<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 2000
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------
INRANGE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3663 06-0962862
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
-----------------------------------
13000 MIDLANTIC DRIVE
MT. LAUREL, NEW JERSEY 08054
(856) 234-7900
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
-----------------------------------
GREGORY R. GRODHAUS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INRANGE TECHNOLOGIES CORPORATION
13000 MIDLANTIC DRIVE
MT. LAUREL, NEW JERSEY 08054
(856) 234-7900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
MARK G. BORDEN, ESQ.
JEFFREY A. STEIN, ESQ.
STUART GELFOND, ESQ. STUART R. NAYMAN, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON HALE AND DORR LLP
ONE NEW YORK PLAZA 405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10004-1980 NEW YORK, NY 10174
(212) 859-8000 (212) 937-7200
-----------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class B Common Stock, $0.01 par value per share.................................... $ 100,000,000 $ 26,400
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 5, 2000
PROSPECTUS
[LOGO]
Shares
INRANGE TECHNOLOGIES CORPORATION
Class B Common Stock
We are selling shares of our Class B common stock. The underwriters named
in this prospectus may purchase up to additional shares of our Class B common
stock to cover over-allotments.
This is an initial public offering of our Class B common stock. We
currently expect the initial public offering price to be between $ and $ per
share. We will apply to have our Class B common stock included for quotation on
the Nasdaq National Market under the symbol "INRG."
INVESTING IN OUR CLASS B COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
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 $ $
UNDERWRITING DISCOUNT $ $
PROCEEDS TO INRANGE (BEFORE EXPENSES) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions.
The underwriters expect to deliver the shares to purchasers on or about ,
2000.
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
CHASE H&Q
, 2000
<PAGE> 3
INSIDE FRONT COVER
[artwork]
<PAGE> 4
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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................................................................................. 1
Risk Factors................................................................................................... 7
Cautionary Notice Regarding Forward-Looking Statements......................................................... 21
Use of Proceeds................................................................................................ 21
Dividend Policy................................................................................................ 21
Capitalization................................................................................................. 22
Dilution....................................................................................................... 23
Selected Combined Financial Data............................................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 26
Business....................................................................................................... 33
Management..................................................................................................... 48
Relationships Between Our Company and SPX...................................................................... 60
Principal and Management Stockholders.......................................................................... 65
Description of Capital Stock................................................................................... 67
Shares Eligible for Future Sale................................................................................ 72
United States Tax Consequences to Non-United States Holders.................................................... 73
Underwriting................................................................................................... 77
Legal Matters.................................................................................................. 79
Experts........................................................................................................ 79
Where You Can Find More Information............................................................................ 79
Index To Combined Financial Statements......................................................................... F-1
</TABLE>
UNTIL 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.
-i-
<PAGE> 5
PROSPECTUS SUMMARY
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION YOU SHOULD CONSIDER BEFORE INVESTING IN OUR CLASS B COMMON STOCK.
YOU SHOULD READ THE SUMMARY TOGETHER WITH THE MORE DETAILED INFORMATION ABOUT
OUR COMPANY AND CLASS B COMMON STOCK ELSEWHERE IN THIS PROSPECTUS, ESPECIALLY
THE RISKS OF INVESTING IN OUR CLASS B COMMON STOCK DISCUSSED UNDER "RISK
FACTORS." UNLESS OTHERWISE INDICATED OR THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "US" OR "WE" ARE TO INRANGE TECHNOLOGIES
CORPORATION, REFERENCES TO SPX ARE TO SPX CORPORATION AND ITS SUBSIDIARIES OTHER
THAN US, AND REFERENCES TO YEARS ARE TO OUR FISCAL YEARS ENDED DECEMBER 31 OF
THE YEAR INDICATED.
INRANGE TECHNOLOGIES CORPORATION
We design, manufacture, market and service networking and switching
solutions for storage, data and telecommunications networks. Our solutions
provide fast and reliable connections among networks of computers and peripheral
devices and are used in large-scale, mission-critical systems in Fortune 1000
businesses and other large enterprises. Our products are designed to be
compatible with various vendors' products and multiple communication standards
and protocols. Our solutions for serving the three networks include:
- Storage Networks. We offer our IN-VSN family of directors, switches,
channel extenders and optical networking products for storage networks,
which are networks used to manage the storage of information. Our
storage solutions are critical to storage networks because they direct,
or facilitate the transport of, data between storage devices, computers
and other networks. We focus on mission-critical datacenters where
reliability and continuous availability are essential. Our products are
compatible with popular storage network communication standards,
including ESCON and Fibre Channel. The flagship of our IN-VSN product
family is our 64-port FC/9000 Fibre Channel director class switch, the
largest Fibre Channel storage network switch available.
- Data Networks. We offer our Universal Touchpoint product family of
matrix switches, control systems and management applications used in
data networks, which are networks used for data transmission and
processing. 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 24,000-port Mega-Matrix switch, the
industry's largest switch.
- Telecommunications Networks. We offer our 7-View product family of
performance monitoring products for telecommunications networks, which
are networks used primarily for voice communication. Our 7-View
surveillance system provides management applications 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.
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. Our customers include
Aetna, American Express, AT&T, Bell Atlantic, British Telecom, Chase, Cisco,
Citigroup, Comdisco, Delta Airlines, EDS, Hewlett Packard, IBM, Lockheed Martin,
Nortel, Qwest, SABRE and Sungard.
THE 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 significantly. As enterprises have become more dependent
on these three 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 mission-critical network, 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
-1-
<PAGE> 6
and manageability of, their networks. As a result, we believe that there is a
need for vendors who can provide solutions and expertise that bridge these
disparate networks.
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 solutions for
multiple networks allows us to apply our expertise across networks and
architectures.
- LEADERSHIP IN DIRECTOR CLASS FIBRE CHANNEL SOLUTIONS. We are the leading
provider of director class Fibre Channel storage area network solutions. In
April 2000, we began shipping the industry's first 64-port Fibre Channel
director class switch, the IN-VSN FC/9000.
- EXTENSIVE INSTALLED CUSTOMER BASE. We have installed our products at over
2,000 sites, primarily in Fortune 1000 businesses and other large
enterprises.
- RESEARCH AND DEVELOPMENT EXPERTISE. As of May 1, 2000, we employed 149
personnel in our research and development department. We believe that this
investment positions us to capitalize on emerging technologies and
standards, such as Fibre Channel, FICON, Infiniband, ATM and xDSL, while
continuing to accommodate legacy technologies.
- SIGNIFICANT DIRECT SALES RESOURCES. As of May 1, 2000, we employed 152
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 May 1, 2000, we employed 144
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 a wholly-owned subsidiary of SPX Corporation. After
the completion of this offering of Class B common stock, SPX will own about
% of the outstanding shares of our common stock. SPX will own 100% of the
outstanding Class A common stock, which will represent % of the combined
voting power of all classes of our voting stock.
SPX has not reached 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. Whether
-2-
<PAGE> 7
SPX will adopt a plan to divest our stock in the future, and how such a
divestiture would occur, will depend on a variety of considerations and economic
factors, including the business prospects for each entity, the business reasons
for a divestiture, the market prices of our and SPX's common stock, SPX's
ability to divest our stock on a tax-free basis and the availability of other
strategic alternatives. Under current law, SPX will not be able to distribute
its shares of Class A common stock to its stockholders on a tax-free basis prior
to October, 2003, which is five years from the date SPX acquired General Signal
Corp.
We will enter into various agreements with SPX that relate to our
ongoing relationship following completion of this offering. These agreements
include a management services agreement, a tax sharing agreement, a registration
rights agreement, an employee matters agreement and a trademark license
agreement. All of these agreements will be made in the context of a
parent-subsidiary relationship and were negotiated in the overall context of
this offering. The terms of these agreements may be more or less favorable to us
than if they had been negotiated with unaffiliated third parties.
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. Our
principal executive office is located at 13000 Midlantic Drive, Mt. Laurel, New
Jersey 08054, and our telephone number is (856) 234-7900.
-3-
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Class B common stock offered by us........................ shares
Common stock to be outstanding after this offering
Class A common stock............................. shares
Class B common stock............................. shares
Total............................................ shares
Use of proceeds........................................... We intend to use the net proceeds of this offering for
general corporate purposes, including potential
acquisitions.
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. 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, shares of Class A common stock will
automatically convert into the same number of Class B
common stock if transferred to anyone other than SPX, except in
connection with a tax-free distribution.
Proposed Nasdaq National Market symbol................... INRG
</TABLE>
Mega-Matrix and CD/9000 are registered trademarks of our company. All
other trademarks, service marks or trade names referred to in this prospectus
are the property of their respective owners.
Unless otherwise indicated, all information contained in this
prospectus:
- gives effect to the conversion of each share of our common stock that
is outstanding prior to the offering into shares of Class A
common stock;
- assumes that the underwriters do not exercise their option to purchase
up to additional shares of our Class B common stock to cover
over-allotments;
- excludes shares of our Class B common stock reserved for
issuance pursuant to our stock compensation plan; and
- assumes an initial public offering price of $ per share of Class B
common stock, the midpoint of the initial public offering price range
set forth on the cover page of this prospectus.
-4-
<PAGE> 9
SUMMARY COMBINED FINANCIAL DATA
The tables on the following page present our summary combined financial
data. The data presented in these tables are from our historical combined
financial statements and the notes to those statements included elsewhere in
this prospectus. You should read those sections 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. Prior to this offering, all of the operations,
assets and liabilities of these units will 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.
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, "EBITDA" represents earnings before interest,
taxes, depreciation and amortization, other income (expense), special charges,
and gain on sale of real estate. We believe that EBITDA is an important
indicator of the liquidity and operating performance of technology companies.
You should not consider 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.
The as adjusted balance sheet data gives effect to the proposed sale of
Class B common stock in this offering at the mid-point of the range set forth on
the cover page of this prospectus.
-5-
<PAGE> 10
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
---------------------------------- ----------------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA: (unaudited)
Revenue .................................................. $ 218,971 $ 225,669 $ 200,622 $ 49,158 $ 46,153
Cost of revenue .......................................... 108,541 115,316 99,641 26,926 23,353
--------- --------- --------- --------- ---------
Gross margin .................................... 110,430 110,353 100,981 22,232 22,800
--------- --------- --------- --------- ---------
Operating expenses:
Research, development and engineering ................. 21,225 25,067 18,928 6,452 4,963
Selling, general and administrative ................... 57,659 63,517 49,337 13,474 12,404
Special charges ....................................... -- 6,971 10,587 9,687 --
Gain on sale of real estate ........................... -- -- (2,829) -- --
--------- --------- --------- --------- ---------
Total operating expenses ........................ 78,884 95,555 76,023 29,613 17,367
--------- --------- --------- --------- ---------
Operating income (loss) .................................. 31,546 14,798 24,958 (7,381) 5,433
Interest expense ......................................... 1,509 1,391 925 254 177
Other income (expense) ................................... 18 (178) 13,726 (181) 94
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............... 30,055 13,229 37,759 (7,816) 5,350
Income taxes ............................................. 12,198 5,873 15,459 (3,197) 2,140
--------- --------- --------- --------- ---------
Net income (loss) ........................................ $ 17,857 $ 7,356 $ 22,300 $ (4,619) $ 3,210
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per share ............. $ $ $ $ $
========= ========= ========= ========= =========
Shares used in computing basic and diluted earnings (loss)
per share .............................................
