to purchase a number of additional shares approximately
proportionate to its initial commitment.
We, our executive officers and directors and SPX and its executive officers
and directors have agreed that, subject to various exceptions, for a period of
180 days from the date of this prospectus, we and they will not, without the
prior written consent of Salomon Smith Barney Inc., dispose of or hedge any
shares of our Class B common stock or any securities convertible into or
exchangeable for our Class B common stock. Salomon Smith Barney Inc. in its sole
discretion may release any or all of the securities subject to these lock-up
agreements at any time without public notice.
Prior to this offering, there has been no public market for our Class B
common stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and the representatives of the
underwriters. Among the factors considered in determining the initial public
offering
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price were our record of operations, our current financial condition, our future
prospects, our markets, the economic conditions in and future prospects for the
industry in which we compete, our management, and currently prevailing general
conditions in the equity securities markets, including current market valuations
of publicly traded companies considered comparable to us. We cannot assure you,
however, that the prices at which the shares will sell in the public market
after this offering will not be lower than the price at which they are sold by
the underwriters or that an active trading market in the Class B common stock
will develop and continue after this offering.
Our Class B common stock has been approved for listing on the Nasdaq
National Market under the symbol INRG.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of Class B common stock.
<TABLE>
<CAPTION>
PAID BY US
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share........................................... $ 1.12 $ 1.12
Total............................................... $8,624,000 $9,917,600
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of our Class B common stock in
the open market. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of Class B common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
"Covered" short sales are sales of shares made in an amount up to the number of
shares represented by the underwriters' over-allotment option. In determining
the source of shares to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Transactions to close out the
covered syndicate short involve either purchases of the Class B common stock in
the open market after the distribution has been completed or the exercise of the
over-allotment option. The underwriters may also make "naked" short sales of
shares in excess of the over-allotment option. The underwriters must close out
any naked short position by purchasing shares of Class B common stock in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of bids
for or purchases of shares in the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Class B common stock. They may also cause the
price of the Class B common stock to be higher than the price that would
otherwise exist in the open market in the absence of these transactions. The
underwriters may conduct these transactions on the Nasdaq National Market or in
the over-the-counter market, or otherwise. If the underwriters commence any of
these transactions, they may discontinue them at any time.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The underwriters may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations.
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We will pay the offering expenses, including registration fees, costs of
printing and engraving and legal and accounting fees, estimated to be
approximately $2.1 million, excluding underwriting discounts and commissions.
At our request, Salomon Smith Barney Inc. has reserved up to 670,000 shares
of Class B common stock, referred to as directed shares, for sale at the initial
public offering price to persons who are our directors or officers or who are
otherwise associated with us and our affiliates, and who have advised us of
their desire to purchase such shares. The number of shares of Class B common
stock available for sale to the general public will be reduced to the extent of
sales of directed shares to any of the persons for whom they have been reserved.
Any shares not so purchased will be offered by Salomon Smith Barney Inc. on the
same basis as all other shares of Class B common stock offered hereby. We have
agreed to indemnify Salomon Smith Barney Inc. against various liabilities and
expenses, including liabilities under the Securities Act, in connection with the
sales of the directed shares.
The representatives have performed various investment banking and advisory
services for us and SPX from time to time for which they have received customary
fees and expenses. The representatives may, from time to time, engage in
transactions with and perform services for us and SPX in the ordinary course of
their business.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Fried, Frank, Harris, Shriver & Jacobson, a partnership including
professional corporations, New York, New York, will pass upon the validity of
the issuance of the shares of Class B common stock offered hereby. Hale and Dorr
LLP, New York, New York, will pass upon certain legal matters in connection with
this offering for the underwriters.
EXPERTS
The audited combined financial statements of Inrange Technologies
Corporation and the audited financial statements of Computerm Corporation
included in this prospectus and elsewhere in this registration statement to the
extent and for the periods indicated in their reports have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The combined financial statements of Inrange Technologies Corporation for
the year ended December 31, 1997 appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated in their report thereon also appearing elsewhere herein and in
the registration statement. Such combined financial statements have been
included herein in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
CHANGE IN PRINCIPAL ACCOUNTANTS
In connection with the merger of SPX and General Signal Corp. in October
1998, SPX's Board of Directors decided to retain Arthur Andersen LLP as its
independent public accountants and dismissed General Signal Corp.'s former
auditors, Ernst & Young LLP. The Ernst & Young LLP auditors' report on Inrange
Technologies Corporation's combined financial statements for the year ended
December 31, 1997 is included in this prospectus. Such report does not contain
an adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. There were no
disagreements with Ernst & Young LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure at the
time of the change or with respect to Inrange Technologies Corporation's
financial statements for 1997, which, if not resolved to Ernst & Young LLP's
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satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their report.
Prior to retaining Arthur Andersen LLP, Inrange Technologies Corporation
had not consulted with Arthur Andersen LLP regarding accounting principles.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the Class B common stock being offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to the registration statement. For
further information with respect to us and the shares of Class B common stock
offered by this prospectus, you should refer to the registration statement,
including its exhibits and schedules. Statements made in this prospectus as to
any contract or other document are materially complete, but you should refer to
the exhibits attached to the registration statement for a complete copy of the
actual contract or document. You may review a copy of the registration
statement, including its exhibits and schedules, at the SEC's public reference
room, located at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's
regional offices located at 500 West Madison Street, Suite 1400, Chicago, IL
60661, and Seven World Trade Center, 13th Floor, New York, NY 10048 or on the
Internet at http://www.sec.gov. You may obtain a copy of this registration
statement from the SEC's public reference room upon payment of prescribed fees.
Please call the SEC at (800) SEC-0330.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF INRANGE TECHNOLOGIES CORPORATION:
Report of Independent Public Accountants.................. F-2
Report of Independent Auditors............................ F-3
Combined Balance Sheets................................... F-4
Combined Statements of Operations......................... F-5
Combined Statements of Stockholder's Investment........... F-6
Combined Statements of Cash Flows......................... F-7
Notes to Combined Financial Statements.................... F-8
FINANCIAL STATEMENTS OF COMPUTERM CORPORATION
Report of Independent Public Accountants.................. F-21
Balance Sheets............................................ F-22
Statements of Operations.................................. F-23
Statements of Shareholders' Equity........................ F-24
Statements of Cash Flows.................................. F-25
Notes to Financial Statements............................. F-26
PRO FORMA FINANCIAL STATEMENTS OF INRANGE TECHNOLOGIES
CORPORATION
Basis of Presentation..................................... P-1
Pro Forma Combined Balance Sheet as of June 30, 2000...... P-2
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1999................................ P-3
Pro Forma Combined Statement of Operations for the Six
Months Ended June 30, 2000............................. P-4
Notes to Pro Forma Combined Financial Statements.......... P-5
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SPX Corporation:
We have audited the accompanying combined balance sheets of Inrange
Technologies Corporation (a Delaware corporation), as defined in Note 1 to the
combined financial statements, as of December 31, 1998 and 1999, and the related
combined statements of operations, stockholder's investment and cash flows for
the years 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 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of Inrange
Technologies Corporation as of December 31, 1998 and 1999, and the combined
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
April 10, 2000 (except with respect to the
recapitalization discussed in Note 11, as
to which the date is June 29, 2000)
F-2
<PAGE> 81
REPORT OF INDEPENDENT AUDITORS
SPX Corporation
We have audited the accompanying combined statements of operations,
stockholder's investment, and cash flows of Inrange Technologies Corporation, as
defined in Note 1 to the combined financial statements, for the year ended
December 31, 1997. 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 combined results of operations and cash flows of
Inrange Technologies Corporation for the year ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1998,
Except for Note 11, as to which the date is
June 29, 2000
F-3
<PAGE> 82
INRANGE TECHNOLOGIES CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................... $ 2,461 $ 1,023 $ 2,234
Accounts receivable, net................................ 42,820 51,037 53,046
Inventories............................................. 22,314 27,624 30,774
Prepaid expenses and other.............................. 1,505 1,314 2,197
Investment.............................................. 2,421 -- --
Deferred income taxes................................... 9,113 4,650 4,650
-------- -------- --------
Total current assets............................ 80,634 85,648 92,901
PROPERTY, PLANT AND EQUIPMENT, net........................ 11,253 10,117 9,940
PROPERTY HELD FOR SALE.................................... 8,050 4,256 4,200
GOODWILL, net............................................. 8,778 7,710 7,176
OTHER ASSETS, net......................................... 17,743 24,619 35,038
-------- -------- --------
Total assets.................................... $126,458 $132,350 $149,255
======== ======== ========
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings and current portion of long-term
debt................................................. $ 3,937 $ 4,111 $ 1,707
Accounts payable........................................ 15,492 20,458 22,725
Accrued expenses........................................ 18,131 15,363 16,012
Deferred revenue........................................ 9,104 10,401 8,540
Debt due to SPX......................................... -- -- 4,429
-------- -------- --------
Total current liabilities....................... 46,664 50,333 53,413
-------- -------- --------
LONG-TERM DEBT............................................ 1,385 20 --
-------- -------- --------
DEFERRED INCOME TAXES..................................... 3,956 3,499 3,499
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDER'S INVESTMENT:
Parent's net investment................................. 73,311 78,577 92,039
Accumulated other comprehensive income (loss)........... 1,142 (79) 304
-------- -------- --------
Total stockholder's investment.................. 74,453 78,498 92,343
-------- -------- --------
Total liabilities and stockholder's
investment.................................... $126,458 $132,350 $149,255
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 83
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -------------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Product revenue............... $ 188,665 $ 192,535 $ 166,556 $ 85,431 $ 81,363
Service revenue............... 30,306 33,134 34,066 16,952 17,065
----------- ----------- ----------- ----------- -----------
Total revenue......... 218,971 225,669 200,622 102,383 98,428
----------- ----------- ----------- ----------- -----------
COST OF REVENUE
Cost of product revenue....... 91,544 95,151 78,803 43,350 39,130
Cost of service revenue....... 16,997 20,165 20,838 10,914 11,333
----------- ----------- ----------- ----------- -----------
Total cost of
revenue............. 108,541 115,316 99,641 54,264 50,463
----------- ----------- ----------- ----------- -----------
Gross margin.................. 110,430 110,353 100,981 48,119 47,965
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Research, development and
engineering................ 21,225 25,067 18,928 10,618 10,060
Selling, general and
administrative............. 56,382 62,449 48,269 24,230 24,534
Amortization of goodwill...... 1,277 1,068 1,068 534 534
Special charges............... -- 6,971 10,587 9,687 (190)
Gain on sale of real estate... -- -- (2,829) -- --
----------- ----------- ----------- ----------- -----------
Operating expenses......... 78,884 95,555 76,023 45,069 34,938
----------- ----------- ----------- ----------- -----------
OPERATING INCOME................ 31,546 14,798 24,958 3,050 13,027
INTEREST EXPENSE................ 1,509 1,391 925 497 316
OTHER INCOME (EXPENSE).......... 18 (178) 13,726 7,757 111
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................... 30,055 13,229 37,759 10,310 12,822
INCOME TAXES.................... 12,198 5,873 15,459 4,228 5,129
----------- ----------- ----------- ----------- -----------
NET INCOME...................... $ 17,857 $ 7,356 $ 22,300 $ 6,082 $ 7,693
=========== =========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE:
Basic and diluted earnings per
common share............... $ 0.24 $ 0.10 $ 0.29 $ 0.08 $ 0.10
=========== =========== =========== =========== ===========
Shares used in computing basic
and diluted earnings per
common share............... 75,633,333 75,633,333 75,633,333 75,633,333 75,633,333
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 84
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF STOCKHOLDER'S INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN
CAPITAL/
INTERCOMPANY NET EQUITY
COMMON STOCK ACCOUNTS OF PARENT'S
PREFERRED ----------------- WITH RETAINED COMBINED NET
STOCK CLASS A CLASS B PARENT EARNINGS UNITS INVESTMENT
--------- ------- ------- ------------ -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996....... $-- $756 $-- $ 36,116 $ (7,532) $ 35,666 $ 65,006
Comprehensive Income:
Net income..................... -- -- -- -- 7,014 10,843 17,857
Other comprehensive income --
Foreign currency
translation................ -- -- -- -- -- -- --
Total comprehensive
income...................
