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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 205494
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 000-31517
INRANGE TECHNOLOGIES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 06-0962862
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 MT. HOLLY BY-PASS, P.O. BOX 440
LUMBERTON, NJ 08048
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (609) 518-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Class B Common Stock, par value $0.01 per share.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of our Class B common stock held by
non-affiliates of the registrant as of March 9, 2001, was approximately
$119,479,939. The number of shares of Class B common stock outstanding on that
date was 8,855,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement dated April 4, 2001 for the
Annual Meeting of Stockholders to be held on April 20, 2001 are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We design, manufacture, market and service switching and networking
products for storage, data and telecommunications networks. Our products provide
fast and reliable connections among networks of computers and related devices.
We serve Fortune 1000 businesses and other large enterprises that operate
large-scale systems where reliability and continuous availability are critical.
This is highlighted by the FC/9000, which is the flagship of our IN-VSN product
family. Our FC/9000, which we recently announced can be scaled up to 128 ports,
is the largest storage network switch available that operates under the Fibre
Channel communication standard. The FC/9000 provides a platform from which
enterprises can build storage networks that can be used in systems where
reliability and continuous availability are critical. Our products are designed
to be compatible with various vendors' products and multiple communication
standards and protocols. We have installed our products at over 2,000 sites in
over 90 countries. We distribute and support our products through a combination
of our direct sales and service operations and indirect channels.
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 Corporation
acquired General Signal, including its Inrange subsidiary.
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 June 2000, we acquired two European distribution businesses,
expanding our direct sales and customer service presence in France, Switzerland,
Belgium and Luxembourg. In August 2000, we acquired selected assets of Varcom
Corporation, to expand our offerings of advanced local area network and wide
area network monitoring and management tools, and substantially all of the
assets of Computerm Corporation to add its channel extension products to our
suite of storage area networking products.
In September 2000, we completed an initial public offering of 8,855,000
shares of Class B Common stock at $16.00 per share and received net proceeds of
$128.2 million.
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:
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- the emergence of the Internet and the growth of e-commerce;
- the increased use of data-intensive applications such as
enterprise resource planning, data warehousing and data mining;
- the decreasing cost of on-line data storage;
- the growth of wireless communication; and
- the availability of lower cost, higher bandwidth communications.
As enterprises have become more dependent on storage, data and
telecommunications networks, the demands on the networks have intensified, with
enterprises requiring constantly available communication, immediate access to
information and fast, complex data processing. Today, many enterprises operate
their networks 24 hours a day, 7 days a week, with limited time for maintenance
and upgrades. Given the cost to a business from the disruption caused by the
failure of a network that is critical to a business' operations, enterprises are
committing substantial financial resources and personnel to reduce network
failures. The cost and complexity associated with maintaining networks are
significantly increased as networks become larger and by the fact that most
enterprises manage three separate networks: a storage network, a data network
and a telecommunications network. Many enterprises are seeking ways to reduce
the costs of, and improve the efficiency and manageability of, their networks.
We believe that the trend towards increasing the efficiency and manageability of
these networks will eventually result in their convergence into a single
network.
STORAGE NETWORKS
According to International Data Corporation, the amount of information
that enterprises are capturing and storing has approximately doubled annually
over the past several years and is projected to increase at a compound annual
growth rate of 82% through 2003. As a result, enterprises are faced with
unprecedented challenges for managing this information and transmitting it at
increasingly fast speeds. Storage networks have developed to address 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:
- networks within a single location or small area, which are
referred to as storage area networks; and
- networks that extend across multiple locations or a wider area
that combine multiple storage area networks, which are referred
to as virtual storage networks.
The emerging industry standard protocol for storage networks is called
Fibre Channel. Fibre Channel is a standard for transmitting large amounts of
information at speeds in excess of one billion bits, or one gigabit, per second.
Fibre Channel was developed in 1988 and since then has been increasingly
endorsed by the storage industry because it can connect to different platforms
and operates with greater functionality and speed than many other protocols.
Many enterprises have not yet converted their storage networks to Fibre
Channel protocol because the large amounts of the information they store on
storage systems connected to mainframe computers are not currently compatible
with Fibre Channel. In fact, according to a report issued in November 1999 by
International Data Corporation, approximately 70% of the information stored by
enterprises resides on mainframe systems. As a result of the benefits of the
Fibre Channel protocol, we believe that the conversion of these storage networks
to Fibre Channel will drive growth of high-end
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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 to provide the reliability,
availability and scalability to manage storage applications that are critical to
a business' operations and that have previously been performed within a
mainframe environment.
In a report issued in April 2000, International Data Corporation
estimated that the Fibre Channel market for storage area network hubs and
switches will increase from $236 million in 1999 to $2.8 billion by 2003, a
compound annual growth rate of 85%. International Data Corporation also
projected that the market for director-class switches will be the fastest
growing segment of the Fibre Channel market, increasing from $52 million in 1999
to $1.4 billion by 2003, representing a compound annual growth rate of 129%. In
the same report, International Data Corporation indicates that director-class
switches will maintain a price premium over the next lower segment of Fibre
Channel switches for the foreseeable future, which we believe 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 can travel in a storage network. Optical networking
platforms reduce the costs of sending information over long distances by
combining up to 32 channels of information onto a single fiber. International
Data Corporation estimates that the market for all mainframe and client server
storage area network components will grow from approximately $3.4 billion in
1999 to approximately $13.8 billion by 2003, representing a compound annual
growth rate of 42%.
Data Networks
The increasing amount of information being processed, combined with
user demands for enhanced computing performance, have led to the creation of
data networks. A data network consists of computers connected to each other for
the purpose of sharing information and applications. Switches, known as matrix
switches, allow the computers in a data network to communicate. Two common types
of data networks are:
- local area networks, which are networks of computers that are
located in a small area; and
- wide area networks, which are networks of computers that are
dispersed geographically.
As the demands for speed and reliability of local area networks and
wide area networks have increased, these networks have become more complex.
Complex networks require better management tools to maintain and raise their
performance and to increase their reliability. Network managers use many tools
to test and 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 to reduce the amount of time that their
personnel must devote to maintaining their networks. The market for enterprise
data network management products is large and stable.
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Telecommunications Networks
Over the past decade there has been tremendous growth in the use of
telecommunications networks. This growth, as well as increased access to capital
and significant global deregulation, has led to intensified competition and the
emergence of many new telecommunications carriers. Greater competition and new
technology have reduced prices for basic telecommunications service and resulted
in carriers seeking to differentiate themselves and generate profits through
advanced, value-added services. These services include caller ID, call
forwarding and sophisticated monitoring and billing systems.
The introduction of additional value-added services, the transition
from analog to digital traffic, and the increase in telecommunications network
traffic have all increased the complexity of telecommunications networks. All of
these factors increase the need for better network management and diagnostic
systems that can reliably test and monitor telecommunications networks without
impacting their performance. International Data Corporation estimates that the
market for telecommunications network management products will grow from
approximately $1.8 billion in 1999 to $3.1 billion in 2003, representing a
compound annual growth rate of 15%.