========= ========= ========= ========= =========
OTHER OPERATING DATA:
Depreciation and amortization ............................ $ 14,528 $ 13,160 $ 10,534 $ 2,895 $ 3,071
Capital expenditures, net ................................ 5,565 7,394 5,469 1,760 1,451
EBITDA ................................................... 46,074 34,929 43,250 5,201 8,504
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------
Actual As Adjusted
----------- -------------
(unaudited)
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash ..................................................................................... $ 1,711 $
Working capital .......................................................................... 37,320
Total assets ............................................................................. 134,385
Total debt (including short-term borrowings and current portion of long-term debt) ....... 3,583
Stockholder's investment ................................................................. 83,776
</TABLE>
-6-
<PAGE> 11
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. Our future revenue and earnings
growth will depend on the success of our new products, and we may not be able to
develop and introduce new products successfully in the timeframe we expect or
prior to the time our competitors do. 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 business and financial results. In addition, our
reputation could be significantly harmed among customers that use our products
for mission-critical applications. Product development delays may result from
numerous factors, including:
- failure to develop the necessary technology on a timely basis;
- changing market or competitive product requirements;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties in hiring and retaining necessary personnel;
- difficulties with independent contractors;
- failure to obtain licenses for required technology;
- changing original equipment manufacturer product specifications; and
- unanticipated engineering complexities.
We cannot be certain of the demand for, and market acceptance of, the
new or enhanced products that we do develop. This may be particularly
problematic since we undertake significant research and development expense
prior to marketing any new product. In addition, we must successfully manage the
introduction of new or enhanced products in order to 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. Customers may choose to delay purchasing
products until a later-generation product is developed, particularly if our
competitors have developed a more advanced product or our customers believe a
more advanced product will shortly be introduced by our competitors. Moreover,
at the end of the life cycle of our products, our reputation for producing
state-of-the-art products may be harmed and our customers may select a
competitor's product. Our revenue and profitability may be reduced if we fail to
develop or introduce new products and new product enhancements on a timely basis
or if any new products and product enhancements that we develop and introduce
are not broadly accepted.
-7-
<PAGE> 12
WIDESPREAD ADOPTION OF STORAGE AREA NETWORKS, AND THE FIBRE CHANNEL PROTOCOL ON
WHICH THESE NETWORKS ARE BASED, IS CRITICAL TO OUR FUTURE SUCCESS.
The market for storage area networks has only recently begun to develop
and is rapidly evolving. Because this market is relatively new, it is difficult
to predict its potential size or future growth rate. Our FC/9000 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. 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. 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
- 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 BUSINESS AND FINANCIAL
RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
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:
- mission-critical storage networks 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 financial results and our competitive position
and reputation.
-8-
<PAGE> 13
WE RELY ON SOLE SOURCES OF SUPPLY FOR SOME OF OUR PRODUCTS AND KEY COMPONENTS OF
OUR PRODUCTS. ANY DISRUPTION IN OUR RELATIONSHIPS WITH THESE SOURCES COULD
MATERIALLY ADVERSELY AFFECT BUSINESS AND FINANCIAL RESULTS.
We purchase custom applications specific integrated circuits ("ASICs")
for the FC/9000 from Ancor Communications, Inc. pursuant to a technology license
agreement. Ancor's failure to perform under this contract as a result of its
financial position or otherwise would have a material adverse effect on our
ability to produce the FC/9000 if we were unable to secure another source of
supply without a significant delay, increase in costs or decrease in the
performance of the FC/9000. The ASICs are currently produced on Ancor's behalf
by a third-party manufacturer, LSI Logic. Our business and financial results
could be harmed if LSI experiences delays, disruptions, capacity constraints,
quality control problems in its manufacturing operations or has financial
difficulties. Ancor has recently agreed to be acquired by QLogic Corp. and we
are not certain how our relationship with Ancor will be affected by this
acquisition.
In addition, under our contract, we and Ancor have agreed to treat
Ancor's next-generation ASIC as an ASIC governed by the terms of the contract,
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 cannot be certain that we will 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 business and financial
results.
In addition, Ancor has agreed to purchase our FC/9000 products and
resell them under its own label. Accordingly, a termination or disruption of our
relationship with Ancor could reduce the sales of the FC/9000.
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 distributor throughout the
world to sell Sorrento's optical networking products for the storage networks of
enterprise customers. Because Sorrento has not yet begun supplying us with this
product, we cannot be certain that Sorrento will be able to manufacture the
number of products that we require, of 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 manufacturing 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 business or financial results.
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 accounted for substantially all of our sales of our Network Channel
Office Equipment and our Integrated Monitor and Test System 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 or 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.
-9-
<PAGE> 14
IF WE FAIL TO SUCCESSFULLY DEVELOP THE INRANGE BRAND, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We believe that establishing and maintaining the INRANGE brand
contributes to our efforts to maintain and develop relationships with our
customers, and that the importance of brand recognition will increase due to the
growing number of vendors of storage area network products. If we do not
increase our revenue as a result of our branding efforts or otherwise fail to
promote our brand successfully, or if we incur excessive expenses in an attempt
to promote and maintain the INRANGE brand, our business and financial results
may be materially adversely affected. It is critical that our customers and
vendors of storage area network products perceive all of our products to be of
high quality since most of our customers use our products in mission-critical
applications. If our reputation suffers, or if we introduce new products that
are not accepted by the market, the value of the INRANGE brand will decline and
our business will suffer.
WE ARE MOVING TO A NEW FACILITY AND IF WE FAIL TO PROPERLY MANAGE THIS MOVE OR
OTHER ELEMENTS OF OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
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. If this facility is not ready for occupancy in the first
quarter of 2001, our growth plans may be materially adversely affected. In
addition, we intend to continue to seek to expand and grow our business for the
foreseeable future. Our expansion has placed significant demands on our
management, research and development department, manufacturing facilities, sales
force, systems and other resources. Additional growth will further strain these
resources. In order to manage our growth effectively, we must continue to invest
in our systems and facilities and continue to expand, train and manage our work
force. Being a public company will place additional demands on our management.
We must continue to improve and coordinate our managerial, operational and
financial controls and our reporting systems and other procedures to manage our
growth and our being a public company. Our failure to manage the growth of our
business effectively could have a material adverse effect on our business and
financial results.
FAILURE TO EXPAND AND MANAGE OUR DISTRIBUTION CHANNELS INCLUDING OUR
RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS COULD LIMIT OUR ABILITY TO
INCREASE REVENUE.
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. As a result, we expect
indirect sales channels to represent an increasing percentage of our total sales
over the next few years. Sales through indirect sales channels have lower gross
margins than sales through directs sales channels. We have only recently
marketed our products to original equipment manufacturers, including Ancor, and
we cannot be certain that we will be able to reach agreement with any other
original equipment manufacturers. Even if we do reach agreement with original
equipment manufacturers, we cannot be certain that they will continue to
develop, market and sell products that incorporate our technology, nor can we
control their ability or willingness to do so. We intend to sell our products to
original equipment manufacturers 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 materially adversely affected. 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. If we fail to develop and manage relationships with original
equipment manufacturers or if they fail to sell our products, it will have a
material adverse effect on our business and financial results.
IF THE PRICES OF OUR PRODUCTS DECLINE, OUR REVENUE AND GROSS MARGINS WILL BE
REDUCED.
Although we have not experienced an overall decrease in the average
selling prices of our products, 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
-10-
<PAGE> 15
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
revenue and gross margins will decline significantly.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR SUCCESS, OUR BUSINESS AND
FINANCIAL RESULTS 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. For a more complete discussion of the protection of our
intellectual property, see "Business -- Intellectual Property." During 1999,
sales to customers outside of the United States accounted for approximately 39%
of our revenue. 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.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND.
In recent years, there has been significant litigation in the United
States and in foreign countries involving patents and other intellectual
property rights. We may be a party to litigation in the future to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting lawsuit could subject us
to significant liability for damages and invalidation of our proprietary rights.
These lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation, if determined adversely to us, or if
settled by us to avoid the expense and disruption of litigation, also could
force us to do one or more of the following:
- stop selling, incorporating or using our products or services that use
the challenged intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; and
- redesign those products or services that use such technology, which we
may or may not be able to do or which may result in a more costly or
less effective product.
If we are forced to take any of the foregoing actions, we may be unable
to manufacture and sell our products, which would reduce our revenue and
profitability.
COMPETITION IN NETWORK MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE.
The business of providing components and solutions to the storage area
network market is highly competitive. As a result, our business may not develop
as significantly or quickly as we expect and our profitability could be impaired
by pricing pressure from this competition. Our future growth is highly dependent
on this business. Our primary competitor in the Fibre Channel switch market,
Brocade Communications, currently sells more Fibre
-11-
<PAGE> 16
Channel switches than we do. Its perception by some as an early leader 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 market, the market for SS7 management
equipment 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 face competition from other emerging telecommunications
networking providers.
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 financial results. See "Business --
Competition."
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 AND GOVERNMENT REGULATIONS AFFECTING OUR BUSINESS EVOLVE
RAPIDLY, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER.
Our products must comply with industry standards. For example, in the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission. Internationally, our products
must also comply with standards established by authorities in various countries.
Any new products and product enhancements that we introduce in the future must
also meet industry standards at the time they are introduced. Failure to comply
with existing or evolving industry standards or to obtain timely domestic or
foreign regulatory approvals or certificates could materially harm our business
and financial results.
Our storage networking products comprise only a portion of the
components needed to create a storage area network. All components of the
storage area network must comply with the same standards in order to operate
efficiently together. We depend on companies that provide other components of
the storage area network to support the industry standards as they evolve. Many
of these companies are significantly larger and more influential in affecting
industry standards than we are. Some industry standards may not be widely
adopted or they may not be implemented uniformly, and competing standards may
emerge that may be preferred by original equipment manufacturer customers or end
users. If larger companies do not support the same industry standards that we
do, or if competing standards emerge, market acceptance of our products could
suffer or we may have to incur significant
-12-
<PAGE> 17
costs to adapt our products to new industry standards and to make our products
adaptable to a wide range of standards.
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 business.
IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL, ENGINEERING,
RESEARCH, SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS MAY
SUFFER.
Our success depends to a significant degree upon the continued
contributions of our key personnel in engineering, research, sales, marketing,
finance and operations, many of whom would be difficult to replace. In
particular, we believe that our future success is highly dependent on Gregory R.
Grodhaus, our President and Chief Executive Officer, and Charles A. Foley, our
Executive Vice President and Chief Technology Officer. We do not maintain key
person life insurance on our key personnel and do not have employment contracts
with any of our key personnel. The loss of the services of any of our key
personnel could have a negative impact on our business.
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 cannot guarantee
that we will 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, 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, since a portion of
employees' compensation is stock based.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We have experienced significant fluctuations in sales, revenue and
operating results from quarter to quarter due to a combination of factors, and
expect these fluctuations to continue in future periods. Since 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;
-13-
<PAGE> 18
- policies by our suppliers;
- regulatory changes;
- capital spending;
- one-time gains or losses;
- delays of payments by customers; and
- general economic conditions.
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 solutions to our customers. This third party may not continue to
bring sales opportunities to us and we cannot be sure that our relationships
with these vendors will continue. If our relationships with these vendors is
terminated, we would lose these sales opportunities.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT CAUSE US TO INCUR DEBT OR ASSUME
CONTINGENT LIABILITIES AND, IF THE PURCHASE PRICE IS PAID IN SHARES OF OUR
STOCK, THE ACQUISITION COULD DILUTE OUR STOCKHOLDERS OR GIVE SUPERIOR RIGHTS TO
THE NEW STOCKHOLDERS.