Net change in intercompany
accounts with Parent........... (32,731) -- 114 (32,617)
-- ---- -- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997....... -- 756 -- 3,385 (518) 46,623 50,246
Comprehensive Income:
Net income..................... -- -- -- -- 358 6,998 7,356
Other comprehensive income --
Foreign currency
translation................ -- -- -- -- -- -- --
Unrealized gain on
investment, net of taxes... -- -- -- -- -- -- --
Total comprehensive
income...................
Net change in intercompany
accounts with Parent........... -- -- -- 14,831 -- 878 15,709
-- ---- -- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998....... -- 756 -- 18,216 (160) 54,499 73,311
Comprehensive Income:
Net income (loss).............. -- -- -- -- 24,978 (2,678) 22,300
Other comprehensive income --
Foreign currency
translation................ -- -- -- -- -- -- --
Unrealized gain on
investment, net of taxes... -- -- -- -- -- -- --
Total comprehensive
income...................
Net change in intercompany accounts
with Parent...................... -- -- -- (17,310) -- 276 (17,034)
Transfer of Tautron to Inrange..... -- -- -- (6,241) 57,608 (51,367) --
-- ---- -- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999....... -- 756 -- (5,335) 82,426 730 78,577
Comprehensive Income:
Net income (loss)
(unaudited).................. -- -- -- -- 7,727 (34) 7,693
Other comprehensive income --
Foreign currency translation
(unaudited)................ -- -- -- -- -- -- --
Total comprehensive income
(unaudited)..............
Net change in intercompany accounts
with SPX (unaudited)............. -- -- -- 5,657 -- 112 5,769
Transfer of a division of General
Signal Limited to Inrange
(unaudited)...................... -- -- -- 2,373 (1,565) (808) --
-- ---- -- -------- -------- -------- --------
BALANCE AT JUNE 30, 2000
(unaudited)...................... $-- $756 $-- $ 2,695 $ 88,588 $ -- $ 92,039
== ==== == ======== ======== ======== ========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS) TOTAL
------------- --------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996....... $(149) $ 64,857
--------
Comprehensive Income:
Net income..................... -- 17,857
Other comprehensive income --
Foreign currency
translation................ (270) (270)
--------
Total comprehensive
income................... 17,587
Net change in intercompany
accounts with Parent........... -- (32,617)
----- --------
BALANCE AT DECEMBER 31, 1997....... (419) 49,827
--------
Comprehensive Income:
Net income..................... -- 7,356
Other comprehensive income --
Foreign currency
translation................ 601 601
Unrealized gain on
investment, net of taxes... 960 960
--------
Total comprehensive
income................... 8,917
Net change in intercompany
accounts with Parent........... -- 15,709
----- --------
BALANCE AT DECEMBER 31, 1998....... 1,142 74,453
--------
Comprehensive Income:
Net income (loss).............. -- 22,300
Other comprehensive income --
Foreign currency
translation................ (261) (261)
Unrealized gain on
investment, net of taxes... (960) (960)
--------
Total comprehensive
income................... 21,079
Net change in intercompany accounts
with Parent...................... -- (17,034)
Transfer of Tautron to Inrange..... -- --
----- --------
BALANCE AT DECEMBER 31, 1999....... (79) 78,498
--------
Comprehensive Income:
Net income (loss)
(unaudited).................. -- 7,693
Other comprehensive income --
Foreign currency translation
(unaudited)................ 383 383
--------
Total comprehensive income
(unaudited).............. 8,076
Net change in intercompany accounts
with SPX (unaudited)............. -- 5,769
Transfer of a division of General
Signal Limited to Inrange
(unaudited)...................... -- --
----- --------
BALANCE AT JUNE 30, 2000
(unaudited)...................... $ 304 $ 92,343
===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 85
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income...................................... $ 17,857 $ 7,356 $ 22,300 $ 6,082 $ 7,693
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 5,331 6,362 5,870 2,690 2,896
Amortization of goodwill...................... 1,277 1,068 1,068 534 534
Amortization of other assets.................. 7,920 5,730 3,596 1,940 2,681
Special charges............................... -- 6,971 10,587 9,687 (190)
Deferred income taxes......................... 3,489 (2,358) 4,646 -- --
Gain on sale of real estate................... -- -- (2,829) -- --
Gain on sale of investment.................... -- -- (13,914) (7,695) --
Changes in operating assets and liabilities:
Accounts receivable........................... 7,579 (4,354) (8,217) (2,826) (2,009)
Inventories................................... 335 (5,091) (5,310) 2,154 (3,150)
Prepaid expenses and other current assets..... (782) 168 191 (657) (883)
Accounts payable.............................. 211 827 4,966 2,325 2,267
Accrued expenses.............................. (2,945) (2,993) 703 4,469 1,592
Deferred revenue.............................. (51) 3,397 1,297 (4,654) (1,861)
Payments of special charges and disposition
related accruals............................ -- -- (11,636) (5,757) (753)
-------- -------- -------- ------- --------
Net cash provided by operating
activities............................. 40,221 17,083 13,318 8,292 8,817
-------- -------- -------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment,
net........................................... (5,565) (7,394) (5,469) (2,742) (2,663)
Proceeds from sale of real estate............... -- -- 6,358 -- --
Net proceeds from sale of investment............ -- -- 14,735 8,270 --
Capitalized software costs...................... (3,956) (5,044) (5,097) (2,853) (2,975)
Increase in demonstration equipment and other
assets........................................ (1,674) (1,410) (3,677) (345) (2,696)
Payment for product rights...................... -- (5,300) (3,120) (3,000) --
Purchase of investment.......................... -- (821) -- -- (7,429)
-------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities............................... (11,195) (19,969) 3,730 (670) (15,763)
-------- -------- -------- ------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of
credit........................................ 4,154 (2,663) 376 (428) (2,383)
Payments on long-term debt...................... (563) (8,300) (1,567) (211) (41)
Proceeds of loan from SPX....................... -- -- -- -- 4,429
Proceeds from (payments to) Parent.............. (32,617) 15,709 (17,034) (7,082) 5,769
-------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities............................... (29,026) 4,746 (18,225) (7,721) 7,774
-------- -------- -------- ------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION............ -- 601 (261) (79) 383
-------- -------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH................... -- 2,461 (1,438) (178) 1,211
CASH AT BEGINNING OF PERIOD....................... -- -- 2,461 2,461 1,023
-------- -------- -------- ------- --------
CASH AT END OF PERIOD............................. $ -- $ 2,461 $ 1,023 $ 2,283 $ 2,234
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 86
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION:
The combined financial statements include the assets, liabilities, revenue
and expenses of Inrange Technologies Corporation (Inrange), a wholly-owned
subsidiary of SPX Corporation (SPX), and the assets, liabilities, revenue and
expenses of certain other units comprising the storage networking, data
communications and telecommunications networking business of SPX, and exclude
two of the subsidiaries of Inrange not involved in the business (combined, the
Company). The net assets of the other combined units were transferred to the
Company in June 1999 (Tautron) and June 2000 (division of General Signal
Limited). The net assets of the two excluded subsidiaries were transferred out
of the Company in June 1999 and May 2000. The Company designs, manufactures,
markets and services networking and switching solutions for storage, data and
telecommunications networks. The solutions are targeted for use in large-scale
systems that are critical to a business' operations to provide fast and reliable
connections among networks of computers and related devices for large scale
enterprise applications.