Network Challenges
The fundamental challenges facing network administrators are the same:
networks are growing in size and complexity but 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, efficient network management solutions are in demand. This in turn
creates demand for products and services from companies like ours that have the
experience and expertise to manage these disparate networks.
OUR SOLUTIONS
We provide high-end networking products and related services for
storage, data and telecommunications networks. We design our products to provide
reliability, accessibility and scalability to address the challenges facing
network managers. We believe that we have differentiated ourselves from our
competitors through our technological expertise and by offering networking
products and related services that are compatible with both emerging industry
standards and proprietary legacy technologies. The following are the products
and services that we provide for the three networks:
- Storage Networks. Our IN-VSN family of directors, switches,
channel extenders and optical networking products are critical to
storage networks because they direct, or facilitate the transport
of, data between storage devices, computers and other networks. We
focus on applications where reliability and continuous
availability are essential. Our products are compatible with
popular storage network communication standards, including ESCON
and Fibre Channel.
- Data Networks. Our Universal Touchpoint family consists of
switches, control systems and management applications used in data
networks. These products provide real-time test, access and
monitoring functions that are critical to maintaining a data
network's high level of service. Our products and related services
are tailored to very large data networks as evidenced by our
24,000-port Mega-Matrix switch, the industry's largest switch.
- Telecommunications Networks. We offer our 7-View family of
products for monitoring telecommunications networks. Our 7-View
surveillance system monitors telecommunications networks in order
to permit the network operators to provide functions such as call
tracing,
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fraud detection and billing verification and enhances carriers'
ability to operate advanced billing, sales and marketing
programs, fraud prevention and call routing.
OUR COMPETITIVE STRENGTHS
We believe that the following attributes of our products and our
company position us to take advantage of market opportunities:
Experience with High-End Storage, Data and Telecommunications Networks
Our focus on providing high-end, large-scale, fault-tolerant products
for storage, data and telecommunications networks allows us to apply our
expertise across networks and architectures. This enables us to design our
products to be compatible with various vendors' products and multiple
communication standards and protocols. For example, we used our experience with
the ESCON protocol to employ a technology in our IN-VSN Fibre Channel products
that allows both Fibre Channel and ESCON storage network protocols to be
switched and managed by a single director.
Leadership in High-End Fibre Channel Products
We are a leading provider of director-class switches that operate under
the Fibre Channel communication standard. In April 2000, we began shipping the
industry's first Fibre Channel director-class switch with 64 ports, the IN-VSN
FC/9000. In March 2001, we announced the general availability of our 128 port
FC/9000. The FC/9000 and identical units we produce for original equipment
manufacturers are the largest Fibre Channel switches currently available. The
FC/9000 provides a platform from which enterprises can establish storage
networks that have the scalability, flexibility and reliability to manage
applications that are critical to a business' operations.
Extensive Installed Customer Base
We have installed our products at over 2,000 sites in over 90
countries, primarily in Fortune 1000 businesses and other large enterprises. Our
long relationships and close collaboration with our customers provide us with
direct insight into their changing requirements and enable us to remain abreast
of market developments.
Research and Development Expertise
Our research and development program is focused on the development of
new and enhanced systems and products that can accommodate emerging information
transmission protocols while continuing to accommodate legacy technologies. We
believe that the substantial investment we have made in our research and
development department has led to our development of hardware and software that
positions us to capitalize on emerging technologies and standards, such as Fibre
Channel, FICON and Infiniband, while continuing to accommodate legacy
technologies, such as ESCON.
Significant Direct Sales Resources
Our large direct sales force maintains close relationships with our
customers and, together with our systems engineering department, provides
comprehensive pre- and post-sales support.
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Service and Support Capabilities
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.
Established International Presence
In conjunction with our indirect sales channels, our internationally
based sales and service professionals generated sales to international customers
that represented approximately 40% of our total revenue during 2000. 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 this experience will position
us to identify, establish and capitalize on current and emerging trends and
technologies in network management and architecture.
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.
In January 2000, we completed the acquisition of Prevail Technology to
complement our professional services' offerings by adding expertise in designing
and implementing high availability solutions for IT infrastructures.
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Drive Enhanced Features and Functions with 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 to increase our access to target markets.
OUR PRODUCTS AND TECHNOLOGY
Our products are designed to address the explosive growth of the volume
of information that is captured, processed, stored and manipulated over storage,
data and telecommunications networks, and to enhance the management capabilities
of these networks as they become increasingly essential to business success. We
offer our customers product families in each of the key network environments to
provide comprehensive solutions to assist them in managing their networks. Our
key product families are:
- IN-VSN family of directors, switches, channel extenders and
optical networking products for storage networks;
- Universal Touchpoint family of matrix switches, control systems
and management applications used for management of data networks;
and
- 7-View family of equipment for monitoring telecommunications
networks.
Storage Networking Products
Our IN-VSN family of products provides a platform from which our
clients can build large and scalable storage networks. Storage networks that use
our IN-VSN products and related services are able to transmit information among
various manufacturers' products and can be managed from a central location. This
allows users of our IN-VSN products to increase the size of their networks as
their needs grow. Key aspects of our IN-VSN products are high reliability,
availability, and scalability with the design to operate across Fibre Channel,
FICON and ESCON technologies. Our IN-VSN director and switch products facilitate
large, storage networking for both the mainframe and client/server markets for
applications that are critical to a business' operations. Our channel extension
and wave division multiplexing (WDM) products facilitate the transport of data
over extended distances.
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Our FC/9000 Fibre Channel director, which we began shipping in April
2000, expands storage area networks into applications that are critical to a
business' operations. Key features of the FC/9000 are:
- 128-port capability (announced March 2001), currently the largest
switch available;
- full duplex, 1 gigabit/second throughput;
- low switching delay available at less than 3.0 millionths of a
second;
- redundancy of all critical systems to guarantee uptime for
applications which are critical or essential to a business'
operations;
- modular design, which allows easy and flexible reconfiguration
into a larger switch;
- a graphical user interface control system to allow for easy
configuration and management; and
- a technology roadmap to increase the number of ports beyond 128,
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 networks and
access and manage large amounts of information. We believe that our CD/9000 is
particularly well positioned to address these trends and has significant
advantages over our competitors' ESCON directors, including:
- the largest connection capability available at 256 ports;
- the only ESCON director with the adaptability to switch Fibre
Channel networks;
- features that expand connectivity and increase utilization of
fiber optic port bandwidth; and
- a graphical user interface control system for easy configuration
and management.
We have entered into multi-year alliances with two manufacturers of
optical networking systems, ADVA Optical and Sorrento Networks. We sell the wave
division multiplexing (WDM) and dense WDM (DWDM) products of both companies as
part of our IN-VSN family of storage networking products. WDM 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 optical fiber, thereby substantially
increasing the bandwidth on a fiber optic link, and substantially reducing the
costs of transmitting data long distances over fiber links.
Our Storage Networking System channel extension products facilitate 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.
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The following table provides information on our IN-VSN family of
storage networking products.