As part of our strategy, we review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets, enhance our technical capabilities or otherwise
offer growth opportunities. We cannot be certain that any such transaction will
occur. If we complete any future purchases, we could issue stock, incur debt, or
be required to assume liabilities of the acquired business, some of which we
would not be aware of at the time of the acquisition. Acquisitions in which we
issue stock may be dilutive to our earnings, and if stock other than Class B
common stock is used, the recipients of the stock may have rights superior to
those of our existing Class B common stockholders. If we borrow money, our
interest expense would increase and may result in our becoming subject to
operating restrictions under a credit agreement. Any acquisition may also
involve other numerous risks, including:
- problems combining the purchased operations, technologies or products
into our existing operations;
- unanticipated costs;
- diversion of management's attention from our core business;
- material adverse effects on existing business relationships with
suppliers and customers;
-14-
<PAGE> 19
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
We are not certain that we will be able to successfully integrate any
operations, products, technologies or personnel of businesses that we might
purchase in the future.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND
DIFFICULTIES ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD HARM OUR
BUSINESS.
Revenue derived from customers located outside of the United States
represented 39% of our 1999 revenue. 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 business could be materially harmed. These difficulties include:
- difficulties related to staffing and managing foreign operations in our
highly technical industry;
- unexpected changes in regulatory requirements;
- licenses, tariffs and other trade barriers imposed on products such as
ours;
- reduced or limited protections of intellectual property rights;
- political and economic instability;
- potentially adverse tax consequences resulting from changes in tax
laws;
- difficulties related to obtaining approvals for products from foreign
governmental agencies which regulate networks;
- compliance with a wide variety of complex foreign laws and treaties
relating to telecommunications equipment; and
- delays or difficulties collecting accounts receivable from foreign
entities that cannot be sued in the United States.
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 thus 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.
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.
Pursuant to current U.S. law, we may not be able to enforce 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.
-15-
<PAGE> 20
IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES OR
RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS.
We believe that the net proceeds of this offering, together with our
existing 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,
we may be required, or could elect, to seek additional funding prior to that
time, particularly if we acquire a business or enter into a joint venture, or
our cash flow is not as strong as we anticipate. We may be unable to borrow
sufficient funds. If we are able to borrow funds, the terms of the credit
arrangements may impose significant operating restrictions on us. Further, if we
issue new equity securities, stockholders may experience significant dilution or
the new equity securities may have rights, preferences or privileges senior to
those of existing holders of our Class B common stock. 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. If we cannot raise funds on acceptable terms, we may
be unable to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY.
In the past, securities class action litigation often has been brought
against companies following periods of volatility in the market price of their
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources and seriously harm our business and financial results.
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
own approximately % of the total number of outstanding shares of our common
stock, or approximately % if the underwriters exercise their over-allotment
option in full. SPX will own 100% of the outstanding Class A common stock, which
will represent % of the combined voting power of our voting stock, or %
of the voting power of all classes of our voting stock if the underwriters
exercise their over-allotment option in full. Until SPX owns less than 50% of
the combined voting power of our stock, SPX will be able to elect our entire
board of directors, to remove any director for cause 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.
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.
-16-
<PAGE> 21
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 depressed.
THE SUPERIOR VOTING RIGHTS OF CLASS A COMMON STOCK RELATIVE TO CLASS B COMMON
STOCK COULD MATERIALLY ADVERSELY AFFECT THE STOCK PRICE AND LIQUIDITY OF THE
CLASS B COMMON STOCK YOU PURCHASE IN THE OFFERING.
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. For more information about the rights
associated with owning our Class A and Class B common stock, see "Description of
Capital 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;
- 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 charter does not contain any
special provisions setting forth rules governing these potential conflicts. In
addition, the contractual agreements we have with SPX for SPX to provide us with
various ongoing services 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. These
agreements were made in the context of an affiliated relationship and were
negotiated in the overall context of this offering. The prices and other terms
under these agreements may be less favorable to us than what we could have
obtained 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 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
-17-
<PAGE> 22
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.
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 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 charter will
not have special provisions to deal with these potential conflicts and we intend
to deal with conflicts on a case-by-case basis.
WE FACE RISKS ASSOCIATED WITH BEING A MEMBER OF SPX'S CONSOLIDATED GROUP FOR
FEDERAL INCOME TAX PURPOSES.
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, notwithstanding the tax sharing
agreement, 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.
There is currently no public market for our Class B common stock, and
an active trading market may not develop or be sustained after this offering.
The initial public offering price will be 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:
- economic and stock market conditions generally and specifically as they
may impact participants in our industry;
- changes in and failures to meet financial estimates and recommendations
by securities analysts following our stock;
- earnings and other announcements by, and changes in market valuations
of, participants in our industry;
-18-
<PAGE> 23
- changes in business or regulatory conditions affecting participants in
the networking industry;
- increased price competition;
- announcements or implementation by us or our competitors of
technological innovations or new products; and
- trading volume of our Class B common stock.
The securities of many companies 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 MORE THAN 80%
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 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.
WE HAVE BROAD DISCRETION TO USE A PORTION OF THE PROCEEDS OF THIS OFFERING AND
MAY NOT USE THE PROCEEDS EFFECTIVELY.
We estimate that the net proceeds of this offering will be
approximately $ million. Our management team will retain broad discretion as
to the allocation of these proceeds and may spend these proceeds in ways with
which our public stockholders may not agree.
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.
Amendments we intend to make to our certificate of incorporation and
our bylaws prior to this offering 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 charter,
our bylaws, and the various
-19-
<PAGE> 24
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, we intend to amend our charter prior to this
offering to authorize 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. We also intend
to amend our certificate of incorporation prior to this offering to provide 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.
INVESTORS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase Class B common stock in this offering, you will pay
more for your shares than the amounts paid by SPX for its shares. As a result,
you will experience immediate and substantial dilution of approximately $
per share, representing the difference between the initial public offering price
of $ per share and our net tangible book value per share as of March 31,
2000 after giving effect to this offering. See "Dilution" for a more complete
description of how the value of your investment in our Class B common stock will
be diluted upon the completion of this offering.
-20-
<PAGE> 25
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" for purposes of
the Securities Act of 1933 and the Securities Exchange Act of 1934. 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. We undertake no obligation to update publicly or revise any
forward-looking statements.
USE OF PROCEEDS
We estimate that the net proceeds from our sale of shares of
Class B common stock will be approximately $ 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 $ million. We intend to use the net
proceeds of this offering for general corporate purposes, including potential
acquisitions. We regularly evaluate, and from time to time engage in discussions
with, acquisition candidates. Pending their use, we may invest the net proceeds
in short-term marketable securities.
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.
-21-
<PAGE> 26
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table sets forth our cash, debt and capitalization as of
March 31, 2000:
- on an actual basis; and
- as adjusted to give effect to this offering.
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 March 31, 2000
----------------------------
Actual As Adjusted
-------- -------------
<S> <C> <C>
(in thousands)
Cash.............................................................................. $ 1,711
======= ========
Short-term borrowings and current portion of long-term debt....................... $ 3,573
Long-term debt.................................................................... 10
------- --------
Total debt................................................................... 3,583
------- --------
Stockholder's equity:
Preferred stock, par value $0.01 per share, shares authorized and --
none outstanding
Class A common stock, par value $0.01 per share, shares authorized, --
shares issued and outstanding as adjusted
Class B common stock, par value $0.01 per share, shares authorized, --
shares issued and outstanding as adjusted
SPX's net investment......................................................... 83,747
Accumulated other comprehensive income....................................... 29
------- --------
Total stockholder's equity........................................................ 83,776
------- --------
Total capitalization.............................................................. $87,359
======= ========
</TABLE>
-22-
<PAGE> 27
DILUTION
Our net tangible book value as of March 31, 2000 was approximately
$76.3 million or $ 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 Class A common stock and Class B common stock outstanding
prior to this offering. Assuming we had also sold the shares of Class B common
stock offered hereby at an assumed initial public offering price of $ per
share, and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our net tangible book value at March
31, 2000 would have been approximately $ million, or $ per share. This
represents an immediate increase in net tangible book value of $ per share
to the existing stockholder and an immediate dilution of $ 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>
Assumed initial public offering price............................. $
Net tangible book value as of March 31, 2000..............
Increase attributable to new investors....................
Net tangible book value after giving effect to the offering.......
---------
Dilution to new investors......................................... $
=========
</TABLE>
The following table sets forth as of March 31, 2000 the number of
shares of common stock purchased from us, the total consideration paid and the
average price per share paid by the existing stockholder and by new investors
purchasing shares of our Class B common stock in this offering. The calculations
with respect to shares purchased by new investors in this offering reflect an
assumed offering price of $ per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- ------------------- Average price
Number Percent Amount Percent per share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder... % $ % $
New investors..........
------ ------- ------ -------
Total............... % $ %
====== ======= ====== =======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
net tangible book value per share of common stock as of March 31, 2000 would
have been $ per share, which would result in dilution to the new investors of $
per share, and the number of shares of Class B common stock held by the new
investors would increase to or % of the total number of shares to be outstanding
after this offering.
-23-
<PAGE> 28
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, 1995,
1996 and 1997 are derived from our audited combined financial statements that
are not included in this prospectus. The combined statement of operations data
for the three months ended March 31, 1999 and 2000 and the combined balance
sheet data as of March 31, 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. Prior to this offering, all of the operations, assets and liabilities of
these units will 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, "EBITDA" represents earnings before interest,
taxes, depreciation and amortization, other income (expense), special charges,
and gain on sale of real estate. We believe that EBITDA is an important
indicator of the liquidity and operating performance of technology companies.
You should not consider 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.
-24-
<PAGE> 29
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended
YEAR ENDED DECEMBER 31, March 31,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue......................... $202,686 $214,433 $218,971 $225,669 $200,622 $ 49,158 $ 46,153
Cost of revenue................. 100,992 108,037 108,541 115,316 99,641 26,926 23,353
-------- -------- -------- -------- -------- -------- --------
Gross margin............. 101,694 106,396 110,430 110,353 100,981 22,232 22,800
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research, development and
engineering.................. 19,666 20,191 21,225 25,067 18,928 6,452 4,963
Selling, general and
administrative............... 54,105 52,979 57,659 63,517 49,337 13,474 12,404
Special charges................ 12,671 731 -- 6,971 10,587 9,687 --
Gain on sale of real estate.... -- -- -- -- (2,829) -- --
-------- -------- -------- -------- -------- -------- --------
Total operating expenses.. 86,442 73,901 78,884 95,555 76,023 29,613 17,367
-------- -------- -------- -------- -------- -------- --------
Operating income (loss).......... 15,252 32,495 31,546 14,798 24,958 (7,381) 5,433
Interest expense................. 1,966 497 1,509 1,391 925 254 177
Other income (expense)........... 75 (149) 18 (178) 13,726 (181) 94
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes............ 13,361 31,849 30,055 13,229 37,759 (7,816) 5,350
Income taxes..................... 7,208 13,497 12,198 5,873 15,459 (3,197) 2,140
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................ $ 6,153 $ 18,352 $ 17,857 $ 7,356 $ 22,300 $ (4,619) $ 3,210
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss)
per share...................... $ $ $ $ $ $ $
======== ======== ======== ======== ======== ======== ========
Shares used in computing basic
and diluted earnings (loss) per
share..........................