Prior to October 6, 1998, Inrange was a subsidiary of General Signal Corp.
(GSX). GSX merged into a subsidiary of SPX and the merger was accounted for as a
reverse acquisition whereby GSX was treated as the acquirer and SPX as the
acquiree. As GSX was treated as the acquirer for financial reporting purposes
and no units of SPX were added to these combined financial statements as a
result of the merger, the combined financial statements of the Company reflect
the same reporting entity before and after the merger and do not reflect
purchase accounting from this merger transaction. GSX and SPX are herein
referred to as the Parent. Upon completion of the merger SPX implemented certain
restructuring initiatives. See Note 4 for a description of the initiatives that
were committed to and announced relating to the Company.
The combined financial statements have been prepared on the historical cost
basis and present the Company's financial position, results of operations and
cash flows as derived from the Parent's historical financial statements. The
Parent provides certain services to the Company including general management and
administrative services for employee benefit programs, insurance, legal,
treasury and tax compliance (see Note 3).
The financial information included herein does not necessarily reflect what
the financial position and results of operations of the Company would have been
had it operated as a stand-alone entity during the periods covered, and may not
be indicative of future operations or financial position.
Advances and other intercompany accounts between the Company and the Parent
are recorded as a component of stockholder's investment. All intercompany
transactions between entities included in the combined financial statements have
been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The interim combined financial statements are unaudited and, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the combined financial
position as of June 30, 2000 and the results of operations for the six months
ended June 30, 1999 and 2000.
The results of operations for the six months ended June 30, 2000 are not
necessarily indicative of the results to be expected for the entire year.
F-8
<PAGE> 87
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
Cash
The Parent uses a centralized cash management system for all of its
domestic operations, including those of the Company. The net amount of daily
cash transactions is transferred to the Parent and credited to a component of
stockholder's investment.
Investment
In connection with the purchase of product rights (see Note 7), the Company
obtained warrants to purchase 750,000 shares of common stock of a publicly
traded company. The Company accounted for the investment in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company considered the
investment securities to be available for sale and, accordingly, unrealized
holding gains or losses associated with the investments are presented as a
separate component of stockholder's equity, net of tax. At December 31, 1998,
the unrealized holding gain was $1,600 and taxes were $640. The investment was
sold in 1999 at a gain (see Note 13).
Inventories
Inventories are valued at the lower of cost or market, with cost determined
on the first-in, first-out (FIFO) method. Inventories on hand include the cost
of materials, freight, direct labor and manufacturing overhead.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Major additions or
improvements are capitalized, while repairs and maintenance are charged to
expense. Depreciation, including amortization of capitalized leases, is provided
on the straight-line method over the estimated useful lives of the assets, which
range from 30 to 40 years for buildings and three to 10 years for machinery and
equipment. Leasehold improvements and equipment under capital leases are
amortized over the shorter of the life of the related asset or the term of the
lease.
Goodwill
Goodwill represents the excess of the costs over the net tangible and
identifiable intangible assets of acquired businesses, is stated at cost and is
amortized on a straight-line basis over 20 years, the estimated future period to
be benefited. On a periodic basis, management reviews the recoverability of
goodwill based primarily upon an analysis of undiscounted cash flows from the
acquired businesses. No impairment losses have been recognized in any period
presented. Goodwill was $21,366 at December 31, 1998 and 1999 and June 30, 2000
and accumulated amortization was $12,588, $13,656 and $14,190, respectively.
F-9
<PAGE> 88
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Software Development Costs
Costs incurred in the research and development of new software included in
products are charged to expense as incurred until technological feasibility is
established. After technological feasibility is established, additional costs
are capitalized in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" until the product is
available for general release. Such costs are amortized over the lesser of three
years or the economic life of the related products and the amortization is
included in cost of revenue. Management performs a periodic review of the
recoverability of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Revenue Recognition
The Company recognizes revenue upon shipment of products with standard
configurations. Revenue from products with other than standard configurations is
recognized upon customer acceptance or when all of the terms of the sales
agreement have been fulfilled. The Company accrues for warranty costs, sales
returns, and other allowances at the time of shipment based on its experience.
Revenue from service obligations is derived primarily from maintenance contracts
and is deferred and recognized on a straight-line basis over the terms of the
contracts. Other service revenue is recognized when the service is provided.
Foreign Currency Translation
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at year-end exchange rates. Revenue and expense
items are translated at average exchange rates prevailing during the period. The
resulting translation adjustments are recorded as a component of equity.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in the results of operations as incurred. Transaction (gains)/losses
were $(20), $159, $134, $239 and $37 in 1997, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000, respectively, and are included in other
income(expense) in the accompanying combined statements of operations.
Post-employment Benefits Other than Pensions
The Parent provides certain severance benefits to former or inactive
employees during the period following employment but before retirement,
including the employees of the Company. The Parent accrues the costs of such
benefits over the expected service lives of the employees in accordance with
SFAS Statement No. 112. Severance benefits resulting from actions not in the
ordinary course of business are accrued when those actions occur. The Parent has
not allocated any of the costs of the post-employment benefits other than
pensions to the Company. Management believes that an allocation of the costs
would not result in a material charge to the combined statements of operations.
Earnings per Common Share
The Company has presented earnings per common share under SFAS No. 128
"Earnings Per Share" and SAB No. 98. Basic earnings per share is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. There were no dilutive securities outstanding in
the periods presented and, as such, diluted earnings per share is the same as
basic earnings per share. The shares used in the computation of earnings per
common share retroactively reflect the recapitalization discussed in Note 11.
F-10
<PAGE> 89
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which will become effective January 2001, establishes accounting
and reporting standards for derivative instruments and hedging contracts. It
also requires all derivatives to be recognized as either assets or liabilities
in the balance sheet at fair value and changes in fair value to be recognized in
operating results. Management is currently analyzing the impact of this
statement, but does not anticipate that the effect on the Company's results of
operations and financial position will be material.
3. TRANSACTIONS WITH PARENT:
There are no material intercompany purchase or sale transactions between
the Parent and the Company. The Parent incurs costs for various matters for
Inrange and other subsidiaries including administration of common employee
benefit programs, insurance, legal, accounting and other items which are
attributable to the subsidiaries' operations. These costs are allocated based on
estimated time incurred to provide the services to each subsidiary. The combined
financial statements reflect allocated charges from the Parent for these
services of $300, $50, $85, $42 and $50 in 1997, 1998 and 1999 and for the six
months ended June 30, 1999 and 2000, respectively. Management of the Parent
believes that the allocated costs are reasonable and reflect the effort involved
in providing the services and also represent what the costs would have been on a
stand-alone basis. In addition, direct costs incurred by the Parent on behalf of
the Company are charged to the Company. The direct costs were $3,414, $3,063,
$6,059, $2,969 and $2,944 in 1997, 1998 and 1999 and for the six months ended
June 30, 1999 and 2000, respectively, excluding the direct costs of employee
retirement plans discussed in Note 16.
In June 2000, the Company paid $4,429 in connection with an acquisition
that will be recorded in the third quarter. This amount was funded by the Parent
and is included as a liability in the accompanying combined balance sheet at
June 30, 2000.
4. SPECIAL CHARGES:
The Company recorded special charges of $6,971 and $10,587 in 1998 and
1999, respectively, for restructuring initiatives. The components of the charges
have been computed based on actual cash payouts, management's estimate of the
realizable value of the affected tangible assets and estimated exit costs
including severance and other employee benefits based on existing severance
policies. The purpose of these restructuring initiatives was to improve
profitability, streamline operations, reduce costs and improve efficiency.
During the fourth quarter of 1998, the Company committed to and announced
that it would close two manufacturing facilities and discontinue certain product
lines. As a result of these actions, the Company recorded charges of $4,597 for
cash severance payments to approximately 200 hourly and salaried employees, $500
for closing costs of the two facilities (primarily holding costs) and $1,874 for
product line discontinuance. The two closed facilities were put up for sale and
one of them was sold in 1999 resulting in a gain of $2,829.
In the first quarter of 1999, the Company announced additional
restructuring initiatives. These actions included consolidation of all general
and administrative functions into one location and reductions in sales,
marketing and engineering headcount in selected non-strategic product areas. The
Company recorded charges of $5,800 for cash severance payments to approximately
215 hourly and salaried employees, $1,765 for field sales and service office
closures (including cash holding costs of $765 and non-cash property write-downs
of $1,000) and $2,122 for product line discontinuance.
F-11
<PAGE> 90
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Also in 1999, the Company entered into a lease agreement for a new facility
into which operations will be further consolidated. In connection therewith, the
Company recorded a charge of $900, which covers the remaining payments for the
existing leases from the abandonment date through the expiration of the lease.
In June 2000, the Company reduced the restructuring charges and disposition
related accruals by $190 to reflect a revision to the expected remaining costs
to be incurred.
5. INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... $13,448 $14,175 $15,496
Work-in-process..................................... 3,104 4,646 3,092
Finished goods...................................... 5,762 8,803 12,186
------- ------- -------
Net inventories................................... $22,314 $27,624 $30,774
======= ======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment........................... $ 38,894 $ 35,818 $ 38,138
Furniture and fixtures............................ 1,111 105 105
Leasehold improvements............................ 1,736 1,925 1,997
-------- -------- --------
41,741 37,848 40,240
Accumulated depreciation.......................... (30,488) (27,731) (30,300)
-------- -------- --------
Net property, plant and equipment............... $ 11,253 $ 10,117 $ 9,940
======== ======== ========
</TABLE>
7. OTHER ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1998 1999 2000
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized software............................... $ 17,434 $11,466 $13,511
Demonstration equipment............................ 7,782 10,665 12,879
Product rights..................................... 6,379 9,499 8,420
Investment......................................... -- -- 7,429
Other.............................................. 474 556 549
-------- ------- -------
Total other assets....................... 32,069 32,186 42,788
Accumulated amortization --
Capitalized software............................... (10,253) (3,021) (3,421)
Demonstration equipment............................ (2,987) (3,442) (4,296)
Product rights..................................... (1,086) (1,104) (33)
-------- ------- -------
Net other assets................................. $ 17,743 $24,619 $35,038
======== ======= =======
</TABLE>
F-12
<PAGE> 91
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The Company capitalized $3,956, $5,044, $5,097, $2,853 and $2,975 in 1997,
1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively, of
software development costs (see Note 2). Amortization expense was $4,532,
$3,111, $2,291, $1,100 and $1,339 in 1997, 1998 and 1999 and for the six months
ended June 30, 1999 and 2000, respectively. In 1998 and 1999, the Company
wrote-off $1,304 and $1,422 of net capitalized software costs, respectively, in
connection with the discontinuance of certain product lines (see Note 4).
Demonstration equipment represents equipment at customer locations for
demonstration purposes and is amortized on a straight-line basis over a period
not to exceed three years.
Product rights represent technology licenses and pre-paid royalties for two
product lines (see Note 20). Amortization of the technology licenses commences
upon general availability of the products and continues through the term of the
license, not to exceed five years.
In March 2000, the Company purchased $3,000 of preferred stock of one of
its suppliers. The investment has been accounted for at cost in the accompanying
combined balance sheet. In addition, in June 2000, the Company paid $4,429 in
connection with an acquisition that will be recorded in the third quarter. This
amount was funded by the Parent and is included as a liability in the
accompanying combined balance sheet at June 30, 2000.
8. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and other compensation...................... $ 2,990 $ 3,649 $ 4,954
Accrued commissions................................. 1,614 2,223 1,991
Other accrued expenses.............................. 7,860 7,295 7,814
Special charges and disposition related accruals.... 5,667 2,196 1,253
------- ------- -------
Total accrued expenses.................... $18,131 $15,363 $16,012
======= ======= =======
</TABLE>
9. VALUATION ACCOUNTS AND DISPOSITION-RELATED ACCRUALS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------- JUNE 30,
1997 1998 1999 2000
------ ------ -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Balance at beginning of period............. $1,195 $ 925 $ 1,147 $1,270
Provision.................................. 132 550 1,822 516
Charges.................................... (402) (328) (1,699) (189)
------ ------ -------- ------
Balance at end of period................. $ 925 $1,147 $ 1,270 $1,597
====== ====== ======== ======
Disposition-related accruals:
Balance at beginning of period............. $ -- $ -- $ 5,667 $2,196
Provision.................................. -- 5,667 8,165 (190)
Charges.................................... -- -- (11,636) (753)
------ ------ -------- ------
Balance at end of period................. $ -- $5,667 $ 2,196 $1,253
====== ====== ======== ======
</TABLE>
F-13
<PAGE> 92
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
10. DEBT:
Short-term borrowings and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Connecticut Development Authority Bonds............... $1,506 $ -- $ --
Capital lease obligations............................. 125 64 23
------ ------ ------
1,631 64 23
Less -- Current portion of long-term debt............. (246) (44) (23)
------ ------ ------
$1,385 $ 20 $ --
====== ====== ======
Short-term borrowings................................. $3,691 $4,067 $1,684
====== ====== ======
</TABLE>
Interest on the Connecticut Development Authority Bonds was the greater of
5.25% or the London Interbank Offered Rate (LIBOR) less 1%. The weighted average
interest rate was 5.25%, 5.75% and 6.11% in 1997, 1998 and 1999, respectively.
The bonds were repaid in 1999.
Previously outstanding Massachusetts Industrial Revenue bonds of $7,500
were repaid in December 1998. Interest on the bonds was based on market interest
rates for comparable tax-exempt securities. The weighted average interest rate
was 3.7% in 1997 and 4.51% in 1998.
Foreign subsidiaries have separate lines of credit with European banks in
their local currency with a U.S. value of approximately $5,200, of which $3,691,
$4,067 and $1,684 was outstanding at December 31, 1998 and 1999 and June 30,
2000, respectively. The revolving credit loans are classified in the
accompanying combined balance sheet as short-term borrowings. The weighted
average interest rate on borrowings under the foreign lines of credit was 7.10%,
7.88% and 6.11% in 1997, 1998 and 1999 and 5.98% and 6.14% for the six months
ended June 30, 1999 and 2000, respectively. The lines of credit are guaranteed
by the Parent.
11. CAPITAL STOCK:
On June 29, 2000, a recapitalization was completed whereby the Company
authorized 20,000,000 shares of $0.01 par value preferred stock, 150,000,000
shares of $0.01 par value Class A common stock and 250,000,000 shares of $0.01
par value Class B common stock. The 1,000 outstanding shares of $0.01 par value
common stock held by the Parent were converted into an aggregate of 75,633,333
shares of Class A common stock. All references to shares outstanding have been
retroactively adjusted for this conversion.
The terms of the preferred stock are to be established by the board of
directors, and any or all series of preferred stock could have preferences over
the common stock with respect to voting and conversion rights, dividends and
other distributions and upon liquidation.
The Class A common stock and Class B common stock are identical except that
the holders of Class A common stock are entitled to five votes for each share
held while the holders of the Class B common stock are entitled to one vote for
each share held. The Class A common stock is convertible into Class B common
stock upon certain events.
F-14
<PAGE> 93
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
12. INCOME TAXES:
The Company has been included in the consolidated federal income tax return
of the Parent. The following provision for income taxes was determined as if the
Company were a separate taxpayer.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current provision:
Federal............................................. $ 4,909 $ 6,727 $ 7,631
Foreign............................................. 514 (122) 876
State and local..................................... 1,539 1,626 2,306
------- ------- -------
6,962 8,231 10,813
------- ------- -------
Deferred provision:
Federal............................................. 4,678 (1,648) 3,808
Foreign............................................. -- -- --
State and local..................................... 558 (710) 838
------- ------- -------
5,236 (2,358) 4,646
------- ------- -------
Total....................................... $12,198 $ 5,873 $15,459
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets:
Inventories.............................................. $3,421 $2,048
General business credits................................. 320 --
Warranty................................................. 1,196 504
Bad debt reserve......................................... 716 423
Special charges and disposition accruals................. 2,261 847
Other.................................................... 1,199 828
------ ------
Total deferred tax assets........................ 9,113 4,650
------ ------
Deferred tax liabilities:
Accelerated depreciation................................. 165 69
Capitalized software..................................... 2,847 3,354
Unrealized investment gain............................... 640 --
Other.................................................... 304 76
------ ------
Total deferred tax liabilities................... 3,956 3,499
------ ------
Net deferred tax assets.................................. $5,157 $1,151
====== ======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries of $4,087 at
December 31, 1999 are considered to be indefinitely reinvested and, accordingly,
no provision for U.S. federal and state income taxes or foreign withholding
taxes has been made. Upon distribution of those earnings, the Company would
F-15
<PAGE> 94
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
be subject to U.S. income taxes and withholding taxes payable to the various
foreign countries. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable.
For financial reporting purposes, earnings from operations before income
taxes include the following components.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Pretax income (loss):
United States....................................... $29,878 $13,575 $35,666
Foreign............................................. 177 (346) 2,093
------- ------- -------
$30,055 $13,229 $37,759
======= ======= =======
</TABLE>
Components of the effective income tax rate are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate.......................... 35.0% 35.0% 35.0%
State and local income taxes, net of U.S. federal benefit... 4.5 7.0 5.4
Goodwill.................................................... 1.4 3.3 1.1
Other....................................................... -- 2.8 .2
Foreign Sales Corporation................................... (1.8) (3.7) (3.1)
Foreign taxes............................................... 1.5 -- 2.3
---- ---- ----
40.6% 44.4% 40.9%
==== ==== ====
</TABLE>
Tax provisions are settled through the intercompany account and the Parent
made payments and received refunds on behalf of the Company.
13. GAIN ON INVESTMENT:
Included in comprehensive income in 1998 in the combined statement of
stockholder's investment is an unrealized pretax gain of $1,600 on warrants held
in a publicly traded company. The warrants were exercised in 1999 and the common
stock received upon exercise was sold resulting in a gain of $13,914. This gain
is included in other income(expense) in the accompanying 1999 combined statement
of operations.