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
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FC/9000 FIBRE CHANNEL DIRECTOR Storage area network applications, - 128 ports
Fibre Channel storage area network including server, data warehousing and - 1 gigabit/sec per port
switching and management tape backup - Scalable into a fabric of
multiple switches
CD/9000 ESCON Director Networking between mainframe class - 256 ports
ESCON switching computers and storage devices over - Redundancy and fault
fiber links tolerance
- Graphical user interface
- Fibre Channel port adapter
OPTICAL NETWORKING PLATFORM Linking storage devices over long - 32:1 multiplexing
WDM, DWDM products distances capability
- 4:1 ESCON multiplexing
STORAGE NETWORKING SYSTEM High speed dual path extension - T1, T3, OC3 capability
Channel extension products - Dual path remote
mirroring applications
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.
The following table provides information on our data networking
products.
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
- ---------------------------------------------------------------------------------------------------------------
UNIVERSAL TOUCHPOINT 2700/2800 Data center communications - Scalable local area
Versatile matrix switch; management for disaster recovery network/wide area network switch
physical network management and test access; central site - Up to 4,000 wide area
platform management of distributed data network ports and 3,000 10Mbps
networks Ethernet ports or 2000
megabyte per second Token Ring
ports
- Remote control from
multiple stations
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MEGA-MATRIX SWITCH Disaster recovery - Scalable switch of up to
High capacity matrix switch 24,000 ports
MD/9000 MESSAGE DIRECTOR Allows legacy data and - Mainframe connects through
Enterprise application applications to be accessed by a standard input/output
integration software various systems, including interface, while the network
client/server connects through a middleware
messaging interface
- Permits legacy
communication without
re-writing legacy applications
Telecommunications Networking Products
Our 7-View family of products permits both large and small
telecommunications carriers to enhance network availability and performance by
accessing the Signaling System Seven monitoring system, which captures and
provides information about telecommunications traffic. As a result, our 7-View
products enable carriers to provide telecommunications business applications
such as fraud detection, call tracing and billing verification.
The following table provides information on our telecommunications
networking products.
PRODUCT MODEL AND DESCRIPTION APPLICATION ADVANCED FEATURES
- ---------------------------------------------------------------------------------------------------------------
7-VIEW SURVEILLANCE SYSTEM Early warning of network outages. - Remote monitoring of 32
Monitoring of telephone Call tracing and fraud detection. ports per unit and 10,000
signaling systems Billing verification links per system
- Local storage of recorded
data
NETWORK CHANNEL OFFICE EQUIPMENT In line performance monitoring - Format conversion
(NCOE) for quality of service - Alarm monitoring
Network probe for network measurement - Measurement of error free
quality assurance seconds
- Local data memory
NETWORK MANAGEMENT Bridged performance monitoring - Alarm monitoring
System for network quality assurance for quality of service - Performance monitoring
measurement - T1/E1; T3/E3; OC3/SDH
CONSULTING SERVICES AND PRODUCT SUPPORT
Our global services and support organization of approximately 254
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
compete effectively for consulting services business. In connection with sales
of our products we offer:
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- 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.
RESEARCH AND DEVELOPMENT
In order to maintain and increase our position in the markets in which
we compete, we place considerable emphasis on research and development to expand
the capabilities of our existing products and to develop new products and
product lines. Because we are focused on large-scale products that are critical
to a business' operations, we believe that our future success will depend upon
our ability to maintain our technological expertise and to introduce, on a
timely basis, enhancements to our existing products and new commercially viable
products that will continue to address the needs of our customers. Although, as
a result of our restructuring initiatives, our research and development expense
decreased in 1999 and through the first quarter of 2000, we expect research and
development expenses to increase in the future.
During 2000, our total gross research and development expenditures were
$29.3 million, of which $22.6 million were charged to expense and $6.7 million
were capitalized under the provisions of SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed". 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 QLOGIC
Since 1998, we have been a party to a technology license with Ancor
Communications, Inc., which was acquired by QLogic Corporation in August 2000,
that provided us with a license to use technology that Ancor developed,
including Applications Specific Integrated Circuits, or ASICs, for use in our
FC/9000. We recently entered into a memorandum of understanding with QLogic on
the terms of a new agreement that will supersede certain provisions of the prior
technology license. Pursuant to the new agreement, QLogic will develop new
features for our existing FC/9000, based on the ASICs and technology we
currently license from QLogic. We also agreed to have QLogic design and license
to us some of the components for our next generation FC/9000, which will contain
QLogic's new 2 gigabit ASIC, and supply us with our requirements of those
components. In exchange for these various product designs, appropriate
technology licenses and a supply of our requirements of components, we have
agreed to pay QLogic additional fees and royalties.
We have also been a party, since 1999, to a reseller agreement with
Ancor under which we appointed Ancor as a non-exclusive reseller of the FC/9000
and gave Ancor the right to purchase our FC/9000 at a significant discount for
resale into its distribution channels. The reseller agreement was amended by the
memorandum of understanding to give us the direct sale into certain of QLogic's
non-OEM distribution channels. In addition, we will be QLogic's preferred
provider for service on the FC/9000, and the parties have agreed to jointly
market their offerings.
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We have had an original equipment manufacturer agreement with Ancor
that did not change as a result of the memorandum of understanding. This
agreement appoints us as a non-exclusive, worldwide reseller for certain Ancor,
now QLogic, products, including its 8 and 16 port Fibre Channel switches.
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.
During the year ended December 31, 2000, our top 20 customers accounted
for 37% of our revenue. No one customer accounted for more than 6.6% of total
revenue.
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.
We own 26 U.S. patents, have 5 additional patent applications pending
with the U.S. Patent and Trademark Office, and are in the process of preparing
11 patent applications.
We have also been granted registration protection for a number of
trademarks, including our corporate logo and products 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 December 2000, we began moving our operations from our former
facilities in Mt. Laurel, New Jersey to our new facility in Lumberton, New
Jersey. The transition was completed in early February 2001. By late February
2001, we had also consolidated the manufacturing of all channel extension
products in our Lumberton plant. Previously, some of the channel extension
products were manufactured in Pittsburgh.
We assemble printed circuit boards and complete the assembly of most of
our products at our Lumberton facility. We carry out full system testing prior
to shipping products to customers. In addition, we determine the components that
are incorporated in our products and select the appropriate suppliers of the
components. We have the FC/9000 manufactured for us by Sanmina Corporation, one
of the largest third-party providers of customized integrated electronic
manufacturing services. We decided to outsource the manufacturing of the FC/9000
to Sanmina because our capacity constraints at the old facility, together with
our volume expectations for sales of this product, made outsourcing the
manufacturing of the FC/9000 a more efficient proposition than the outsourcing
of other legacy products. While we will use Sanmina for final product assembly,
we maintain key component expertise internally. We design and develop the key
components of the FC/9000, including software, as well as certain details in the
fabrication and enclosure of our products.
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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.
SALES AND MARKETING
We bring our products to market via a multi-tiered approach, which
includes a global direct sales force, a global distribution network and sales to
original equipment manufacturers.