======== ======== ======== ======== ======== ======== ========
OTHER OPERATING DATA:
Depreciation and amortization.... $ 9,806 $ 12,468 $ 14,528 $ 13,160 $ 10,534 $ 2,895 $ 3,071
Capital expenditures, net........ 6,077 4,062 5,565 7,394 5,469 1,760 1,451
EBITDA........................... 37,729 45,694 46,074 34,929 43,250 5,201 8,504
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Cash............................ $ -- $ -- $ -- $ 2,461 $ 1,023 $ 1,711
Working capital................. 7,131 31,893 21,142 33,970 35,315 37,320
Total assets.................... 111,403 118,281 105,452 126,458 132,350 134,385
Total debt (including short-term
borrowings and current
portion of long-term debt).... 35,117 12,694 16,285 5,322 4,131 3,583
Stockholder's investment........ 36,921 65,006 50,246 74,453 78,498 83,776
</TABLE>
-25-
<PAGE> 30
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 networking and switching
solutions for storage, data and telecommunications networks. Our solutions
provide fast and reliable connections among networks of computers and peripheral
devices and are used in large-scale, mission-critical systems in 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.
Prior to this offering, all of the operations, assets and liabilities of these
units will 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.
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.
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 include labor costs for those engaged in the assembly and
-26-
<PAGE> 31
maintenance of our products, overhead costs 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
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
operating data as a percentage of revenue:
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
------------------------ ----------------------------
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% 45.2% 49.4%
Research, development and engineering 9.7% 11.1% 9.4% 13.1% 10.8%
Selling, general and administrative 26.3% 28.1% 24.6% 27.4% 26.9%
Operating income 14.4% 6.6% 12.4% (15.0)% 11.8%
Net income 8.2% 3.3% 11.1% (9.4)% 7.0%
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 2000
Revenue. Revenue for the three months ended March 31, 2000 was $46.2
million, a decrease of $3.0 million or 6.1% from $49.2 million for the three
months ended March 31, 1999. Excluding the negative impact of foreign currency
fluctuations, revenue in the quarter declined 4.5%. We believe that the decrease
in revenue in the first quarter of 2000 resulted in large part from an expected
slowdown in purchases from major accounts following their accelerated purchases
during the first half of 1999 in preparation for the year 2000 transition.
-27-
<PAGE> 32
Revenue was negatively impacted by decreased sales of a matrix
switching product and of a telecommunications monitoring product. In addition to
the impact of the year 2000 transition, we believe that the decrease in sales of
the matrix product 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
and our new models that we began shipping in the first quarter of 2000, to
expand the applications of, and market for, this product. The reduction in sales
of the telecommunications monitoring product resulted from reduced sales to a
single customer.
Cost of Revenue. Our cost of revenue for the three months ended March
31, 2000 was $23.4 million, a decrease of $3.6 million, or 13.3%, from $26.9
million for the three months ended March 31, 1999. As a percentage of revenue,
cost of revenue decreased to 50.6% for the three months ended March 31, 2000
from 54.8% for the three months ended March 31, 1999. This represented an
increase in gross margin to 49.4% for the three months ended March 31, 2000 from
45.2% for the three months ended March 31, 1999. The decrease in cost of revenue
was related to a reduction in manufacturing overhead and service costs with the
remainder related to a reduction in labor and material costs as a percentage of
sales.
Research, Development and Engineering. Research, development and
engineering expenses for the three months ended March 31, 2000 were $5.0
million, a decrease of $1.5 million, from $6.5 million for the three months
ended March 31, 1999. As a percentage of revenue, research, development and
engineering expenses were 10.8% for the three months ended March 31, 2000,
compared to 13.1% for the three months ended March 31, 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 $6.3 million for the three months ended March 31,
2000, or 13.6%, of revenue, compared to $7.9 million, or 16.1% of revenue, for
the three months ended March 31, 1999.
Selling, General and Administrative. Selling, general and
administrative expenses for the three months ended March 31, 2000 were $12.4
million, a decrease of $1.1 million or 7.9% from $13.5 million for the three
months ended March 31, 1999. As a percentage of revenue, selling, general and
administrative expenses were 26.9% for the three months ended March 31, 2000,
compared to 27.4% for the three months ended March 31, 1999. 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.
Special Charges. There were no special charges for the three months
ended March 31, 2000. Special charges of $9.7 million were recorded for the
three months ended March 31, 1999 to cover the cost of restructuring initiatives
announced in that quarter. 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.
Interest Expense. Interest expense for the three months ended March 31,
2000 was $0.2 million, compared to $0.3 million for the three months ended March
31, 1999.
Other Income (Expense). Other income for the three months ended March
31, 2000 was $0.1 million, compared to an expense of $0.2 million for the three
months ended March 31, 1999. This change resulted primarily from reduced foreign
currency expense.
Income Taxes. Our effective tax rate for the three months ended March
31, 2000 was 40%, compared to 41% for the three months ended March 31, 1999.
-28-
<PAGE> 33
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue. Revenue for 1999 was $200.6 million, a decrease of $25.1
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, our research, development and engineering expense decreased to
$18.9 million for 1999 from $25.1 million for 1998. Including capitalized
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 $49.3 million, down $14.2 million, or
22.3%, from $63.5 million in 1998. As a percentage of revenue, selling, general
and administrative expenses were 24.6% for 1999, compared to 28.1% 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.
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.
-29-
<PAGE> 34
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 $63.5 million, an increase of $5.9
million, or 10.2%, from $57.7 million in 1997. As a percentage of revenue,
selling, general and administrative expenses were 28.1% in 1998, compared to
26.3% in 1997. This increase was a result of our expansion of sales, technical
support and marketing organizations, both 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.
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.
-30-
<PAGE> 35
QUARTERLY FINANCIAL INFORMATION
The following table presents our unaudited quarterly statement of
operations data for 1998 and 1999 and the first 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
-------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- --------- --------- --------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF
OPERATIONS DATA (IN THOUSANDS)
Revenue $54,157 $58,542 $59,968 $53,002 $49,158 $53,225 $50,221 $48,018 $46,153
Cost of Revenue 26,401 28,839 30,041 30,035 26,926 27,338 21,879 23,498 23,353
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross Margin 27,756 29,703 29,927 22,967 22,232 25,887 28,342 24,520 22,800
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Expenses:
Research, development and
engineering 5,737 6,294 6,515 6,521 6,452 4,166 3,818 4,492 4,963
Selling, general and
administrative 15,521 15,529 15,270 17,197 13,474 11,311 10,873 13,679 12,404
Special charges - - - 6,971 9,687 - - 900 -
Gain on sale of real estate - - - - - - (2,829) - -
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 21,258 21,823 21,785 30,689 29,613 15,477 11,862 19,071 17,367
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Income (Loss) 6,498 7,880 8,142 (7,722) (7,381) 10,410 16,480 5,449 5,433
Interest Expense 292 298 437 364 254 243 213 215 177
Other Income(Expense) - - 134 (312) (181) 7,938 6,156 (187) 94
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes 6,206 7,582 7,839 (8,398) (7,816) 18,105 22,423 5,047 5,350
Income Taxes 2,755 3,366 3,481 (3,729) (3,197) 7,416 9,177 2,063 2,140
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income (Loss) $ 3,451 $ 4,216 $ 4,358 $(4,669) $(4,619) $10,689 $13,246 $ 2,984 $ 3,210
======= ======= ======= ======= ======= ======= ======= ======= =======
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 51.3 50.7 49.9 43.3 45.2 48.6 56.4 51.1 49.4
Research, development and
engineering 10.6 10.8 10.9 12.3 13.1 7.8 7.6 9.4 10.8
Selling, general and
administrative 28.7 26.5 25.5 32.4 27.4 21.3 21.7 28.5 26.9
Net income (loss) 6.4 7.2 7.3 (8.8) (9.4) 20.1 26.4 6.2 7.0
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $5.5 million for the three
months ended March 31, 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 three months ended March 31, 2000, operating cash flow benefited from a
decrease in receivables and offset by an increase in 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.
-31-
<PAGE> 36
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 three months ended March 31, 2000, net cash generated by
financing activities was $1.4 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 March 31, 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 March 31, 2000,
approximately $3.5 million was outstanding under these facilities. The weighted
average interest rate on borrowings under the foreign lines of credit was 5.93%
for the three months ended March 31, 2000 and 6.11% 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 $0.7
million for the three months ended March 31, 2000, $3.1 million for 1999, $3.0
million for 1998 and $2.7 million for 1997. As of May 1, 2000, total future
minimum rental payments were approximately $21.7 million.
Cash flow used for investing activities was $6.3 million for the three
months ended March 31, 2000, $20.0 million for 1998 and $11.2 million for 1997.
Of the $6.3 million used for the three months ended March 31, 2000, $3.0 million
represented an equity investment in a strategic third party. 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 $1.5 million was spent in the first
quarter. In 1999, we spent $5.5 million on capital expenditures.
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. We cannot be certain that
additional financing will be available at all, or, if available, that such
financing will be obtainable on terms acceptable to us or that any additional
financing will not be dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1999, the Securities and Exchange Commission's staff issued Staff
Accounting Bulletin ("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.
-32-
<PAGE> 37
BUSINESS
OVERVIEW
We design, manufacture, market and service networking and switching
solutions for storage, data and telecommunications networks. Our solutions
provide fast and reliable connections among networks of computers and peripheral
devices and are used in large-scale, mission-critical systems in Fortune 1000
businesses and other large enterprises. This is highlighted by our 64-port
FC/9000 director class switch which is the largest Fibre Channel switch
available and provides a platform from which enterprises can build
mission-critical storage networks. 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. Our customers include
Aetna, American Express, AT&T, Bell Atlantic, British Telecom, Chase, Cisco,
Citigroup, Comdisco, Delta Airlines, EDS, Hewlett Packard, IBM, Lockheed Martin,
Nortel, Qwest, SABRE, and Sungard.
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 these three 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 mission-critical
network, 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 Dataquest, the growth of information that enterprises are
capturing and storing has approximately doubled annually over the past several
years and is projected to continue to approximately double annually 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.
Storage networks may be separated into two categories:
-33-
<PAGE> 38
- networks within a single location or small area, which are referred to
as storage area networks, or SANs; 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, or VSNs.
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 of the large amounts of the information they store on
storage systems connected to mainframe computers that are not currently
compatible with Fibre Channel. In fact, according to a report issued in November
1999 by International Data Corporation, or IDC, 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 mission-critical storage applications
that have previously been performed within a mainframe environment.
In a report issued in April 2000, IDC 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%.
IDC 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 IDC 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. IDC 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, or LANs, which are networks of computers that are
located in a small area; and
- wide area networks, or WANs, which are networks of computers that are
dispersed geographically.
-34-
<PAGE> 39
As the demands for speed and reliability of LANs and WANs 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. IDC 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. IDC 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 solutions 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 solutions that are
compatible with both emerging industry standards and proprietary legacy
technologies. The following are our solutions 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 mission-critical datacenters 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 product family
consists of matrix 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
-35-
<PAGE> 40
solutions 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 product
family of performance monitoring products for
telecommunications networks. Our 7-View surveillance system
provides management applications 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 solutions
for multiple networks allows us to apply our expertise across networks and
architectures. This enables us to design our solutions 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 DIRECTOR CLASS FIBRE CHANNEL SOLUTIONS
We are the leading provider of director class Fibre Channel storage
area network solutions. In April 2000, we began shipping the industry's first
64-port Fibre Channel director class switch, 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 mission-critical applications.