14. FOREIGN CURRENCY CONTRACTS:
The Parent utilized natural hedges and offsets to reduce foreign currency
exposures and also combined positions to reduce the cost of hedging. The Parent
entered into forward foreign exchange contracts and purchased currency options
to hedge net combined currency transaction exposure for periods consistent with
the terms of the underlying transactions including consideration given to
Inrange foreign operations. At December 31, 1999, the Parent had a notional
amount of $200 on forward foreign exchange contracts outstanding. This contract
did not relate to Inrange.
The Company conducts its business in various foreign countries and foreign
currencies. Accordingly, the Company is subject to the typical currency risks
and exposures that arise as a result of changes in the relative value of
currencies such as transactional, translational, and economic currency
exposures. The Parent's policy objectives are to reduce currency risk on a
consolidated basis, protect the functional
F-16
<PAGE> 95
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
currency value of foreign currency denominated cash flows and reduce the
volatility that the changes in foreign exchange rates may present to operating
income.
Foreign currency forward or option contracts were not used for trading
purposes by the Parent, and these contracts did not subject the Company to
currency risk from exchange rate movements. On forward exchange and option
contracts which specifically hedge an underlying transaction, gains or losses
are deferred and recorded when the underlying transaction occurs. While it is
not the practice of the Parent to enter into contracts to hedge anticipatory
transactions, any gains or losses on forward foreign exchange and option
contracts that do not hedge a specific transaction are recognized currently.
15. COMMITMENTS AND CONTINGENCIES:
The Company has various operating lease agreements for facilities and
equipment. The lease agreements generally contain renewal options. The future
minimum rental payments under leases with remaining noncancellable terms in
excess of one year are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000....................................................... $ 2,949
2001....................................................... 3,216
2002....................................................... 2,184
2003....................................................... 1,870
2004....................................................... 1,797
2005 and thereafter........................................ 10,387
-------
$22,403
=======
</TABLE>
Rent expense was $2,747, $2,980, $3,104, $1,507 and $1,465 in 1997, 1998
and 1999 for the six months ended June 30, 1999 and 2000, respectively.
All of the assets of the Company are pledged as security under a credit
facility of the Parent and all of the subsidiaries of the Parent, including
Inrange, have guaranteed repayment of borrowings under the credit facility. The
Parent's outstanding borrowings under the credit facility were $1,135,000 at
June 30, 2000. The Company's pledge of assets and guarantee of debt repayment
terminate when the Company is no longer a wholly-owned subsidiary of the Parent.
There are contingent liabilities for lawsuits and various other matters
occurring in the ordinary course of business. On the basis of information
furnished by counsel and others, management believes that none of these
contingencies will materially impact the Company's financial condition or
results of operations.
16. EMPLOYEE RETIREMENT PLANS:
As discussed in Note 3, the Company participates in the Parent's employee
benefit plans which cover substantially all employees. The employee benefit
plans consist of a cash balance plan and a 401(k) plan. The Company's expense
for these plans was $1,171, $3,069, $4,485, $1,712 and $1,635 in 1997, 1998 and
1999 and for the six months ended June 30, 1999 and 2000, respectively.
17. FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments
The carrying amount of accounts receivable, accounts payable and accrued
expenses reported in the combined balance sheets approximates fair value because
of the short maturity of these instruments.
F-17
<PAGE> 96
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The fair value of the Company's debt instruments, based on borrowing rates
available to the Company at December 31, 1998 and 1999 for similar debt, is not
materially different than the carrying value.
Concentration of Risk
The Company transacts business with a significant customer in the
telecommunications industry. Revenue from this customer represented 23%, 17%,
9%, 9% and 5% of combined revenue in 1997, 1998 and 1999 and the six months
ended June 30, 1999 and 2000, respectively, and accounts receivable from this
customer were $1,827 at June 30, 2000.
Except as discussed above, the Company sells its products and services to a
large number of customers in various industries and geographical areas. The
Company's trade accounts receivable are exposed to credit risk, however, the
risk is limited due to the general diversity of the customer base. The Company
performs ongoing credit evaluations of its customers' financial condition and
maintains reserves for potential bad debt losses.
The Company receives certain of its products and components from sole
suppliers. The inability of any supplier or manufacturer to fulfill supply
requirements of the Company could impact future results.
18. STOCK OPTIONS:
The Parent has a stock option plan under which stock options were granted
to certain employees of the Company. The options were issued with an exercise
price equal to the fair market value of the underlying stock at the date of
grant and, accordingly, no compensation was recorded. In 1999 options to
purchase 42,750 shares of stock were granted to employees of the Company at a
weighted-average exercise price of $82.56. Through June 30, 2000, options to
purchase 94,000 shares of stock were granted to employees and options to
purchase 4,500 shares of stock were cancelled with weighted average exercise
prices of $80.05 and $73.03, respectively.
Stock options outstanding at June 30, 2000 and related weighted average
price and life information is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
REMAINING
EXERCISE PRICE OPTIONS LIFE (YEARS)
-------------- ------- ------------
<S> <C> <C>
$ 64.88............................................... 5,000 8.75
$ 77.81............................................... 82,000 9.50
$ 81.81............................................... 3,000 9.15
$ 85.00............................................... 2,000 9.05
$ 86.03............................................... 2,000 9.67
$ 86.50............................................... 30,250 9.15
$102.00............................................... 8,000 9.92
-------
132,250
=======
</TABLE>
At June 30, 2000, options to purchase 2,333 shares were exercisable.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for stock options issued. Had compensation cost for the stock
options been determined based on the fair value at the grant date for awards
consistent with the accounting provisions of SFAS No. 123, pro forma net income
for 1999 and for
F-18
<PAGE> 97
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
the six month period ended June 30, 2000 would be $22,125 and $7,193,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions: 0% dividend yield, 33.5% expected volatility,
5.67% risk free interest rate, 75% expected vesting and 6 year expected option
life. The weighted-average fair value of options granted during 1999 and 2000
was $35.63 and $34.52, respectively.
In June 2000, the Company established the 2000 Stock Compensation Plan (the
"2000 Plan"). The 2000 Plan provides for the issuance of up to 11,530,000 shares
of Class B common stock for incentive stock options, nonqualified stock options,
stock appreciation rights, performance units and restricted stock, to employees,
non-employee directors or consultants of the Company, the Parent or any direct
or indirect subsidiary of the Company. The 2000 Plan is administered by the
Board of Directors of the Parent prior to the initial public offering and, after
the initial public offering, will be administered by a committee established by
the Board of Directors of the Company. Subject to the specific provisions of the
2000 Plan, the committee determines award eligibility, timing and the type,
amount and terms of the awards.
On June 29, 2000, the Company issued options to purchase 1,331,000 shares
of Class B common stock to directors and employees of the Parent. The options
were granted at $13.00 per share and are fully vested.
19. GEOGRAPHIC INFORMATION:
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes additional standards for segment reporting in the
financial statements. Management has determined that all of the operations have
similar economic characteristics and may be aggregated into a single segment for
disclosure under SFAS 131. Information concerning geographic information of the
Company as prescribed by SFAS 131 is provided below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Domestic................................. $170,132 $158,520 $122,972
Foreign.................................. 27,691 38,884 40,062
Export................................... 21,148 28,265 37,588
-------- -------- --------
$218,971 $225,669 $200,622
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Long-lived Assets:
Domestic............................................... $43,764 $44,798
Foreign................................................ 2,060 1,904
------- -------
$45,824 $46,702
======= =======
</TABLE>
20. TECHNOLOGY LICENSE AGREEMENT:
In September 1998, the Company entered into a technology license agreement
with Ancor Communications, Inc. Under the agreement, the Company licensed from
Ancor the right to use certain ASICs and software in Fibre Channel connectivity
products. Also, as part of the agreement, Ancor has agreed not to sell or
license its ASICs and software to any third party for use in the high-end
datacenter
F-19
<PAGE> 98
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
networking and datacenter storage area network markets for IBM and
IBM-compatible environments nor to sell products in configurations that compete
directly with the Company's products in that market. Additionally, the Company
has entered into a reseller agreement with Ancor. The Company has also signed an
original equipment manufacturer agreement with Ancor under which Ancor will
provide its GigWorks MKII family of switches, in both 8- and 16-port
configurations, to integrate into the Company's products.