- Direct Sales. The majority of our current business is generated
by our direct sales organization, which has offices in the United
States, Canada, the United Kingdom, Germany, Switzerland,
Belgium, France and Italy. As of December 31, 2000, we had 204
personnel in our sales and systems engineering department.
- Distribution Sales. We manage a worldwide network of
distributors, resellers and alliance partners. This network
allows us to cost-effectively expand the reach of our sales and
service channels.
- Original Equipment Manufacturers Sales. We have recently
established a team of employees dedicated to enhancing existing
relationships with original equipment manufacturers and expanding
the number of relationships we have with original equipment
manufacturers. Although our sales through the original equipment
manufacturer channel have not been significant to date, we
believe that there is opportunity to increase sales through this
channel.
We believe that selling our products through three channels allows us
to expand our sales by reaching customers we would not be able to reach with a
single sales channel. In addition, having multiple sales channels reduces the
adverse effect that weakness in any single sales channel may have on our
financial condition.
Our marketing strategy is to establish brand and product recognition
and maintain our reputation as a provider of technologically advanced, high
quality products and related services for our customers needs. Our marketing
efforts are directed principally at developing brand awareness and include a
number of programs, including the following:
- participating in industry trade shows, technical conferences and
technology seminars;
- web site marketing;
- education and training;
- publishing technical and educational articles in industry
journals;
- advertising; and
- distributing newsletters and other educational materials to our
customers.
COMPETITION
The markets in which we sell our products are highly competitive. We
believe that these markets will continue to be competitive and will be
continually evolving and subject to rapid technological
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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 competitor for channel extension products is CNT. Our principal
competitors for wave division multiplexing products are IBM/Nortel, Pandatel,
Finisar, and ONI. While the Fibre Channel switching market has yet to develop
fully, we believe that the market for our products will be highly competitive,
continually evolving and subject to rapid technological change. In the Fibre
Channel storage area network switch market, we compete principally against
Brocade Communications and McDATA. We also face competition from manufacturers
of Fibre Channel hubs, including Gadzoox Networks and Vixel Corporation. As the
market for storage area network products grows, we may face competition from
traditional networking companies and other manufacturers of networking equipment
who may enter the storage area network market with their own switching products.
The data networking market is highly competitive and subject to
continual technological change. Our principal competitor for our matrix switches
is Cornet. We also face competition from major systems integrators and other
established and emerging companies.
The market for telecommunications network management equipment is
relatively new, but is highly competitive and is subject to rapid technological
change, evolving industry standards and regulatory developments. We compete with
a number of U.S. and international suppliers that vary in size and in the scope
and breadth of the products and services they offer. Our principal competitors
in this sector are Hewlett Packard, Inet, and Tekelec. The market for test,
access, and measurement products is similarly highly competitive. In this
sector, we compete with companies such as Hekimian, Applied Digital Access and
Dynatech. As the market for these products grows, we may face competition from
emerging telecommunications networking providers.
EMPLOYEES
As of December 31, 2000, we had 926 employees, including contract
employees. Our employees are not represented by any labor unions. We have
experienced no work stoppages and believe that our relationship with our
employees is good.
Competition for qualified personnel in the storage, data and
telecommunications industries is intense. We have established a number of
programs in order to help us attract highly skilled employees.
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We have an active college relations program with several universities for
developing and attracting talented technical personnel. We have three
geographically dispersed research and product development centers, which allows
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 internal and external training
classes.
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.
ITEM 2. PROPERTIES
We recently moved our corporate offices to Lumberton, New Jersey, where
we lease approximately 162,000 square feet of office space to accommodate our
headquarters, manufacturing, marketing and New Jersey-based research and
development staffs. We have an option to expand this facility to up to 200,000
square feet. The lease continues through January 31, 2011. We believe that the
Lumberton facility will provide sufficient space for us for the foreseeable
future. Our various leases at the Mt. Laurel, New Jersey facilities, covering
62,000 square feet of office space and 66,000 square feet of manufacturing
space, terminated in January and February 2001, respectively.
We lease approximately 42,000 square feet in Shelton, Connecticut, for
our research and development department, our product verification laboratory and
a sales and service center; 3,300 square feet of office space in Westford,
Massachusetts, for research and development efforts associated with some of our
telecommunications products; and, 6,120 square feet of office space in Fairfax,
Virginia in connection with our data networking and telecommunications
networking products.
We own a 28,800 square foot building in Pittsburgh, Pennsylvania that
houses marketing and customer support of our channel extension products. We also
lease 3,108 square feet of warehouse space in Pittsburgh, Pennsylvania for
offsite storage.
We lease office space from time to time for our regional sales offices.
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 renew
these leases or lease other space on approximately equivalent terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in litigation relating to claims
arising out of our operations in the normal course of business. In our opinion,
the outcome of these matters will not have a material adverse effect on the
Company's financial condition, liquidity or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ADDITIONAL ITEM - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
As of March 1, 2001, our directors were:
JOHN B. BLYSTONE, 47, 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 July 1994 through December 1995, he served as
President and Chief Executive Officer of Nuovo Pignone, an 80% owned subsidiary
of General Electric Company, and President and Chief Executive Officer of Europe
Power Pole Plus of GE Power Systems. From November 1991 through August 1994, he
served as Vice President, General Manager, GE Superabrasives of General Electric
Company. Mr. Blystone also serves on the boards of directors of SPX Corporation
and Worthington Industries, Inc., and on the advisory board of Stern Stewart.
GREGORY R. GRODHAUS, 53, 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. 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.
DAVID L. CHAPMAN, 66, has been a member of our board of directors since
September 2000. He has been Chief Executive Officer of Northpoint Software
Ventures, a developer of software tools to perform risk and value assessments of
information technology projects, since 1992. Prior to that time, he was a
general partner in Landmark Venture Partners. Mr. Chapman also serves on the
boards of directors of Northpoint Software Ventures, Northpoint Software and
Services, Brooktrout, Inc., Enteron, and Template Graphics Software.
ROBERT B. FOREMAN, 43, 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, 45, 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 the GE Plastics
business group of General Electric Company.
LEWIS M. KLING, 56, 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, 43, 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
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.
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BRUCE J. RYAN, 57, has been a member of our board of directors since
September 2000. He has been Executive Vice President and Chief Financial Officer
of Global Knowledge Network, Inc., a provider of information technology and
computer software training programs and certifications, since 1998. From 1994 to
1998, he was Executive Vice President and Chief Financial Officer of Amdahl
Corporation, a provider of Internet based information technology solutions. Mr.
Ryan also serves on the board of directors of Ross Systems, Inc.
DAVID B. WRIGHT, 51, has been a member of our board of directors since
September 2000. He has been President and Chief Executive Officer of Legato
Systems since October 2000. He had previously been President and Chief Executive
Officer of Amdahl Corporation since 1997. From 1995 to 1997, he was the
Executive Vice President of the Amdahl Systems Group, and before 1995 served in
various other senior executive positions at Amdahl Corporation.