EXTENSIVE INSTALLED CUSTOMER BASE
We have installed our products at over 2,000 sites, 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 May 1, 2000, we employed 149 personnel in our research and development
department. We believe that this investment positions us to capitalize on
emerging technologies and standards, such as Fibre Channel, FICON, Infiniband,
ATM and xDSL, while continuing to accommodate legacy technologies.
SIGNIFICANT DIRECT SALES RESOURCES
As of May 1, 2000, we employed 152 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.
-36-
<PAGE> 41
SERVICE AND SUPPORT CAPABILITIES
As of May 1, 2000, we employed 144 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
Our 60 internationally based sales and service professionals, in
conjunction with indirect sales channels, 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, or ATM, 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.
-37-
<PAGE> 42
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.
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. 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
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 based on
our IN-VSN solutions have a streamlined infrastructure, are able to transmit
information across multiple architectures, and offer a single point of
management to efficiently scale the network as our clients' 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,
mission-critical storage networking for both the mainframe and client/server
markets and 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 mission-critical applications. Key
features of the FC/9000 are:
- 64-port capability, currently the largest switch available;
-38-
<PAGE> 43
- full duplex, 1 gigabit/second throughput;
- the lowest switching delay available at 0.5 - 2.0 millionths
of a second;
- redundancy of all critical systems to guarantee uptime for
mission-critical applications;
- modular design, which allows easy and flexible reconfiguration
into a larger switch;
- a graphical user interface control system for easy
configuration and management; and
- a technology roadmap to increase the number of ports to 128
and eventually to 256.
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 communicate
over Fibre Channel networks;
- features that expand connectivity and increase port bandwidth;
and
- a graphical user interface control system for easy
configuration and management.
Our 9801 Storage Networking System (9801SNS) 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 May 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, or WDM, and dense wave division
multiplexing, or DWDM products, including Gigamux, as part of our IN-VSN family
of storage networking products. We will provide Sorrento revenue guarantees in
return for exclusive worldwide rights to offer these products in the enterprise
storage networking market. These products facilitate the creation of virtual
storage networks by reducing the costs of sending information over long
distances. WDM 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.
-39-
<PAGE> 44
The following table provides information on our IN-VSN family of storage
networking products.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
PRODUCT MODEL DESCRIPTION APPLICATION ADVANCED FEATURES
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FC/9000 Fibre Channel Fibre Channel SAN SAN applications, - 64 ports
Director switching and management including server, data - 1 gigabit/sec per port
warehousing, and tape - Scalable into a fabric
backup of multiple switches
----------------------------------------------------------------------------------------------------------------------------------
CD/9000 ESCON Director ESCON switching Networking between - 256 ports
mainframe class - Redundancy and
computers and storage fault tolerance
peripherals over fiber - Graphical user
links interface
----------------------------------------------------------------------------------------------------------------------------------
Gigamux Optical Wave Division Linking storage devices - 32:1 multiplexing
Networking Platform Multiplexing solutions over long distances capability
- 4:1 ESCON multiplexing
----------------------------------------------------------------------------------------------------------------------------------
9801 Storage Networking Channel extension High speed dual path - T1, T3, OC3
System extension capability
- Dual path remote
mirroring applications
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
-40-
<PAGE> 45
The following table provides information on our data networking
products.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
PRODUCT MODEL DESCRIPTION APPLICATION ADVANCED FEATURES
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Universal Touchpoint Versatile matrix switch; Datacenter - Scalable LAN/WAN switch
2700/2800 matrix switching physical network communications - Up to 4,000 WAN ports
platform management platform management for disaster and 3,000 10Mbps
recovery and test Ethernet ports or 2000
access; central site megabyte per second
management of Token Ring ports
distributed data networks - Remote control from
multiple stations
------------------------------------------------------------------------------------------------------------------------------------
Mega-Matrix switch High capacity matrix Disaster recovery - Scalable switch
switch of up to 24,000 ports
------------------------------------------------------------------------------------------------------------------------------------
MD/9000 Message director Enterprise Application Allows legacy data and - Mainframe connects
Integration software applications to be through a standard
accessed by various input/output interface,
systems, including while the network
client/server connects through a
middleware messaging
interface
- Permits legacy
communication
without re-writing
legacy applications
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TELECOMMUNICATIONS NETWORKING PRODUCTS
Our 7-View family of products permits both large and small
telecommunications carriers to enhance network availability and performance by
accessing Signaling System Seven, or SS7, technology, which is a technology that
captures and provides information about carrier 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.
-41-
<PAGE> 46
The following table provides information on our telecommunications
networking products.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
PRODUCT MODEL DESCRIPTION APPLICATION ADVANCED FEATURES
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7-VIEW Surveillance System Monitoring of telephone Early warning of network - Remote monitoring of 32
signaling systems outages. Call tracing ports per unit and 10,000
and fraud detection. links per system
Billing verification. - Local storage of
recorded data
----------------------------------------------------------------------------------------------------------------------------------
Network Channel Office Network probe for In line performance - Format conversion
Equipment (NCOE) network quality assurance monitoring for quality - Alarm monitoring
of service measurement - Measurement of
error free seconds
- Local data memory
----------------------------------------------------------------------------------------------------------------------------------
Integrated Monitor and Network Management Bridged performance - Alarm monitoring
Test System (CPM) System for network monitoring for quality - Performance monitoring
quality assurance of service measurement - T1/E1; T3/E3; OC3/SDH
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSULTING SERVICES AND PRODUCT SUPPORT
Our global services and support organization of approximately 200
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.
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. Since we are focused on large-scale, mission-critical products,
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
-42-
<PAGE> 47
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. 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 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. 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. 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.
In May 2000 Ancor announced that it had agreed to be 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 customers include Aetna, American Express,
AT&T, Bell Atlantic, British Telecom, Chase, Cisco, Citigroup, Comdisco, Delta
Airlines, EDS, Hewlett Packard, IBM, Lockheed Martin, Nortel, Qwest, SABRE, and
Sungard.
In 1999, our largest customer accounted for 8.5% of our revenue.
-43-
<PAGE> 48
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 May 1, 2000, we received 23 U.S. patents, had pending
applications with the U.S. Patent and Trademark Office for four additional
patents, and were in the process of preparing filings for eleven additional
patents.
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. Since most of our products are high cost, low volume, 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 Sanmina
Corporation. While we 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
OEMs.
- 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 May 1, 2000, we employed 152 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 with original
equipment manufacturers.
-44-
<PAGE> 49
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
solutions 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;
- 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 competitors for channel extension products are CNT and CompuTerm. 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, IBM, and McData. We also face competition from
-45-
<PAGE> 50
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 May 1, 2000, we had 691 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.
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
260,000 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
-46-
<PAGE> 51
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 3,500 square feet of office space in Westford,
Massachusetts for research and development efforts associated with some of our
telecommunications products.
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.
-47-
<PAGE> 52
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY MANAGEMENT
The following table sets forth information regarding our executive
officers, directors and key management.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
John B. Blystone 46 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
OTHER KEY MANAGEMENT
Ronald J. Bulin 58 Vice President-Service
Donna E. Jack 42 Director-Human Resources
J. Geoffrey Lapres 43 Vice President
Eugene Levine 58 Vice President-Business Management
Michael C. Sutter 38 Vice President-Operations
Frederick E. Weber 55 Vice President-Engineering
</TABLE>
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, 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 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,
-48-
<PAGE> 53
including Vice President, 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.
BOARD OF DIRECTORS
Our board of directors currently consists of six directors. Prior to
the completion of this offering, we expect to increase the size of our board of
directors to include three independent directors.
We intend to amend our certificate of incorporation prior to this
offering to divide 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. 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 will provide 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
Prior to 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. We anticipate that the members of our audit
committee will be our independent directors. The compensation committee will
review and approve the compensation and benefits for our key executive officers,
administer our employee benefit plans and make
-49-
<PAGE> 54
recommendations to the board of directors regarding grants of stock options and
other incentive compensation arrangements. We anticipate that the members of our
compensation committee will be our independent directors.
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
$ and will be granted an option to purchase 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.
EXECUTIVE OFFICERS
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
-50-
<PAGE> 55
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. The table excludes all
executive officers whose total annual salary and bonus for 1999 was $100,000 or
less.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
NAME AND ---------------------------------------------------- SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITIONS YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (1) (#) COMPENSATION ($) (2)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gregory R. Grodhaus (3) 1999 83,942 86,196 86,339 (4) 6,000 24,060
President and Chief
Executive Officer
Anthony J. Fusarelli 1999 294,239 (5) -- -- 5,000 15,432
Executive Vice
President, Sales
Jayne A. Fitzgerald (6)
Former Chief 1999 179,848 110,331 -- 2,000 (7) 15,540
Technology Officer
</TABLE>
---------------------------
(1) These options are options to acquire SPX common stock.
(2) 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 Allowance Matching 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.
(3) Mr. Grodhaus was hired on August 5, 1999. His annual base salary is
$245,000.
(4) This figure consists of a reimbursement to Mr. Grodhaus for relocation
expenses.
(5) This figure includes $117,700 paid to Mr. Fusarelli in commissions for
1999.
(6) Ms. Fitzgerald terminated her employment with us on February 4, 2000.
(7) These options were forfeited when Ms. Fitzgerald terminated employment.
-51-
<PAGE> 56
SPX OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO
GRANTED (#) EMPLOYEES IN EXERCISE PRICE EXPIRATION GRANT DATE
NAME (1) 1999 ($/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 pursuant to 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 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.
-52-
<PAGE> 57
AGGREGATE SPX OPTION EXERCISES IN 1999 AND 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT 1999
ACQUIRED ON REALIZED OPTIONS AT 1999 YEAR-END (#) YEAR-END ($) (1)
NAME EXERCISE (#) ($) 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.
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
-53-
<PAGE> 58
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, or EVA, 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 will adopt the INRANGE 2000 Stock
Compensation Plan, and SPX, as our sole stockholder, is expected to approve the
plan. Our 2000 Stock Compensation Plan will be substantially similar to SPX's
amended and restated 1992 Stock Compensation Plan as approved by SPX's
stockholders at SPX's 2000 annual meeting. The following summary describes the
basic features of our plan. However, the summary is not complete and, therefore,
you should not rely solely on it for a detailed description of every aspect of
the 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) and to directors who are not our employees. We may also
grant stock-based incentives to employees and directors of SPX and its
affiliates. 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 established and set
forth in a written award agreement.
SHARES AVAILABLE FOR THE PLAN
We will reserve 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 shares. 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
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:
-54-
<PAGE> 59
- 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 (sometimes called "reload") 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.
OPTIONS GRANTED
In connection with this offering, we will make initial grants of stock
options to certain of our employees, including our executive officers, under our
2000 Stock Compensation Plan, and we also may grant additional options
-55-
<PAGE> 60
shortly after the offering. An aggregate of shares of Class B common
stock will be issuable upon the exercise of the options to be issued in
connection with the offering, and the exercise price of these options will be
the initial public offering price. The following table sets forth the number of
shares of our Class B common stock subject to these options:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
--------------------------------------------------------------- ----------------
<S> <C>
Gregory R. Grodhaus...........................................
Anthony J. Fusarelli..........................................
All of our current executive officers, as a group.............
All of our current directors who are not executive officers,
as a group....................................................
All of our employees other than current executive officers,
as a group....................................................
</TABLE>
In addition, we intend to grant options to acquire shares of
our Class B common stock under the 2000 Stock Compensation Plan to a limited
group of SPX employees with supervisory authority over INRANGE and who are not
otherwise included in the table above. The exercise price for these options will
be the initial public offering price.
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.