F-20
<PAGE> 99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Computerm Corporation:
We have audited the accompanying balance sheet of Computerm Corporation (a
Pennsylvania corporation) as of December 31, 1999, and the related statement of
operations, shareholders' equity 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 Computerm Corporation as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
August 4, 2000
F-21
<PAGE> 100
COMPUTERM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
----------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 3,819,950 $ 959,376
Accounts receivable, net of allowances of $18,900......... 2,452,559 5,718,972
Inventories............................................... 2,690,665 2,481,990
Prepaid taxes and other................................... 262,919 37,947
------------ ------------
Total current assets............................... 9,226,093 9,198,285
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 200,000 200,000
Building and improvements................................. 4,494,795 4,499,421
Machinery and equipment................................... 16,840,384 17,125,416
Furniture and fixtures.................................... 1,024,458 1,024,458
------------ ------------
22,559,637 22,849,295
Less- Accumulated depreciation............................ (16,383,877) (16,713,129)
------------ ------------
Net property, plant and equipment....................... 6,175,760 6,136,166
------------ ------------
OTHER ASSETS:
Split-dollar life insurance policy........................ 2,740,215 3,097,952
Goodwill, net of accumulated amortization of $87,725 and
$95,244,
respectively............................................ 137,854 130,335
Intangible assets, net of accumulated amortization of
$17,500 and $29,167, respectively....................... 332,500 320,833
Note receivable........................................... 22,857 416
------------ ------------
Total other assets................................. 3,233,426 3,549,536
------------ ------------
Total assets....................................... $ 18,635,279 $ 18,883,987
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 137,424 $ 598,662
Accrued liabilities....................................... 315,832 220,497
Accrued compensation...................................... -- 452,672
Accrued taxes............................................. 293,599 305,724
Deferred revenue.......................................... 598,565 794,636
------------ ------------
Total current liabilities.......................... 1,345,420 2,372,191
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value per share; 124 shares
authorized and issued................................... 62 62
Additional paid-in capital................................ 117,238 117,238
Retained earnings......................................... 17,412,679 16,634,616
------------ ------------
17,529,979 16,751,916
Less- Treasury stock (62 shares, at cost)................. (240,120) (240,120)
------------ ------------
Total shareholders' equity......................... 17,289,859 16,511,796
------------ ------------
Total liabilities and shareholders' equity......... $ 18,635,279 $ 18,883,987
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE> 101
COMPUTERM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED -------------------------
DECEMBER 31, 1999 1999 2000
----------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
NET SALES......................................... $21,403,486 $9,860,881 $13,740,387
COST OF SALES..................................... 6,310,802 2,382,775 4,663,357
----------- ---------- -----------
Gross profit............................ 15,092,684 7,478,106 9,077,030
----------- ---------- -----------
OPERATING EXPENSES:
Selling, general, and administrative............ 9,970,781 4,837,341 4,606,205
Research, development and engineering........... 3,470,917 2,121,973 1,828,580
Amortization of intangibles..................... 32,536 13,351 19,186
----------- ---------- -----------
Total operating expenses................ 13,474,234 6,972,665 6,453,971
----------- ---------- -----------
Operating income........................ 1,618,450 505,441 2,623,059
----------- ---------- -----------
OTHER INCOME:
Interest income................................. 125,934 78,518 64,423
Other income.................................... 206,282 57,851 143,493
----------- ---------- -----------
Total other income...................... 332,216 136,369 207,916
----------- ---------- -----------
INCOME BEFORE INCOME TAXES........................ 1,950,666 641,810 2,830,975
BENEFIT (PROVISION) FOR INCOME TAXES.............. 31,230 (96,240) (89,045)
----------- ---------- -----------
NET INCOME........................................ $ 1,981,896 $ 545,570 $ 2,741,930
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE> 102
COMPUTERM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------ ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998...... 62 $62 $117,238 $17,550,546 $(240,120) $17,427,726
Distributions to
shareholders............... -- -- -- (2,119,763) -- (2,119,763)
Net income.................... -- -- -- 1,981,896 -- 1,981,896
-- --- -------- ----------- --------- -----------
BALANCE, December 31, 1999...... 62 62 117,238 17,412,679 (240,120) 17,289,859
Distributions to shareholders
(unaudited)................ -- -- -- (3,519,993) -- (3,519,993)
Net income (unaudited)........ -- -- -- 2,741,930 -- 2,741,930
-- --- -------- ----------- --------- -----------
BALANCE, June 30, 2000
(unaudited)................... 62 $62 $117,238 $16,634,616 $(240,120) $16,511,796
== === ======== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE> 103
COMPUTERM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
YEAR ENDED -------------------------
DECEMBER 31, 1999 1999 2000
----------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 1,981,896 $ 545,570 $ 2,741,930
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 2,196,960 1,124,464 631,373
Working capital items --
Accounts receivable........................... 1,378,914 666,136 (3,266,413)
Inventories................................... 117,785 (453,802) 208,675
Prepaid taxes and other....................... 39,060 (18,212) 224,972
Split dollar life insurance................... (357,001) (357,001) (357,737)
Accounts payable.............................. (128,355) 366,321 461,238
Accrued liabilities........................... 177,267 (24,977) (95,335)
Accrued compensation.......................... (663,652) (663,652) 452,672
Accrued taxes................................. (214,436) (37,875) 12,125
Deferred revenue.............................. 103,104 98,996 196,071
----------- ----------- -----------
Net cash provided by operating
activities............................... 4,631,542 1,245,968 1,209,571
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment, net..... (1,662,768) (825,867) (572,593)
Purchase of intellectual property.................. (350,000) (350,000) --
----------- ----------- -----------
Net cash used in investing activities...... (2,012,768) (1,175,867) (572,593)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders...................... (2,119,763) (1,717,683) (3,519,993)
Collection of note receivable from related-party... 187 71 22,441
----------- ----------- -----------
Net cash used in financing activities...... (2,119,576) (1,717,612) (3,497,552)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH...................... 499,198 (1,647,511) (2,860,574)
CASH, BEGINNING OF PERIOD............................ 3,320,752 3,320,752 3,819,950
----------- ----------- -----------
CASH, END OF PERIOD.................................. $ 3,819,950 $ 1,673,241 $ 959,376
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 104
COMPUTERM CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATION:
Computerm Corporation (the Company), based in Pittsburgh, Pennsylvania,
designs, manufactures and markets mainframe channel extension and mirroring
hardware. The Company is incorporated in the Commonwealth of Pennsylvania and
serves markets throughout the United States, Europe, and Asia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements reflect the application of the
following significant accounting policies:
Interim Financial Statements
The interim financial statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position as of June 30, 2000
and the results of operations for the six months ended June 30, 1999 and 2000.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of purchased raw materials that are stated at
the lower of cost or market. Cost is determined by specific identification.
Income Taxes
The shareholders have consented to the Company's election to be taxed as an
S corporation under the provisions of Section 1362(a) of the Internal Revenue
Code for Federal and for most states, which provides for the Company's income to
be taxed directly to its shareholders. Accordingly, no provision for Federal
income taxes has been included in the accompanying financial statements.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Upon retirement or other
disposition of property, plant and equipment items, the cost and the related
accumulated depreciation are removed from the accounts. The resulting gain or
loss is reflected in operations. Repairs and maintenance are charged to
operations when incurred while betterments are capitalized.
Depreciation is determined on a straight-line basis over the estimated
useful lives of the properties for financial reporting purposes and on
accelerated methods for tax purposes. The estimated useful lives used in
computing depreciation for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Building and improvements................................... 31.5 years
Machinery and equipment..................................... 5 years
Furniture and fixtures...................................... 7 years
</TABLE>
F-26
<PAGE> 105
COMPUTERM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense charged to cost of sales was $2,164,424 for the year
ended December 31, 1999 and $1,111,113 and $612,187 for the six months ended
June 30, 1999 and 2000, respectively.
Revenue Recognition
The Company recognizes product revenues when the equipment is shipped. In
some instances, the equipment is leased to the customer and accounted for as a
sales-type lease. As such, the revenue is recognized based on the monthly
payments. Revenue from service obligations is derived from maintenance contracts
and is deferred and recognized on a straight-line basis over the terms of the
contracts.
Research, Development and Engineering
Research and development costs are charged to expense as incurred. These
costs were $284,114 for the year ended December 31, 1999 and $131,329 and
$180,025 for the six months ended June 30, 1999 and 2000, respectively.
Goodwill
Goodwill resulted from the purchase of certain assets from McData
Corporation in 1994 and CTP Corporation in 1999. Goodwill is amortized on a
straight-line basis over 15 years. Amortization expense was $15,036 for the year
ended December 31, 1999 and $7,518 and $7,519 for the six months ended June 30,
1999 and 2000, respectively.
Intangible Assets
On April 21, 1999, the Company purchased certain tangible and intangible
assets from CTP Corporation. The total purchase price was $625,000. Of this
amount, $350,000 was for intellectual property rights for new product
development. The remaining $275,000 was for the transfer of know-how and trade
secrets. This transfer was executed through training sessions and was subject to
reduction based on certain conditions. Accordingly, the Company charged these
costs to expense as incurred. Amortization expense was $17,500 for the year
ended December 31, 1999 and $5,833 and $11,667 for the six months ended June 30,
1999 and 2000, respectively.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments", requires disclosure of the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized in the balance sheets of the Company, for which it is practicable to
estimate fair value. The carrying value of the Company's financial instruments
approximate the related fair value.
3. RELATED-PARTY TRANSACTIONS:
A former director of the Company had a loan payable to the Company of
$22,858 and $0 at December 31, 1999 and June 30, 2000, respectively. This note
bore interest at 9.25%. The loan was repaid in June 2000.
4. MAJOR CUSTOMERS:
In 1999, approximately 29% of the Company's net sales were from two
customers.
F-27
<PAGE> 106
COMPUTERM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, the Company had receivables from two customers
totaling 28% and 18% of receivables. At June 30, 2000, the Company had
receivables from two customers totaling 33% and 21% of receivables.
5. EMPLOYEE BENEFIT PLANS:
The Company has a profit sharing plan for its employees pursuant to Section
401(k) of the Internal Revenue Code of 1986, as amended. This plan provides for
certain discretionary contributions to the plan by the Company.
The Company did not contribute to the plan in 1999. In 2000, the Company
committed to a contribution equal to 3% of eligible compensation for all
employees. This amounts to $100,236, which will be paid subsequent to year-end.
6. COMMITMENTS AND CONTINGENCIES:
The Company leases office space for $4,800 per month. The lease expires in
June 2001.
The Company is subject to claims and lawsuits arising in the normal course
of business. Management does not expect any litigation from such claims or
lawsuits to have a material effect on the Company's financial position or
results of operations.