EXECUTIVE OFFICERS
Our executive officers serve at the pleasure of the Board of Directors.
Our executive officers at March 1, 2001, in addition to Greg Grodhaus, our
President and Chief Executive Officer, were:
CHARLES A. FOLEY, 39, has been our Executive Vice President and Chief
Technology 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.
ANTHONY J. FUSARELLI, 53, 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, 51, has been our Executive Vice President and Chief
Financial Officer since May 2000. From 1985 through 1998, Mr. Zager held several
senior management positions with Digital Equipment Corporation, including Vice
President and Chief Financial Officer, Worldwide Engineering and Research, and
Vice President, Business Development. From 1998 through 1999, Mr. Zager served
as a vice president in the Enterprise Solutions Group of Compaq Computer
Corporation.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Class B common stock has been quoted on the Nasdaq National Market
under the symbol "INRG" since September 21, 2000. Prior to that time, there was
no public market for our Class B common stock. The following table shows, for
the periods indicated, the high and low closing prices per share of Inrange
Class B common stock as reported on the Nasdaq National Market.
High Low
---- ---
Year Ended December 31, 2000
Third Quarter (since September 21) $59.81 $46.25
Fourth Quarter $47.25 $12.50
Year Ended December 31, 2001
First Quarter (through March 23) $27.00 $10.81
On March 9, 2001, we had 14 holders of record of our Class B common
stock, with approximately 99.8% of our Class B common stock held in street name
through Depository Trust Co.
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Since we have been a public company, we have not declared or paid cash dividends
on our Class B common stock. We currently intend to retain all available funds
and any future earnings for use in the operation and expansion of our business
and do not anticipate paying 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.
ITEM 6. SELECTED FINANCIAL DATA
The tables on the following pages present our selected consolidated
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 consolidated financial statements and the notes
to those statements included elsewhere in this Form 10-K. The consolidated
statement of operations data set forth below for the years ended December 31,
2000, 1999 and 1998 and consolidated balance sheet data as of December 31, 2000
and 1999 are derived from our audited consolidated financial statements included
herein which have been audited by Arthur Andersen LLP, independent public
accountants, whose report is included herein.
The consolidated statement of operations data for the years ended
December 31, 1997 and 1996 and the consolidated balance sheet data as of
December 31, 1998, 1997 and 1996 are derived from our audited consolidated
financial statements that are not included in this filing. The 1998 financial
statements were audited by Arthur Andersen LLP and the 1997 and 1996 financial
statements were audited by Ernst & Young LLP. Our consolidated financial
statements include our own assets, liabilities, revenue and expenses as well as
the assets, liabilities, revenue and expenses of various other units of SPX
comprising the storage networking, data networking and telecommunications
networking business of SPX. All of the operations, assets and liabilities of
these units have been transferred to us. (See Note 1 of the Consolidated
Financial Statements.)
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. In 2000, we recorded a reversal
of special charges to reflect the actual costs incurred and revision of
estimates for the remaining costs to be incurred. Special charges in 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.
In August 2000, in connection with the acquisition of Varcom, we
recorded a write-off of acquired in-process technology for projects that had not
reached technological feasibility in accordance with Statement of Accounting
Standards No. 2 "Accounting for Research and Development Costs."
Our other (income) expense for 1999 includes a gain of $13.9 million
realized upon the sale of common stock of a public company that we received upon
the exercise of warrants.
As used in the tables, Adjusted EBITDA represents earnings before
interest, taxes, depreciation and amortization, other (income) expense, special
charges, write off of acquired in-process technology and gain on sale of real
estate. We believe that Adjusted EBITDA is an important indicator of the
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liquidity and operating performance of technology companies. You should not
consider Adjusted EBITDA to be a substitute for operating income, net income,
cash flow and other measures of financial performance prepared in accordance
with generally accepted accounting principles.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ----------- ------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue ................................ $ 233,646 $ 200,622 $ 225,669 $ 218,971 $ 214,433
Cost of revenue ........................ 117,040 99,641 115,316 108,541 108,037
------------ ------------ ------------ ------------ ------------
Gross margin ................. 116,606 100,981 110,353 110,430 106,396
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research, development and
engineering......................... 22,589 18,928 25,067 21,225 20,191
Selling, general and administrative... 58,898 48,269 62,449 56,382 51,772
Amortization of goodwill and other
intangibles ......................... 2,263 1,068 1,068 1,277 1,207
Special charges ...................... (540) 10,587 6,971 -- 731
Write off of acquired in-process
technology........................... 10,000 -- -- -- --
Gain on sale of real estate .......... -- (2,829) -- -- --
------------ ------------ ------------ ------------ ------------
Total operating expenses....... 93,210 76,023 95,555 78,884 73,901
------------ ------------ ------------ ------------ ------------
Operating income ....................... 23,396 24,958 14,798 31,546 32,495
Interest (income) expense, net ......... (348) 925 1,391 1,509 497
Other (income) expense ................. (22) (13,726) 178 (18) 149
------------ ------------ ------------ ------------ ------------
Income before income taxes ... 23,766 37,759 13,229 30,055 31,849
Income taxes ........................... 9,506 15,459 5,873 12,198 13,497
------------ ------------ ------------ ------------ ------------
Net income ............................. $ 14,260 $ 22,300 $ 7,356 $ 17,857 $ 18,352
============ ============ ============ ============ ============
Basic and diluted earnings per share.... $ 0.18 $ 0.29 $ 0.10 $ 0.24 $ 0.24
============ ============ ============ ============ ============
Shares used in computing basic
earnings per share ................... 77,961,004 75,633,333 75,633,333 75,633,333 75,633,333
============ ============ ============ ============ ============
Shares used in computing diluted
earnings per share ................... 78,674,645 75,633,333 75,633,333 75,633,333 75,633,333
============ ============ ============ ============ ============
OTHER OPERATING DATA:
Depreciation and amortization .......... $ 14,157 $ 10,534 $ 13,160 $ 14,528 $ 12,468
Capital expenditures, net ............. 5,193 5,469 7,394 5,565 4,062
Cash flows from operating activities ... 23,357 13,318 17,083 40,221 29,222
Cash flows from investing activities ... (134,899) 3,730 (19,969) (11,195) (16,532)
Cash flows from financing activities ... 132,478 (18,225) 4,746 (29,026) (12,690)
Adjusted EBITDA ........................ 47,013 43,250 34,929 46,074 45,694
AS OF DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------ ------------ ----------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 22,646 $ 1,023 $ 2,461 $ -- $ --
Working capital....................... 134,735 35,315 33,970 21,142 31,893
Total assets.......................... 301,058 132,350 126,458 105,452 118,281
Total debt (including short-term
borrowings and current portion of
long-term debt)....................... 5,721 4,131 5,322 16,285 12,694
Stockholders' equity.................. 230,554 78,498 74,453 49,827 64,857
ITEM 7. 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 consolidated financial statements and the notes to those
statements included elsewhere in this Form 10-K.