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:
- materially 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;
-56-
<PAGE> 61
- extend the period during which awards may be granted; or
- extend the maximum period during which a holder may exercise
his or her 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 EVA incentive
compensation plans for INRANGE employees. The EVA plans provide for bonuses
based on improvements in economic value added, or "EVA." EVA 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 EVA plan bonus is based on three key components: (1) a target bonus,
(2) the EVA improvement in excess of expected EVA improvement (called "Excess
EVA Improvement," which may be negative), and (3) 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 EVA 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.
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. However, the summary is not complete, and, therefore, you should not rely
solely on it for a detailed description of every aspect of the 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 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.
-57-
<PAGE> 62
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.
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
All 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. In
-58-
<PAGE> 63
addition, we expect that all of our employees whom we hire in the future will
sign non-competition and non-solicitation agreements with us.
-59-
<PAGE> 64
RELATIONSHIPS BETWEEN OUR COMPANY AND SPX
SPX IS OUR CONTROLLING STOCKHOLDER
We are currently a wholly-owned subsidiary of SPX. After the completion
of this offering of Class B common stock, SPX will own about % of the
outstanding shares of our common stock, or about % if the underwriters
exercise their over-allotment option in full. SPX will own 100% of the
outstanding Class A common stock, which will represent % of the combined
voting power of all classes of our voting stock, or % of the combined voting
power of all classes of our voting stock if the underwriters exercise their
over-allotment option in full. Until SPX holds less than 50% of the 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. Whether SPX
divests its entire ownership in our Class A common stock, and how such a
divestiture would occur, will depend on a variety of considerations and economic
factors, including the business prospects for each entity, the business reasons
for a divestiture, the market prices of our and SPX's common stock, SPX's
ability to divest our stock on a tax-free basis and the availability of other
strategic alternatives.
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 pro rata distribution by SPX of its
shares of our Class A common stock to holders of its
common stock.
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.
-60-
<PAGE> 65
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 expect to enter into various agreements with SPX that relate to our
ongoing relationship with SPX following completion of the offering. These
agreements include a management services agreement, a tax sharing agreement, a
registration rights agreement, an employee matters agreement and a trademark
license agreement.
All of the foregoing agreements will be effective on or prior to the
completion of this offering. Because these agreements were entered into at a
time when we were a wholly-owned subsidiary of SPX, they were 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
our separation from SPX. The prices and other terms of these agreements may be
less favorable to us than what we could have obtained 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 that
we could have obtained in arm's length negotiations with an unaffiliated third
party.
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."
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 will provide that the services
provided by SPX will be substantially similar in scope, quality, nature and cost
to those services provided to us when we were a wholly-owned subsidiary of SPX
prior to this offering. SPX will also be 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 will not be 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 will provide that SPX may have a
third party provide any service to us rather than providing the service itself,
but that SPX will remain responsible for any services it causes to be provided
in this manner. 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 will not be required to provide any
service if doing so would require SPX to violate any laws, rules or regulations.
The agreement also will provide 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 provide that we will indemnify
and hold harmless SPX, each of its subsidiaries and their directors, officers,
agents and employees against any claims arising out of the services rendered to
us unless resulting from any breach of contract, gross negligence or willful
misconduct on their part. In addition, we will agree that these same persons
will be liable to us only for any claims, damages or expenses resulting from a
breach of contract, gross negligence or willful misconduct on their part.
-61-
<PAGE> 66
The management services agreement will start upon the completion of
this offering and will continue until SPX owns less than a combined 50% of the
aggregate amount of our outstanding shares of Class A common stock and Class B
common stock. We may also terminate any services, 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 will provide SPX with registration
rights relating to the shares of our Class A common stock which SPX will
continue to hold after this offering. SPX will be able to require us to register
under the Securities Act all or any portion of our shares covered by the
registration rights agreement. In addition, the registration rights agreement
will provide for various 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 will be 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 will set 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 will be 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 will impose 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 such registration, although
SPX must indemnify us for any liabilities resulting from information provided by
SPX.
SPX's rights under the registration rights agreement will remain in
effect with respect to the shares covered by the agreement until:
- those shares have been sold pursuant to an effective
registration statement under the Securities Act;
- those shares have been sold to the public pursuant to Rule 144
under the Securities Act; or
-62-
<PAGE> 67
- 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 will set 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 EVA 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, including the trademark
INRANGE, are owned by us or one of our subsidiaries. The trademark license
agreement will govern our use of various trademarks used in our business that
are owned by SPX. Under the agreement, SPX has granted to us a worldwide
royalty-free license to use the trademarks 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 will agree to refrain from various actions that
could interfere with SPX's ownership of the trademarks. 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 will start 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 discontinued use of the
trademarks, 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.
OPTION GRANTS TO SPX EMPLOYEES
We intend to grant options to acquire shares of our Class B
common stock under our 2000 Stock Compensation Plan to a limited group of SPX
employees with supervisory authority over INRANGE. See "Compensation and Benefit
Plans Long-Term Incentives - Option Grants."
-63-
<PAGE> 68
CORPORATE OPPORTUNITIES AND CONFLICTS OF INTEREST
All of our directors have fiduciary duties to our company and our
stockholders under applicable 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
charter does 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.
-64-
<PAGE> 69
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. SPX is our only
stockholder.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
AGGREGATE OUTSTANDING VOTING CONTROL
SHARES OF
BENEFICIALLY OWNED 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.................. shares of 100% % 100% %
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 % of our
common stock and % of the voting control of our company.
MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our outstanding common stock 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 of March 15, 2000 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 amounts and percentages are based
upon 31,399,172 shares of SPX common stock outstanding as of March 15, 2000.
<TABLE>
<CAPTION>
Shares of Our Percentage of
Class B Aggregate Shares of SPX
Common Stock Outstanding Shares Percentage of Common Stock
Beneficially Beneficially Voting Control Beneficially Percentage
Name Owned Owned of Our Company Owned Ownership of SPX
---- ------------- ------------------ -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
John B. Blystone 344,363 (1) 1.1%
Robert B. Foreman 38 *
Christopher J. Kearney 40,050 (2) *
Lewis M. Kling 1,525 *
Patrick J. O'Leary 78,240 (3) *
Gregory R. Grodhaus 0 *
Anthony J. Fusarelli 0 *
Jayne A. Fitzgerald (4) 0 *
All directors and executive
officers as a group (10
persons) 464,216 1.5%
</TABLE>
-65-
<PAGE> 70
---------------------------
* Denotes less than 1% beneficial ownership.
(1) 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.
(2) Includes options to purchase 36,147 shares of common stock that are
exercisable within 60 days.
(3) Includes options to purchase 56,362 shares of common stock that are
exercisable within 60 days.
(4) Ms. Fitzgerald terminated employment with us on February 4, 2000.
-66-
<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
We intend to amend our certificate of incorporation and bylaws prior to
the completion of this offering. The forms of our certificate of incorporation
and bylaws will be filed as exhibits to the registration statement of which this
prospectus is a part. The following summarizes the terms and provisions of our
capital stock upon the closing of this offering. The summary is not complete,
and you should read the forms of our certificate of incorporation and bylaws.
Upon the completion of this offering, our authorized capital stock will
consist of:
- shares of Class A common stock, par value $.01 per share;
- shares of Class B common stock, par value $.01 per share; and
- shares of preferred stock, par value $.01 per share.
COMMON STOCK
Upon completion of this offering, there will be shares of our
Class A common stock outstanding and shares of our Class B common stock
outstanding. As of , 2000, there were outstanding options
for the purchase of a total of 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.
- Merger. In the event of a merger or consolidation of us with or
into another entity, holders of each share of Class A common stock
and Class B common stock will be entitled to receive the same per
share consideration.
-67-
<PAGE> 72
The outstanding shares of our common stock are, and the shares of Class
B common stock being sold in this offering will be, upon the closing of this
offering, validly issued, fully paid and nonassessable.
CONVERSION OF CLASS A COMMON STOCK
Each share of Class A common stock is convertible while held by SPX or
any of its subsidiaries, 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, excluding us, 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.
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 annual 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.
-68-
<PAGE> 73
LIMITATION ON DIRECTORS' LIABILITIES
Our certificate of incorporation will limit 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 will 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.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Our certificate of incorporation and our bylaws will 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 Class A and Class B common stock combined.
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 Class A
and Class B common stock combined, we will call a special meeting of
stockholders promptly upon the request of SPX. 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 Class A and Class B common stock
combined, except as otherwise required by law and 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, its chairman or, at the written
request of a majority of our board of directors, our president, 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.
-69-
<PAGE> 74
BOARD OF DIRECTORS
Our certificate of incorporation and our bylaws will provide that the
number of directors shall 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 shall 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
or any other series or class of stock to elect additional directors under
specified circumstances, prior to the date when 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 Class A and Class B common stock combined, any
director may be removed from office, with cause, by the affirmative vote of the
holders of at least a majority of the voting power of the outstanding Class A
and Class B common stock combined, voting together as a single class. On and
after the date when 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 Class A and Class B common stock combined, any director may be removed
from office only for cause upon the affirmative vote of holders of at least 80%
of our outstanding Class A and Class B common stock combined, voting as a single
class. A director may not be removed by the stockholders at a meeting unless the
notice of the meeting states that the purpose, or one of the purposes, of the
meeting is removal of the director.
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 will provide that the affirmative vote
of holders of at least 80% of our outstanding Class A and Class B common stock
combined 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 will further provide that our bylaws
may be altered, amended or repealed only by our board of directors or upon the
affirmative vote of holders of at least 80% of our outstanding Class A and Class
B common stock combined, voting together as single class.
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;
-70-
<PAGE> 75
- 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.
-71-
<PAGE> 76
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, shares of our Class B common
stock will be outstanding, or 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,
which equals approximately shares immediately after
this offering; 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 and
SPX have agreed that, subject to specified 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 shares of Class B common
stock reserved or to be available for issuance pursuant to our 2000 Stock
Compensation Plan. In addition, we intend to file a registration statement on
Form S-8 to register shares of Class B common stock reserved or to be available
for issuance pursuant to our Employee Stock Purchase Plan. Shares of Class B
common stock issued pursuant to 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.
-72-
<PAGE> 77
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.
-73-
<PAGE> 78
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
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;
-74-
<PAGE> 79
- 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 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;
-75-
<PAGE> 80
- 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.
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.
-76-
<PAGE> 81
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. ...................................
Bear, Stearns & Co. Inc. ....................................
Chase Securities Inc.........................................
Total.............................................. _______
</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 per share.
The underwriters may allow, and these dealers may re-allow, a concession not in
excess of 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 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 officers and directors and SPX and its 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
will be determined by negotiations between us and the representatives of the
underwriters. Among the factors considered in determining the initial public
offering 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.
-77-
<PAGE> 82
We intend to apply to have the Class B common stock included for
quotation 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.............. $ $
Total.................. $ $
</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 over-allotment, syndicate
covering transactions and stabilizing transactions. Over-allotment involves
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. Syndicate covering transactions involve purchases of the Class B
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing transactions consist of
certain bids or purchases of Class B common stock made for the purpose of
preventing or retarding a decline in the market price of our Class B common
stock while this 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 cause the price of the Class B common stock
to be higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on the Nasdaq
National Market or in the over-the-counter market, or otherwise, and, if
commenced, may be discontinued at any time.
We will pay the offering expenses, including registration fees, costs
of printing and engraving and legal and accounting fees, estimated to be
approximately , excluding underwriting discounts and commissions.