7. SUBSEQUENT EVENTS:
Effective August 14, 2000, Inrange Technologies Corporation acquired
substantially all of the assets of the Company and assumed certain liabilities
pursuant to an asset purchase agreement executed on July 14, 2000. The purchase
price is subject to subsequent adjustments based on net assets at closing versus
a set target.
F-28
<PAGE> 107
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined balance sheet as of June 30,
2000 and unaudited pro forma combined statements of operations for the year
ended December 31, 1999 and for the six months ended June 30, 2000 are based on
our historical combined financial statements and are adjusted to illustrate the
estimated effects of the following transactions as if each transaction occurred
on June 30, 2000 for the pro forma combined balance sheet and on January 1, 1999
for the pro forma combined statements of operations:
- On August 4, 2000, we completed the acquisition of certain net assets of
Varcom Corporation. The purchase price was $25.0 million, with $23.5
million paid at closing and the remaining $1.5 million payable two years
later. The note due to the seller does not bear interest.
- On August 14, 2000, we completed the acquisition of certain net assets of
Computerm Corporation. The purchase price was $30.0 million, with $27.0
million payable at closing and the remaining $3.0 million payable one
year later. The note due to the seller does not bear interest. The
purchase price will be adjusted on a dollar-for-dollar basis for the
difference in the actual net assets delivered at closing versus a target
of $10.7 million.
- Borrowings of $50.5 million from SPX to fund the portion of the purchase
price of the acquisitions paid at closing.
- The sale of 7,700,000 shares of Class B common stock from this offering
resulting in net proceeds of approximately $112.5 million (net of the
underwriting discount and offering expenses), the use of a portion of
these proceeds to repay borrowings from SPX and the loan of a portion of
these proceeds to SPX.
The unaudited pro forma combined financial statements reflect the
acquisitions under the purchase method of accounting. The pro forma adjustments
for the acquisitions are based upon preliminary estimates, currently available
information and certain assumptions that we deem appropriate. We do not believe
that the changes to these estimates will be material. The unaudited pro forma
combined statements of operations do not necessarily indicate the actual results
of operations that we would have reported if the events described above had
occurred as of January 1, 1999, nor do they necessarily indicate the results of
future operations. In our opinion, all adjustments and disclosures necessary to
fairly represent these unaudited pro forma combined financial statements have
been made.
On June 30, 2000, we paid $4.4 million related to the acquisition of TCS
and STI. In addition, pursuant to the notes we issued to the sellers,
approximately $1.3 million is payable one year later and $0.7 million is payable
two years later. These notes do not bear interest. The cash paid on June 30,
2000 was funded from borrowings from SPX. This debt is included in the June 30,
2000 historical combined balance sheet. These acquisitions will be recorded in
the third quarter of 2000. The unaudited pro forma combined financial statements
do not reflect the TCS and STI acquisition because the impact is not material to
our historical combined financial statements.
You should also read our historical combined financial statements and the
notes to those statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus.
P-1
<PAGE> 108
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------ PRO FORMA
COMPUTERM VARCOM ACQUISITION FOR OFFERING
INRANGE CORPORATION CORPORATION ADJUSTMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
-------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash....................... $ 2,234 $ 959 $ 836 $ (1,309)(a) $ 2,720 $ 12,280(e) $ 15,000
Demand loan due from SPX... -- -- -- -- -- 45,291(e) 45,291
Accounts receivable, net... 53,046 5,719 1,097 (1,097)(a) 57,974 -- 57,974
(791)(b)
Inventories................ 30,774 2,482 -- -- 33,256 -- 33,256
Prepaid expenses and
other.................... 2,197 38 24 (62)(a) 2,197 -- 2,197
Deferred income taxes...... 4,650 -- -- -- 4,650 -- 4,650
-------- ------- ------ -------- -------- ----------- --------
Total current
assets............. 92,901 9,198 1,957 (3,259) 100,797 57,571 158,368
PROPERTY, PLANT AND
EQUIPMENT, net............. 9,940 6,136 124 189(c) 16,389 -- 16,389
PROPERTY HELD FOR SALE....... 4,200 -- -- -- 4,200 -- 4,200
INTANGIBLE ASSETS, net....... 7,176 451 -- 17,750(c) 41,247 -- 41,247
16,321(c)
(130)(d)
(321)(d)
OTHER ASSETS, net............ 35,038 3,099 5 (3,104)(a) 35,038 -- 35,038
-------- ------- ------ -------- -------- ----------- --------
Total assets......... $149,255 $18,884 $2,086 $ 27,446 $197,671 $ 57,571 $255,242
======== ======= ====== ======== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings and
current portion of
long-term debt........... $ 1,707 $ -- $ -- $ 4,779(c) $ 6,486 $ -- $ 6,486
Accounts payable........... 22,725 598 45 (45)(a) 22,532 -- 22,532
(791)(b)
Accrued expenses........... 16,012 979 159 (918)(a) 16,832 -- 16,832
600(c)
Deferred revenue........... 8,540 795 486 -- 9,821 -- 9,821
Debt due to SPX............ 4,429 -- -- 50,500(c) 54,929 (54,929)(e) --
-------- ------- ------ -------- -------- ----------- --------
Total current
liabilities........ 53,413 2,372 690 54,125 110,600 (54,929) 55,671
-------- ------- ------ -------- -------- ----------- --------
LONG-TERM DEBT............... -- -- -- 1,229(c) 1,229 -- 1,229
-------- ------- ------ -------- -------- ----------- --------
DEFERRED INCOME TAXES........ 3,499 -- -- 3,499 -- 3,499
-------- ------- ------ -------- -------- ----------- --------
STOCKHOLDERS' INVESTMENT..... 92,343 16,512 1,396 (4,609)(a) 82,343 112,500(e) 194,843
(451)(d)
(10,000)(c)
(12,848)(c)
-------- ------- ------ -------- -------- ----------- --------
Total liabilities and
stockholders'
investment......... $149,255 $18,884 $2,086 $ 27,446 $197,671 $ 57,571 $255,242
======== ======= ====== ======== ======== =========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
P-2
<PAGE> 109
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO FORMA
COMPUTERM VARCOM ACQUISITION FOR OFFERING
INRANGE CORPORATION CORPORATION ADJUSTMENTS ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE.................. $ 200,622 $21,404 $3,581 $(2,520)(a) $223,087 $ -- $ 223,087
COST OF REVENUE.......... 99,641 6,311 898 (2,520)(a) 104,330 -- 104,330
---------- ------- ------ ------- -------- ------ ----------
Gross margin........... 100,981 15,093 2,683 -- 118,757 -- 118,757
---------- ------- ------ ------- -------- ------ ----------
OPERATING EXPENSES:
Research, development
and engineering...... 18,928 3,471 1,327 -- 23,726 -- 23,726
Selling, general and
administrative....... 48,269 9,971 523 (791)(b) 57,972 -- 57,972
Amortization of
goodwill and other
intangibles.......... 1,068 32 -- 2,785(c) 3,885 -- 3,885
Special charges........ 10,587 -- -- -- 10,587 -- 10,587
Gain on sale of real
estate............... (2,829) -- -- -- (2,829) -- (2,829)
---------- ------- ------ ------- -------- ------ ----------
Operating expenses... 76,023 13,474 1,850 1,994 93,341 -- 93,341
---------- ------- ------ ------- -------- ------ ----------
OPERATING INCOME......... 24,958 1,619 833 (1,994) 25,416 -- 25,416
INTEREST INCOME
(EXPENSE).............. (925) 126 -- (4,706)(d) (5,505) 4,293(f) (1,212)
OTHER INCOME............. 13,726 206 28 -- 13,960 -- 13,960
---------- ------- ------ ------- -------- ------ ----------
Income before income
taxes.............. 37,759 1,951 861 (6,700) 33,871 4,293 38,164
INCOME TAXES............. 15,459 (31) -- (1,541)(e) 13,887 1,760(e) 15,647
---------- ------- ------ ------- -------- ------ ----------
NET INCOME............... $ 22,300 $ 1,982 $ 861 $(5,159) $ 19,984 $2,533 $ 22,517
========== ======= ====== ======= ======== ====== ==========
BASIC AND DILUTED
EARNINGS PER COMMON
SHARE:
Basic and diluted
earnings per common
share................ $ 0.29 $ 0.28
========== ==========
Shares used in
computing basic and
diluted earnings per
common share......... 75,633,333 79,324,798(g)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
P-3
<PAGE> 110
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
COMPUTERM VARCOM ACQUISITION PRO FORMA OFFERING
INRANGE CORPORATION CORPORATION ADJUSTMENTS FOR ACQUISITIONS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ----------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE................ $ 98,428 $13,740 $2,095 $(2,442)(a) $111,821 $ -- $ 111,821
COST OF REVENUE........ 50,463 4,663 494 (2,442)(a) 53,178 -- 53,178
---------- ------- ------ ------- -------- ------ ----------
Gross margin......... 47,965 9,077 1,601 -- 58,643 -- 58,643
---------- ------- ------ ------- -------- ------ ----------
OPERATING EXPENSES:
Research, development
and engineering.... 10,060 1,829 874 -- 12,763 -- 12,763
Selling, general and
administrative..... 24,534 4,606 286 (386)(b) 29,040 -- 29,040
Amortization of
goodwill and other
intangibles........ 534 19 -- 1,391(c) 1,944 -- 1,944
Special charges...... (190) -- -- -- (190) -- (190)
---------- ------- ------ ------- -------- ------ ----------
Operating
expenses......... 34,938 6,454 1,160 1,005 43,557 -- 43,557
---------- ------- ------ ------- -------- ------ ----------
OPERATING INCOME....... 13,027 2,623 441 (1,005) 15,086 -- 15,086
INTEREST INCOME
(EXPENSE)............ (316) 64 27 (2,468)(d) (2,693) 2,399(f) (294)
OTHER INCOME........... 111 144 -- -- 255 -- 255
---------- ------- ------ ------- -------- ------ ----------
Income before
income taxes..... 12,822 2,831 468 (3,473) 12,648 2,399 15,047
INCOME TAXES........... 5,129 89 -- (156)(e) 5,062 956(e) 6,018
---------- ------- ------ ------- -------- ------ ----------
NET INCOME............. $ 7,693 $ 2,742 $ 468 $(3,317) $ 7,586 $1,443 $ 9,029
========== ======= ====== ======= ======== ====== ==========
BASIC AND DILUTED
EARNINGS PER COMMON
SHARE:
Basic and diluted
earnings per common
share.............. $ 0.10 $ 0.11
========== ==========
Shares used in
computing basic and
diluted earnings
per common share... 75,633,333 79,324,798(g)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
P-4
<PAGE> 111
INRANGE TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. HISTORICAL FINANCIAL STATEMENTS
The historical financial information is derived from the financial position
and results of operations for Inrange, Computerm Corporation and Varcom
Corporation. The audited 1999 and unaudited interim 2000 financial statements of
Inrange and Computerm Corporation are included elsewhere in this prospectus. The
audited December 31, 1999 and unaudited June 30, 2000 financial statements of
Varcom Corporation are not included in this prospectus.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto included
elsewhere in this prospectus.