OVERVIEW
We design, manufacture, market and service switching and networking
solutions for storage, data and telecommunications networks. Our products
provide fast and reliable connections among networks of
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computers and related devices and are used in large-scale systems that are
critical to the operations of Fortune 1000 businesses and other large
enterprises.
Our 32-year history began in 1968 with the formation of Spectron Corp.,
an early provider of data transmission testing equipment. In 1983, Telenex
Corporation acquired Spectron's business. In 1986, General Signal Corp.
purchased Telenex. In 1996, General Signal consolidated several of its
subsidiaries specializing in the communications industry into General Signal
Networks, a wholly owned subsidiary of General Signal. In July 1998, General
Signal Networks was renamed Inrange Technologies Corporation in order to create
a new brand name for the combined businesses. In October 1998, SPX acquired
General Signal, including its Inrange subsidiary.
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. In 2000, we revised our
estimates for the remaining costs to be incurred and reduced the accrual by $1.0
to reflect a settlement with the landlord for lease costs and the revised
estimate of other remaining costs.
On June 30, 2000, we acquired two European distribution businesses, TCS
and STI, expanding our direct sales and customer service presence in France,
Switzerland, Belgium and Luxembourg. On August 4, 2000, we acquired selected
assets of Varcom Corporation to expand our offerings of advanced local area
network and wide area network monitoring and management tools. As a result of
the Varcom acquisition, we recorded a write-off of in process technology of
$10.0 million. On August 14, 2000, we acquired substantially all of the assets
of Computerm Corporation to add its channel extension products to our suite of
storage area networking products. We have accounted for all three acquisitions
using the purchase method of accounting.
In September 2000, we completed an initial public offering of
8,855,000 shares of Class B Common stock at $16.00 per share and received net
proceeds of $128.2 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
operating data as a percentage of revenue:
Years Ended
-----------
December 31,
------------
2000 1999 1998
----- ----- -----
Revenue........................... 100.0% 100.0% 100.0%
Gross margin...................... 49.9% 50.3% 48.9%
Research, development and
engineering..................... 9.7% 9.4% 11.1%
Selling, general and
administrative.................. 25.2% 24.1% 27.7%
Operating income.................. 10.0% 12.4% 6.6%
Net income........................ 6.1% 11.1% 3.3%
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Comparison of years ended December 31, 2000 and 1999
Revenue. Revenue for the year ended December 31, 2000 was $233.6
million, an increase of $33.0 million or 16.5% from $200.6 million for the year
ended December 31, 1999. Excluding the negative impact of foreign currency
translations in Europe, revenue would have increased to $240.1 million, an
increase of $39.5 million or 19.7%.
Sales of our open storage networking products were $49.1 million, an
increase of $31.5 million, or 178.5%, from $17.6 million in the year ended
December 31, 1999. Our open storage networking products consist of fibre channel
directors and optical networking equipment as well as related services for these
products. The increase was primarily driven by sales of the FC/9000 Director,
which was released for general availability during the third quarter of 2000.
Service revenue was $39.4 million, an increase of $5.3 million, or 15.6%, from
$34.1 million. This increase was attributable to revenue from acquisitions, our
entry into and growth of professional services, and higher revenue associated
with increased product sales.
Cost of Revenue. Our cost of revenue for the year ended December 31,
2000 was $117.0 million, an increase of $17.4 million, or 17.5%, from $99.6
million for the year ended December 31, 1999. As a percentage of revenue, cost
of revenue increased to 50.1% for the year ended December 31, 2000 from 49.7%
for the year ended December 31, 1999. This represented a slight decrease in
gross margin to 49.9% for the year ended December 31, 2000 from 50.3% for the
year ended December 31, 1999. The increase in cost of revenue was related to
increased sales, higher service costs and a change in mix of products of sold.
Costs of service revenues increased $4.2 million as a result of increased
service headcount to support the introduction of the FC/9000, professional
service start-up costs and costs associated with employee headcount acquired in
the acquisitions.
Research, Development and Engineering. Research, development and
engineering expenses for the year ended December 31, 2000 were $22.6 million, an
increase of $3.7 million, from $18.9 million for the year ended December 31,
1999. As a percentage of revenue, research, development and engineering expenses
were 9.7% for the year ended December 31, 2000 as compared to 9.4% for the year
ended December 31, 1999. The increase was a result of additional headcount
primarily to support Fibre Channel initiatives and other storage networking
products, as well as new data networking and telecommunications networking
programs. The added headcount for the data networking and telecommunications
networking programs came principally from the acquisitions. Including
capitalized software, research development and engineering spending was $29.3
million for the year ended December 31, 2000, or 12.5% of revenue, compared to
$24.0 million, or 12.0% of revenue, for the year ended December 31, 1999. We
expect that total research, development and engineering expenses will continue
to increase in the future as we develop new products and product lines and
enhance existing product lines.
Selling, General and Administrative. Selling, general and
administrative expenses for the year ended December 31, 2000 were $58.9 million,
an increase of $10.6 million, from $48.3 million for the year ended December 31,
1999. As a percentage of revenue, selling, general and administrative expenses
were 25.2% for the year ended December 31, 2000, compared to 24.1% for the year
ended December 31, 1999. Selling and administrative personnel and related costs
of approximately $5.0 million from the acquired businesses are included in the
December 31, 2000 amounts. The remainder of the increase was primarily due to
increased personnel to support the expected sales levels for the FC/9000, from
spending related to additional marketing and e-commerce initiatives and from
hiring additional key management personnel to support our initial public
offering.
Amortization of Goodwill and Other Intangibles. Amortization of
goodwill and other intangibles for the years ended December 31, 2000 and 1999
was $2.3 million and $1.1 million, respectively. The
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increase was a result of amortization of goodwill and other intangibles
associated with the acquisitions completed in 2000.
Special Charges. Special charges for the year ended December 31, 2000
resulted in $0.5 million of income as compared to $10.6 million of expense in
1999. The income recorded in 2000 was primarily related to a reversal of a
charge recorded in December 1999 for abandonment of certain facilities, offset
by $0.5 million in charges for options issued to employees of SPX. We incurred
special charges of $10.6 million in 1999, consisting 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, $2.1 million for
product line discontinuance and $0.9 million for the abandonment of a leased
facility.
Write-off of Acquired In-Process Technology. In conjunction with the
acquisition of Varcom, we recorded a charge of $10.0 million for the write-off
of acquired in-process technology. The purchased in-process technology had not
yet reached technical feasibility and the technology had no alternative future
use as of the closing date.
Gain on Sale of Real Estate. In 1999, we sold one of our facilities for
$6.4 million and recognized a gain on sale of real estate of $2.8 million. In
2000, we sold a manufacturing facility and are leasing back a portion of the
site. We fully recovered our cost basis in the property and have deferred the
gain, which we will recognize over the term of the lease.
Net Interest Income. Net interest income was $0.3 million for the year
ended December 31, 2000 as compared to net interest expense of $0.9 million for
the year ended December 31, 1999, as we used the proceeds from our initial
public offering in September 2000 to pay down our debt and invested the balance.