At our request, Salomon Smith Barney Inc. has reserved up to % of
the shares of Class B common stock (the "Directed Shares") for sale at the
initial public offering price to persons who are our directors, officers or
employees, 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.
-78-
<PAGE> 83
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 as of and for the years ended December 31, 1998 and 1999 included in
this prospectus and elsewhere in this registration statement 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.
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 not necessarily complete and you should refer
to the exhibits attached to the registration statement for copies 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.
-79-
<PAGE> 84
INRANGE TECHNOLOGIES CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
F-1
<PAGE> 85
After the recapitalization discussed in Note 11 to the INRANGE Technologies
Corporation combined financial statements is effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
April 10, 2000
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.
Philadelphia, Pa.,
___________, 2000
F-2
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
SPX Corporation
We have audited the accompanying combined statements of operations, changes in
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.
Ernst & Young LLP
Philadelphia, Pennsylvania
March 31, 1998
The foregoing report is in the form that will be signed upon the completion of
the recapitalization described in Note 11 to the combined financial statements.
/s/ Ernst & Young LLP
June 2, 2000
F-3
<PAGE> 87
INRANGE TECHNOLOGIES CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999 MARCH 31, 2000
--------- ---------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash................................................. $ 2,461 $ 1,023 $ 1,711
Accounts receivable, net............................. 42,820 51,037 47,573
Inventories.......................................... 22,314 27,624 29,073
Prepaid expenses and other........................... 1,505 1,314 1,413
Investment........................................... 2,421 - -
Deferred income taxes................................ 9,113 4,650 4,650
--------- --------- ---------
Total current assets............................. 80,634 85,648 84,420
PROPERTY, PLANT AND EQUIPMENT, net...................... 11,253 10,117 10,147
PROPERTY HELD FOR SALE.................................. 8,050 4,256 4,228
GOODWILL, net........................................... 8,778 7,710 7,443
OTHER ASSETS, net....................................... 17,743 24,619 28,147
--------- --------- ---------
Total assets..................................... $ 126,458 $ 132,350 $ 134,385
========= ========= =========
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CURRENT LIABILITIES:
Short-term borrowings and current portion
of long-term debt.................................. $ 3,937 $ 4,111 $ 3,573
Accounts payable..................................... 15,492 20,458 18,096
Accrued expenses..................................... 18,131 15,363 13,791
Deferred revenue..................................... 9,104 10,401 11,640
--------- --------- ---------
Total current liabilities........................ 46,664 50,333 47,100
--------- --------- ---------
LONG-TERM DEBT.......................................... 1,385 20 10
--------- --------- ---------
DEFERRED INCOME TAXES................................... 3,956 3,499 3,499
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDER'S INVESTMENT:
Net investment....................................... 73,311 78,577 83,747
Accumulated other comprehensive income (loss)........ 1,142 (79) 29
--------- --------- ---------
Total stockholder's investment................... 74,453 78,498 83,776
--------- --------- ---------
Total liabilities and stockholder's investment... $ 126,458 $ 132,350 $ 134,385
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 88
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE........................................... $ 218,971 $ 225,669 $ 200,622 $ 49,158 $ 46,153
COST OF REVENUE................................... 108,541 115,316 99,641 26,926 23,353
--------- --------- --------- --------- ---------
Gross margin................................... 110,430 110,353 100,981 22,232 22,800
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Research, development and engineering.......... 21,225 25,067 18,928 6,452 4,963
Selling, general and administrative............ 57,659 63,517 49,337 13,474 12,404
Special charges................................ -- 6,971 10,587 9,687 --
Gain on sale of real estate.................... -- -- (2,829) -- --
--------- --------- --------- --------- ---------
Operating expenses...................... 78,884 95,555 76,023 29,613 17,367
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS)........................... 31,546 14,798 24,958 (7,381) 5,433
INTEREST EXPENSE.................................. 1,509 1,391 925 254 177
OTHER INCOME(EXPENSE)............................. 18 (178) 13,726 (181) 94
--------- --------- --------- --------- ---------
Income (loss) before income taxes........... 30,055 13,229 37,759 (7,816) 5,350
INCOME TAXES...................................... 12,198 5,873 15,459 (3,197) 2,140
--------- --------- --------- --------- ---------
NET INCOME (LOSS)................................. $ 17,857 $ 7,356 $ 22,300 $ (4,619) $ 3,210
========= ========= ========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER
COMMON SHARE:
Basic and diluted earnings (loss) per
common share................................. $ $ $ $ $
========= ========= ========= ========= =========
Shares used in computing basic and
diluted earnings (loss) per common share.....
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 89
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF STOCKHOLDER'S INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
STOCKHOLDER'S COMPREHENSIVE
INVESTMENT INCOME (LOSS) TOTAL
------------- ------------- ---------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.......................... $ 65,006 $ (149) $ 64,857
---------
Comprehensive Income:
Net income....................................... 17,857 -- 17,857
Other comprehensive income-
Foreign currency translation................... -- (270) (270)
---------
Total comprehensive income................... 17,587
Net change in intercompany accounts................ (32,617) -- (32,617)
--------- ------ ---------
BALANCE AT DECEMBER 31, 1997.......................... 50,246 (419) 49,827
---------
Comprehensive Income:
Net income....................................... 7,356 -- 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................ 15,709 -- 15,709
--------- ------ ---------
BALANCE AT DECEMBER 31, 1998.......................... 73,311 1,142 74,453
---------
Comprehensive Income:
Net income....................................... 22,300 -- 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................ (17,034) -- (17,034)
--------- ------ ---------
BALANCE AT DECEMBER 31, 1999.......................... 78,577 (79) 78,498
---------
Comprehensive Income:
Net income (unaudited)........................... 3,210 -- 3,210
Other comprehensive income-
Foreign currency translation (unaudited)....... -- 108 108
---------
Total comprehensive income (unaudited)....... 3,318
Net change in intercompany accounts (unaudited).... 1,960 -- 1,960
--------- ------ ---------
BALANCE AT MARCH 31, 2000 (unaudited) ................ $ 83,747 $ 29 $ 83,776
========= ====== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 90
INRANGE TECHNOLOGIES CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)................................. $ 17,857 $ 7,356 $ 22,300 $ (4,619) $ 3,210
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation.................................... 5,331 6,362 5,870 1,543 1,449
Amortization of goodwill........................ 1,277 1,068 1,068 267 267
Amortization of other assets.................... 7,920 5,730 3,596 1,085 1,355
Special charges................................. -- 6,971 10,587 9,687 --
Deferred income taxes........................... 3,489 (2,358) 4,646 -- --
Gain on sale of real estate..................... -- -- (2,829) -- --
Gain on sale of investment...................... -- -- (13,914) -- --
Changes in operating assets and liabilities:
Accounts receivable............................. 7,579 (4,354) (8,217) 500 3,464
Inventories..................................... 335 (5,091) (5,310) 320 (1,449)
Prepaid expenses and other current assets....... (782) 168 191 312 (99)
Accounts payable................................ 211 827 4,966 (1,563) (2,362)
Accrued expenses................................ (2,945) (2,993) 703 1,937 (1,011)
Deferred revenue................................ (51) 3,397 1,297 (1,052) 1,239
Payments of special charges and disposition
related accruals.............................. -- -- (11,636) (4,317) (561)
---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities..... 40,221 17,083 13,318 4,100 5,502
---------- ---------- ---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment, net................................. (5,565) (7,394) (5,469) (1,760) (1,451)
Proceeds from sale of real estate................. -- -- 6,358 -- --
Net proceeds from sale of investment.............. -- -- 14,735 -- --
Capitalized software costs........................ (3,956) (5,044) (5,097) (1,477) (1,322)
Increase in demonstration equipment and other
assets.......................................... (1,674) (1,410) (3,677) (120) (561)
Payment for product rights........................ -- (5,300) (3,120) (3,000) --
Purchase of investment............................ -- (821) -- -- (3,000)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing
activities.................................... (11,195) (19,969) 3,730 (6,357) (6,334)
---------- ---------- ---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (payments) under lines of credit... 4,154 (2,663) 376 277 (515)
Payments on long-term debt........................ (563) (8,300) (1,567) (279) (33)
Proceeds from (payments to) Parent................ (32,617) 15,709 (17,034) 2,143 1,960
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... (29,026) 4,746 (18,225) 2,141 1,412
---------- ---------- ---------- ---------- ----------
EFFECT OF FOREIGN CURRENCY TRANSLATION...............
-- 601 (261) 93 108
---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH...................... -- 2,461 (1,438) (23) 688
CASH AT BEGINNING OF PERIOD.......................... -- -- 2,461 2,461 1,023
---------- ---------- ---------- ---------- ----------
CASH AT END OF PERIOD................................ $ -- $ 2,461 $ 1,023 $ 2,438 $ 1,711
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 91
INRANGE TECHNOLOGIES CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR THE
THREE MONTHS ENDED MARCH 31, 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 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, mission-critical systems to
provide fast and reliable connections among networks of computers and peripheral
devices for large scale enterprise applications.
Prior to October 6, 1998, INRANGE was a subsidiary of General Signal
Corporation ("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. Accordingly, the combined financial statements of the
Company 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 March 31, 2000 and the results of operations for the three months
ended March 31, 1999 and 2000. The results of operations for the three months
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the entire year.
F-8
<PAGE> 92
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 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 ("SFAS") 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 March 31, 2000
and accumulated amortization was $12,588, $13,656 and $13,923, respectively.
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.
F-9
<PAGE> 93
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 for standard products. Revenue
is recognized on certain transactions upon customer acceptance or when the
Company has fulfilled the terms of the sales agreement. 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. Service revenue was $30,306, $33,134, $34,066, $8,359 and $8,456 in
1997, 1998 and 1999 and for the three months ended March 31, 1999 and 2000,
respectively. Service expenses were $16,997, $20,165, $20,838, $5,946 and $5,047
in 1997, 1998 and 1999 and for the three months ended March 31, 1999 and 2000,
respectively.
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, $189 and $56 in 1997, 1998 and 1999 and for the three
months ended March 31, 1999 and 2000, respectively, and are included in other
income(expense) in the accompanying combined statements of operations.
POST-RETIREMENT 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-retirement 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 (LOSS) PER COMMON SHARE
The Company has presented earnings (loss) per common share pursuant to SFAS
No. 128 "Earnings Per Share" and the Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Basic earnings (loss) per share is computed by
dividing net income (loss) 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 (loss) per
share is the same as basic earnings (loss) per share. The shares used in the
computation of earnings (loss) per common share retroactively reflect the
recapitalization discussed in Note 11.
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
F-10
<PAGE> 94
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, $21 and $25 in 1997, 1998 and 1999 and for the three
months ended March 31, 1999 and 2000, respectively. Management of the Parent
believes that the allocated costs are reasonable and reflect the effort involved
in providing the services. 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, $1,439 and $1,418 in 1997, 1998 and 1999 and for the three
months ended March 31, 1999 and 2000, respectively, excluding the direct costs
of employee retirement plans discussed in Note 16.
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.
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.