2. PURCHASE TRANSACTIONS
The acquisition of the net assets of Computerm Corporation and Varcom
Corporation will be recorded under the purchase method of accounting. The notes
due to sellers have been discounted at an imputed interest rate of 10%. The
purchase price and preliminary allocation of the purchase price to the net
assets acquired based on the June 30, 2000 balance sheets of the acquired
companies are as follows:
<TABLE>
<CAPTION>
COMPUTERM VARCOM
CORPORATION CORPORATION
----------- -----------
<S> <C> <C>
Purchase price --
Cash at closing........................................... $27,000 $23,500
Due to seller (at discounted value)....................... 2,716 1,229
Purchase price adjustment due to seller................... 2,063 --
Estimated transaction costs............................... 300 300
------- -------
$32,079 $25,029
======= =======
Purchase price allocation --
Cash...................................................... $ -- $ 486
Accounts receivable....................................... 5,719 --
Inventories............................................... 2,482 --
Property, plant and equipment............................. 6,325 124
Purchased research and development........................ -- 10,000
Identifiable intangibles.................................. 11,750 6,000
Goodwill.................................................. 7,416 8,905
Accounts payable.......................................... (598) --
Accrued expenses.......................................... (220) --
Deferred revenue.......................................... (795) (486)
------- -------
$32,079 $25,029
======= =======
</TABLE>
The final purchase price allocation will be based on the net assets
acquired as of the closing date of the transactions. In addition, the purchase
price of Computerm Corporation will be adjusted based on the actual amount of
tangible net assets acquired as compared to a minimum level of $10,661. Based on
the June 30, 2000 balance sheet, an additional $2,063 is payable to the seller.
P-5
<PAGE> 112
INRANGE TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
(a) Represents the elimination of certain assets and liabilities retained
by the sellers.
<TABLE>
<CAPTION>
COMPUTERM VARCOM
CORPORATION CORPORATION TOTAL
----------- ----------- ------
<S> <C> <C> <C>
Cash........................................... $ 959 $ 350 $1,309
Accounts receivable............................ -- 1,097 1,097
Prepaid expenses............................... 38 24 62
Other assets................................... 3,099 5 3,104
Accounts payable............................... -- (45) (45)
Accrued expenses............................... (759) (159) (918)
------ ------ ------
Stockholders' equity........................... $3,337 $1,272 $4,609
====== ====== ======
</TABLE>
Varcom Corporation is required to transfer cash to Inrange equal to the
deferred revenue liability assumed.
(b) Represents the elimination of intercompany receivable and payables of
$791 at June 30, 2000 resulting from sales from Computerm Corporation
to Inrange.
(c) To record the funding and purchase price allocation.
<TABLE>
<CAPTION>
COMPUTERM VARCOM
CORPORATION CORPORATION TOTAL
----------- ----------- -------
<S> <C> <C> <C>
Property, plant and equipment................. $ 189 $ -- $ 189
Identifiable intangibles...................... 11,750 6,000 17,750
Goodwill...................................... 7,416 8,905 16,321
In-process research and development........... -- 10,000 10,000
Stockholders' investment...................... 12,724 124 12,848
------- ------- -------
$32,079 $25,029 $57,108
======= ======= =======
Due to SPX.................................... $27,000 $23,500 $50,500
Due to seller................................. 4,779 1,229 6,008
Accrued expenses.............................. 300 300 600
------- ------- -------
$32,079 $25,029 $57,108
======= ======= =======
</TABLE>
The step-up in the value of property, plant and equipment is based on a
preliminary assessment of the fair value of the acquired real estate of
$3,750 as compared to the net book value of $3,561 at June 20, 2000. We
believe that the net book value of the other acquired property and
equipment approximates fair value.
The allocation of the purchase price to identifiable intangible assets,
acquired in-process research and development and goodwill has been
determined by management based on an analysis of factors such as
historical operating results, discounts of cash flow projections and
specific evaluations of product, customer and other information.
As of the acquisition date, Varcom Corporation had in-process
technology projects that had not reached technological feasibility and
did not have any alternative future uses. A value of $10,000 has been
assigned to these in-process technology projects. This value excludes
the efforts to be completed on the development projects, and solely
reflects progress made as of the acquisition
P-6
<PAGE> 113
INRANGE TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
date. The in-process technology projects are for the development of two
new products. Based on an assessment of factors including time spent on
the project compared to total expected project time and expenses incurred
to date compared to total project expenses, management estimates that the
projects were 77% and 48% complete, respectively. The total cost incurred
for these projects was approximately $4,000 as of the acquisition date.
Total expected costs to complete these projects are approximately $1,500.
Management anticipates that successful completion of the in-process
technology projects will allow for the ongoing enhancement of product
offerings. There are risks associated with the projects that may
prevent them from becoming viable products that result in revenues.
These risks include, but are not limited to, the successful development
of the underlying technology and the ability to market these products.
The charge of $10,000 for acquired in-process research and development
was recorded in August 2000 when the acquisition was completed. This
charge is not presented in the pro forma combined statements of
operations but is reflected as a reduction in stockholders' investment
in the accompanying pro forma combined balance sheet.
(d) To record the elimination of the net book value of the existing
goodwill and intangible assets of Computerm Corporation.
<TABLE>
<S> <C>
Goodwill.................................................... $130
Other assets................................................ 321
----
Stockholders' equity........................................ $451
====
</TABLE>
(e) To reflect the net proceeds from this offering of approximately
$112,500 (assuming the sale of 7,700,000 shares at the initial public
offering price of $16.00 per share, net of the underwriting discount
and offering expenses), the repayment of debt of $54,929 due to SPX and
the loan of $45,291 to SPX.
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
(a) Represents the elimination of actual sales and royalties from Computerm
Corporation and Varcom Corporation to Inrange during the periods
presented.
(b) Certain costs included in the historical statements of operations of
Computerm Corporation and Varcom Corporation relate to compensation
($353 in 1999 and $178 in 2000) and fringe benefits ($438 in 1999 and
$208 in 2000) of some of the stockholders of these companies and have
been eliminated as these costs will no longer be incurred since the
stockholders will not be involved in future operations and there will
be no replacement costs. The fringe benefit costs primarily relate to
premiums on life insurance policies, which policies were retained by
the seller.
(c) Additional amortization costs will be incurred as a result of the
purchase accounting for the acquisitions. Pro forma amortization
expense is based on amortization lives of five to 12 years for
identifiable intangibles and 10 and 20 years for goodwill resulting
from the acquisition of Varcom Corporation and Computerm Corporation,
respectively.
(d) Represents increase in interest expense due to the incremental
indebtedness of $50,500 to fund the acquisitions at 8.5% in 1999 and
9.5% for the six months ended June 30, 2000, which represents the rate
(prime plus 1/2%) charged by SPX. A change in interest rate of 1/8 of
one percent results in a change to interest expense of $63. The pro
forma interest adjustment also
P-7
<PAGE> 114
INRANGE TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
reflects imputed interest of $413 and $69 in 1999 and for the six
months ended June 30, 2000, respectively, on the seller notes.
(e) Computerm Corporation and Varcom Corporation are S corporations for
federal and certain state income tax purposes. The income tax
adjustment represents the impact of applying our effective tax rate of
41% in 1999 and 40% for the six months ended June 30, 2000.
(f) Represents the reduction in interest expense for the repayment of debt
due to SPX from proceeds from the offering.
(g) Reflects the sale of 3,691,465 shares at the initial public offering
price of $16.00 per share, net of the underwriting discount, that must
be sold in order to repay the $54,929 of borrowings from SPX.
P-8
<PAGE> 115
INSIDE BACK COVER
<PAGE> 116
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7,700,000 SHARES
INRANGE TECHNOLOGIES CORPORATION
CLASS B COMMON STOCK
[INRANGE LOGO]
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PROSPECTUS
SEPTEMBER 21, 2000
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SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
CHASE H&Q
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