In 2000, we received approximately $1.7 million of interest income from our
demand note with SPX and from cash invested in a money market account. This was
offset in part by $1.4 million of interest expense. The interest expense for
2000 was principally for money loaned to us by SPX for the acquisitions of
Varcom, Computerm and TCS / STI. The loan for these acquisitions was repaid from
the proceeds of our initial public offering.
Other Income (Expense). We had minimal other income/expense for the
year ended December 31, 2000, as compared to $13.7 million of other income for
the year ended December 31, 1999. The other income in 1999 was attributable to a
gain we recognized on the sale of an investment.
Income Taxes. Our effective tax rate, for the year ended December 31,
2000, was 40.0%, compared to 40.9% for the year ended December 31, 1999.
Comparison of Years Ended December 31, 1999 and 1998
Revenue. Revenue for 1999 was $200.6 million, a decrease of $25.0
million, or 11.1%, from $225.7 million for 1998. The revenue decline was
primarily attributable to lower sales of certain telecommunications products to
a single account. For 1999, the revenue from the sale of these
telecommunications products was $17.9 million, compared to $38.8 million for
1998. This decrease was offset in part by an increase in our open storage
networking revenue of $7.3 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%
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in 1998. This increase was attributable primarily to reduced labor and overhead
associated with manufacturing plant consolidations. This was offset by lower
revenue from higher margin telecommunications products.
Research, Development and Engineering. As a result of restructuring
initiatives taken in late 1998 and early 1999, which included ceasing research
and development on products that we were discontinuing, our research,
development and engineering expense decreased to $18.9 million for 1999 from
$25.1 million for 1998. Including capitalized software, research, development
and engineering spending was $24.0 million in 1999 or 12.0% of revenue versus
$30.1 million or 13.3% of revenue in 1998.
Selling, General and Administrative. Selling, general and
administrative expenses for 1999 were $48.3 million, down $14.2 million, or
22.7%, from $62.4 million in 1998. As a percentage of revenue, selling, general
and administrative expenses were 24.1% for 1999, compared to 27.7% for 1998. The
decrease resulted from restructuring initiatives taken in 1999 and reflects the
consolidation of duplicate selling and administrative functions into one
location and the reduction of sales and marketing efforts associated with the
cancellation of non-strategic product lines.
Amortization of Goodwill and Other Intangibles. Amortization of
goodwill and other intangibles was $1.1 million in 1999 and 1998.
Special Charges. We incurred special charges of $10.6 million in 1999,
compared to $7.0 million in 1998. The $10.6 million was comprised primarily of
$5.8 million for cash severance payments to approximately 215 hourly and
salaried employees, $1.8 million for field sales and service office closings and
$2.1 million for product line discontinuance. The $7.0 million for 1998
consisted of $4.6 million for cash severance payments to approximately 200
hourly and salaried employees, $0.5 million for closing costs of two facilities
and $1.9 million for product line discontinuance.
Gain on Sale of Real Estate. During 1999, we sold one of our facilities
for $6.4 million and recognized a gain on sale of real estate of $2.8 million.
We did not sell any real estate in 1998.
Net Interest Expense. Net 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 40.9% in 1999, compared to
44.4% 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.
QUARTERLY FINANCIAL INFORMATION
The following table presents our unaudited quarterly statement of
operations data for 2000 and 1999. 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. We have reclassified expenses previously reported for the
quarter ended September 30, 2000 to conform to the year 2000 financial
presentation. The operating results for any quarter are not necessarily
indicative of results for a full fiscal year.
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THREE MONTHS ENDED
(IN THOUSANDS)
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2000 2000 2000 2000 1999 1999 1999 1999
--------- -------- -------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Revenue........................... $ 71,123 $ 64,095 $ 52,275 $ 46,153 $ 48,018 $ 50,221 $ 53,225 $ 49,158
Cost of revenue................... 34,804 31,773 27,110 23,353 23,498 21,879 27,338 26,926
--------- -------- -------- -------- -------- -------- -------- --------
Gross margin.................... 36,319 32,322 25,165 22,800 24,520 28,342 25,887 22,232
--------- -------- -------- -------- -------- -------- -------- --------
Operating Expenses:
Research, development and
engineering................... 6,722 5,807 5,097 4,963 4,492 3,818 4,166 6,452
Selling, general and
administrative................ 18,467 15,897 12,397 12,137 13,433 10,606 11,023 13,207
Amortization of goodwill and
other intangibles............. 982 747 267 267 267 267 267 267
Special charges................. (600) 250 (190) -- 900 -- -- 9,687
Write-off of acquired
in-process technology......... -- 10,000 -- -- -- -- -- --
Gain on sale of real estate..... -- -- -- -- -- (2,829) -- --
--------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses.. 25,571 32,701 17,571 17,367 19,092 11,862 15,456 29,613
--------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... 10,748 (379) 7,594 5,433 5,428 16,480 10,431 (7,381)
Interest expense (income) ....... (1,494) 830 139 177 215 213 243 254
Other expense (income) ........... (54) 143 (17) (94) 187 (6,156) (7,938) 181
--------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes.................... 12,296 (1,352) 7,472 5,350 5,026 22,423 18,126 (7,816)
Income taxes...................... 4,918 (541) 2,989 2,140 2,054 9,177 7,425 (3,197)
--------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)......... $ 7,378 $ (811) $ 4,483 $ 3,210 $ 2,972 $ 13,246 $ 10,701 $ (4,619)
========= ======== ======== ======== ======== ======== ======== ========
Statement of Operations
Data (percentage of revenue):
Revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin...................... 51.1 50.4 48.1 49.4 51.1 56.4 48.6 45.2
Research, development and
engineering................... 9.5 9.1 9.8 10.8 9.4 7.6 7.8 13.1
Selling, general and
administrative................ 26.0 25.2 23.7 26.3 28.0 21.1 20.7 26.9
Net income (loss)................. 10.4 (1.3) 8.6 7.0 6.2 26.4 20.1 (9.4)
Because we sell high-end products with relatively high costs for each
product, our financial results for each quarter may be materially affected by
the timing of particular orders, and we anticipate that our largest customers in
one period may not be our largest customers in future periods. Other factors
that may cause our results of operations to vary significantly from quarter to
quarter include:
- the timing and market acceptance of product introductions or
enhancements by us or our competitors;
- the size, timing, terms and fluctuations of customer orders;
- customer order deferrals in anticipation of new products;
- technological changes in the networking industry;
- competitive pricing pressures;
- seasonal fluctuations in customer buying patterns;
- changes in our operating expenses;
- personnel changes;
- policies by our suppliers;
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- regulatory changes;
- capital spending;
- one-time gains or losses;
- delays of payments by customers; and
- general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities was $23.4 million for the year
ended December 31, 2000. During this period, cash flow from operations was
principally generated from net income plus add-backs for depreciation,
amortization and the write off of in-process technology, increases in accounts
payable and accrued expenses, offset by increases in accounts receivable and
prepaid expenses.