F-11
<PAGE> 95
5. INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999 MARCH 31, 2000
--------- --------- --------------
<S> <C> <C> <C>
(unaudited)
Raw materials.......................................... $ 13,448 $ 14,175 $ 15,935
Work-in-process........................................ 3,104 4,646 4,604
Finished goods......................................... 5,762 8,803 8,554
--------- --------- --------
Net inventories..................................... $ 22,314 $ 27,624 $ 29,073
========= ========= ========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999 MARCH 31, 2000
--------- --------- --------------
(unaudited)
<S> <C> <C> <C>
Machinery and equipment................................ $ 38,894 $ 35,818 $ 36,952
Furniture and fixtures................................. 1,111 105 105
Leasehold improvements................................. 1,736 1,925 1,968
--------- --------- ---------
41,741 37,848 39,025
Accumulated depreciation............................... (30,488) (27,731) (28,878)
--------- --------- ---------
Net property, plant and equipment................... $ 11,253 $ 10,117 $ 10,147
========= ========= =========
</TABLE>
7. OTHER ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999 MARCH 31, 2000
--------- --------- --------------
<S> <C> <C> <C>
(unaudited)
Capitalized software................................... $ 17,434 $ 11,466 $ 11,852
Demonstration equipment................................ 7,782 10,665 10,444
Product rights......................................... 6,379 9,499 9,499
Investment............................................. -- -- 3,000
Other.................................................. 474 556 542
--------- --------- --------
Total other assets.................................. 32,069 32,186 35,337
Accumulated amortization-
Capitalized software................................... (10,253) (3,021) (2,760)
Demonstration equipment................................ (2,987) (3,442) (3,321)
Product rights......................................... (1,086) (1,104) (1,109)
--------- --------- --------
Net other assets.................................... $ 17,743 $ 24,619 $ 28,147
========= ========= ========
</TABLE>
The Company capitalized $3,956, $5,044, $5,097, $1,477 and $1,322 in 1997,
1998 and 1999 and the three months ended March 31, 1999 and 2000, respectively,
of software development costs (see Note 2). Amortization expense was $4,532,
$3,111, $2,291, $575 and $668 in 1997, 1998 and 1999 and for the three months
ended March 31, 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.
F-12
<PAGE> 96
Product rights represent technology licenses and pre-paid royalties for two
product lines (see Note 19). 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.
8. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999 MARCH 31, 2000
-------- -------- --------------
<S> <C> <C> <C>
(unaudited)
Payroll and other compensation......................... $ 2,990 $ 3,649 $ 2,662
Accrued commissions.................................... 1,614 2,223 1,691
Other accrued expenses................................. 7,860 7,295 7,803
Special charges and disposition related accruals....... 5,667 2,196 1,635
-------- -------- --------
Total accrued expenses.............................. $ 18,131 $ 15,363 $ 13,791
======== ======== ========
</TABLE>
9. VALUATION ACCOUNTS AND DISPOSITION-RELATED ACCRUALS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999 MARCH 31, 2000
-------- -------- --------- --------------
<S> <C> <C> <C> <C>
(unaudited)
Allowance for doubtful accounts:
Balance at beginning of period......................... $ 1,195 $ 925 $ 1,147 $ 1,270
Provision.............................................. 132 550 1,822 151
Charges................................................ (402) (328) (1,699) (43)
------- ------- --------- -------
Balance at end of period............................ $ 925 $ 1,147 $ 1,270 $ 1,378
Disposition-related accruals:
Balance at beginning of period......................... $ -- $ -- $ 5,667 $ 2,196
Provision.............................................. -- 5,667 8,165 --
Charges................................................ -- -- (11,636) (561)
------- ------- --------- -------
Balance at end of period............................ $ -- $ 5,667 $ 2,196 $ 1,635
======= ======= ========= =======
</TABLE>
F-13
<PAGE> 97
10. DEBT:
Short-term borrowings and long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999 MARCH 31, 2000
------- ------- --------------
<S> <C> <C> <C>
(unaudited)
Connecticut Development Authority Bonds................ $ 1,506 $ -- $ --
Capital lease obligations.............................. 125 64 31
------- ------- -------
1,631 64 31
Less-Current portion of long-term debt................. (246) (44) (21)
------- ------- -------
$ 1,385 $ 20 $ 10
======= ======= =======
Short-term borrowings.................................. $ 3,691 $ 4,067 $ 3,552
======= ======= =======
</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 $3,522 was outstanding at December 31, 1998 and 1999 and March 31,
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 6.15% and 5.93% for the three months
ended March 31, 1999 and 2000, respectively. The lines of credit are guaranteed
by the Parent.
11. CAPITAL STOCK:
In 2000, a recapitalization was completed whereby the Company
authorized shares of $0.01 par value preferred stock, shares of
$0.01 par value Class A common stock and 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 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.
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.
F-14
<PAGE> 98
<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 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.
F-15
<PAGE> 99
<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's foreign operations.
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 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. Gains and losses related to forward
foreign exchange and option contracts that qualify for hedge accounting
treatment are deferred and offset against losses and gains when the underlying
transaction occurs.
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:
F-16
<PAGE> 100
<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, $785 and $706 in 1997, 1998 and
1999 for the three months ended March 31, 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
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, $870 and $862 in 1997, 1998 and 1999
and for the three months ended March 31, 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.
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%, 7% and 3% of combined revenue in 1997, 1998 and 1999 and the three months
ended March 31, 1999 and 2000, respectively, and accounts receivable from this
customer were $1,303 at March 31, 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.
F-17
<PAGE> 101
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.
Stock options outstanding at December 31, 1999 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 7,000 9.00
$ 81.81 3,000 9.40
$ 85.00 2,000 9.30
$ 86.50 30,750 9.40
--------
42,750
========
</TABLE>
No options were exercisable at December 31, 1999.
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 would be $22,178. 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 was $35.63.
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>
F-18
<PAGE> 102
20. TECHNOLOGY LICENSE AGREEMENT:
In September 1998, the Company entered into a technology license agreement
with Ancor Communications, Inc. ("Ancor"). 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 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 OEM 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-19
<PAGE> 103
INSIDE BACK COVER
[artwork]
<PAGE> 104
Shares
INRANGE TECHNOLOGIES CORPORATION
Class B Common Stock
[LOGO]
PROSPECTUS
, 2000
SALOMON SMITH BARNEY
BEAR, STEARNS & CO. INC.
CHASE H&Q
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by INRANGE
Technologies Corporation (other than underwriting discounts and commissions)
expected to be incurred in connection with the issuance and distribution of the
securities described in this registration statement. All amounts are estimated
except for the Securities and Exchange Commission's registration fee and the
National Association of Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Registration fee under Securities Act...................... $ 26,400
NASD filing fee............................................ 10,500
Nasdaq National Market fees*...............................
Legal fees and expenses*...................................
Accounting fees and expenses*..............................
Printing and engraving expenses*...........................
Registrar and transfer agent fees*.........................
Miscellaneous expenses*....................................
----------
Total................................................. $
==========
</TABLE>
-----------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation law (the "DGCL")
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with specified
actions, suits and proceedings, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the corporation - a
"derivative action"), if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. A similar standard is
applicable in the case of derivative actions, except that indemnification only
extends to expenses (including attorneys' fees) incurred in connection with the
defense or settlement of such action, and the statute requires court approval
before there can be any indemnification where the person seeking indemnification
has been found liable to the corporation. The statute provides that it is not
exclusive of other indemnification that may be granted by a corporation's
certificate of incorporation, bylaws, disinterested director vote, stockholder
vote, agreement, or otherwise.
Our bylaws and our certificates of incorporation require us to
indemnify to the fullest extent authorized by the DGCL any person made or
threatened to be made a party to an action, suit or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he
or she is or was a director or officer of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise.
As permitted by Section 102(b)(7) of the DGCL, our certificate of
incorporation eliminates the liability of a director to the corporation or its
stockholders for monetary damages for such breach of fiduciary duty as a
director, except for liabilities arising (a) from any breach of the director's
duty of loyalty to the corporation or its stockholders; (b) from acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (c) under section 174 of the DGCL; or (d) from any transaction
from which the director derived an improper personal benefit.
II-1
<PAGE> 106
We intend to obtain primary and excess insurance policies insuring our
directors and officers and those of our subsidiaries against certain liabilities
they may incur in their capacity as directors and officers. Under these
policies, the insurer, on our behalf, may also pay amounts for which we have
granted indemnification to the directors or officers.
Additionally, the Underwriting Agreement filed as Exhibit 1.1 to this
registration statement provides for indemnification by us of our underwriters,
and persons who control them, under certain circumstances and by our
underwriters of us and persons who control us, under certain circumstances.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits
The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
-------- ---------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.2 Amended and Restated By-Laws of INRANGE Technologies Corporation. *
3.3 Form of Amended and Restated Certificate of Incorporation of INRANGE
Technologies Corporation. *
4.1 Form of INRANGE Technologies Corporation Class B common stock
certificate. *
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson regarding the
legality of the shares being registered. *
10.1 Tax Sharing Agreement, between INRANGE Technologies Corporation and
SPX Corporation. *
10.2 Management Services Agreement, between INRANGE Technologies
Corporation and SPX Corporation. *
10.3 Registration Rights Agreement, between INRANGE Technologies
Corporation and SPX Corporation. *
10.4 Trademark License Agreement, between INRANGE Technologies Corporation
and SPX Corporation.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1). *
24.1 Power of Attorney (set forth on the signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
* To be filed by amendment
(B) Financial Statement Schedules
Financial statement schedules have been omitted because they are not
applicable or the required information is shown in the combined financial
statements or notes thereto.
II-2
<PAGE> 107
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
(2) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mount
Laurel, State of New Jersey, on June 5, 2000.
INRANGE TECHNOLOGIES CORPORATION
By: /s/ Gregory R. Grodhaus
--------------------------------------
Gregory R. Grodhaus
President and Chief Executive Officer
The undersigned directors and officers of INRANGE Technologies
Corporation hereby constitute and appoint Gregory R. Grodhaus and Jay Zager and
each of them with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below this
Registration Statement on Form S-1 and any and all amendments to this
Registration Statement and to sign any and all additional registration
statements relating to the same offering of securities as this Registration
Statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratify and confirm that all such attorneys-in-fact, or any of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gregory R. Grodhaus Director, President and Chief June 5, 2000
----------------------------- Executive Officer
Gregory R. Grodhaus
/s/ Jay Zager Vice President, Chief Financial June 5, 2000
----------------------------- Officer (Principal Financial and
Jay Zager Accounting Officer)
/s/ John B. Blystone Chairman of the Board June 5, 2000
-----------------------------
John B. Blystone
/s/ Robert B. Foreman Director June 5, 2000
-----------------------------
Robert B. Foreman
/s/ Christopher J. Kearney Director June 5, 2000
-----------------------------
Christopher J. Kearney
/s/ Lewis M. Kling Director June 5, 2000
-----------------------------
Lewis M. Kling
/s/ Patrick J. O'Leary Director June 5, 2000
-----------------------------
Patrick J. O'Leary
</TABLE>
II-4
<PAGE> 109
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
-------- ---------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.*
3.2 Amended and Restated By-Laws of INRANGE Technologies Corporation. *
3.3 Form of Amended and Restated Certificate of Incorporation of INRANGE
Technologies Corporation. *
4.1 Form of INRANGE Technologies Corporation Class B common stock
certificate. *
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson regarding the
legality of the shares being registered. *
10.1 Tax Sharing Agreement, between INRANGE Technologies Corporation and
SPX Corporation. *
10.2 Management Services Agreement, between INRANGE Technologies
Corporation and SPX Corporation. *
10.3 Registration Rights Agreement, between INRANGE Technologies
Corporation and SPX Corporation. *
10.4 Trademark License Agreement, between INRANGE Technologies Corporation
and SPX Corporation.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in
Exhibit 5.1). *
24.1 Power of Attorney (set forth on the signature page hereto).
27.1 Financial Data Schedule.
</TABLE>
----------------------------
* To be filed by amendment
II-5