Cash flow used in investing activities was $134.9 million for the year
ended December 31, 2000. Of that amount, $55.4 million was used to fund the
acquisitions of the acquired businesses, including transaction costs, $61.0
million was loaned to SPX, $3.0 million was invested in securities of a private
company and the remainder was used for additions of property and equipment,
capitalized software and other assets.
In September 2000, we completed an initial public offering of 8,855,000
shares of Class B common stock at $16.00 per share and received net proceeds of
$128.2 million. The net proceeds were used to repay certain borrowings from SPX
to fund certain acquisitions made in the second and third quarters of 2000. The
remaining proceeds are being used for general corporate purposes. Pending use,
we invested $15.0 million in a money market account and loaned the remaining net
proceeds to SPX under a demand note. From time to time, we have supplemented our
operating cash flows with capital contributions from SPX prior to the initial
public offering, borrowings under foreign lines of credit and capital leases.
For the year ended December 31, 2000, net cash generated by financing
activities was $132.5 million, primarily consisting of net cash inflows from the
initial public offering and payments from SPX offset by repayments under lines
of credit and long term debt. We have borrowed funds for the working capital and
business expansion needs of our foreign operations from local financial
institutions. At December 31, 2000, our available credit facilities consisted of
approximately $5.2 million in lines of credit in the United Kingdom, Germany and
Italy that were guaranteed by SPX. At December 31, 2000, there were no
borrowings outstanding under these facilities. The weighted average interest
rate on borrowings under the foreign lines of credit outstanding during 2000 was
5.63%.
As part of our cash management system, we lend, on a daily basis, our
cash and cash equivalents in excess of $15 million to SPX. We lend these amounts
to SPX under a loan agreement that allows us to demand repayment of outstanding
amounts at any time. However, even after SPX repays us the amount due under the
loan agreement, as part of our cash management system we will continue, on a
daily basis, to lend all of our cash and cash equivalents in excess of $15
million to SPX until the termination of the loan agreement. The loan agreement
will terminate when SPX owns less than 50% of our outstanding shares of Class A
common stock and Class B common stock or if there is an event of default under
SPX's credit agreement. Amounts loaned under the loan agreement are unsecured.
Interest accrued quarterly at a rate of 8 1/2% on loans to SPX made prior to
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October 1, 2000. Interest on loans to SPX made on or after October 1, 2000
accrues quarterly at the weighted average rate of interest paid by SPX for
revolving loans under its credit agreement for the prior quarter. SPX's ability
to repay these borrowings is subject to SPX's financial condition and liquidity,
including its ability to borrow under its credit agreement or otherwise.
We believe that the net proceeds from the initial public offering,
together with current cash balances, foreign credit facilities and cash provided
by future operations, will be sufficient to meet the working capital, capital
expenditure and research and development requirements for the foreseeable
future. However, if additional funds are required 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 financing or from other
sources. Our ability to issue equity may be limited by SPX's desire to preserve
its ability in the future to effect a tax-free spin-off and by limitations under
SPX's credit agreement. In addition, our ability to borrow money may be limited
by restrictions under SPX's credit agreement. Additional financing may not be
available, or, if it is available, it may be dilutive or may not be obtainable
on terms acceptable to us.
SEASONALITY AND INFLATION
Our business is not highly seasonal. Inflation has not been significant
to our recent operating results, but we cannot assure you that a high rate of
inflation in the future would not have an adverse effect on our operating
results.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which became effective January 2001, establishes accounting and
reporting standards for derivative instruments and hedging contracts. It also
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet at fair value and that changes in fair value be recognized in
operating results. Management believes that the impact of this statement will
not effect our results of operations and financial position.
FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks and uncertainties described
below and other information in this report. These are not the only risks and
uncertainties that we face. Additional risks and uncertainties that we do not
currently know about or that we currently believe are immaterial may also harm
our business operations. If any of these risks or uncertainties occurs, it could
have a material adverse effect on our business.
RISKS RELATING TO OUR BUSINESS
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF OUR CUSTOMERS.
Our success depends upon our ability to address the rapidly changing
markets in which we operate, including changes in relevant industry standards
and the changing needs of our customers. To address this risk, we must develop
and introduce high-quality, technologically advanced, cost-effective products
and product enhancements on a timely basis. If we are not able to develop and
introduce new products successfully in the timeframe we expect or prior to the
time our competitors do, our future revenue and earnings growth will be impaired
and our reputation for producing technologically-advanced products could be
damaged.
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WE MAY EXPERIENCE DELAYS IN THE DEVELOPMENT OF NEW PRODUCTS.
Given the relatively short product life cycles in the market for our
products, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could significantly harm our future
revenue and earnings growth. Product development delays may result from numerous
factors, including:
- failure to develop or license the necessary technology on a
timely basis;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with independent contractors and suppliers;
- failure to obtain regulatory approvals;
- changing original equipment manufacturer product specifications;
and
- unanticipated engineering complexities.
Since developing new products on a timely basis is critical to our
success, any delay we experience in developing new products could reduce our
revenue and profitability.
WE MAY OVERESTIMATE THE DEMAND FOR, AND MARKET ACCEPTANCE OF, THE NEW OR
ENHANCED PRODUCTS THAT WE DEVELOP.
We attempt to continuously bring new products to market. There is a
risk that some of these products will not be accepted by the market. We
undertake significant research and development expense prior to marketing any
new product. As a result, if the new products that we introduce do not gain
acceptance, not only will we lose sales as a result of not having developed a
product that the market accepts, but we will have used our resources
ineffectively.
OUR FINANCIAL SUCCESS DEPENDS ON OUR ABILITY TO MANAGE THE PHASING OUT OF OLD
PRODUCTS AND THE INTRODUCTION OF NEW PRODUCTS.
We must successfully predict when one of our products has reached the
end of its life cycle and when it has to be updated, replaced or phased out. If
a product is not technologically advanced, customers will frequently delay
purchasing that product in the expectation that a more advanced product will be
developed by us or one of our competitors, particularly near the end of a
product's life cycle. In addition, selling a number of products that are at the
end of their life cycle may harm our reputation as being technologically
advanced. We must manage the introduction of new or enhanced products in order
to minimize disruption in our customers' ordering patterns, avoid excessive
levels of older product inventories and ensure that adequate supplies of new
products can be delivered to meet our customers' demands.
WIDESPREAD ADOPTION OF STORAGE AREA NETWORKS, AND THE FIBRE CHANNEL PROTOCOL ON
WHICH THESE NETWORKS ARE BASED, IS CRITICAL TO OUR FUTURE SUCCESS. IF OTHER
TECHNOLOGIES BECOME PREDOMINANT OR READILY ACCEPTED, OUR BUSINESS WILL BE
SIGNIFICANTLY HARMED.
The market for storage area networks has only recently begun to develop
and is rapidly evolving. Our FC/9000, which operates using the Fibre Channel
protocol, is used exclusively in storage area networks. In addition, our FC/9000
switching products are designed to operate in corporate datacenters. Currently,
there are only limited Fibre Channel storage area network products operating in
these datacenters and potential end users may seek to adopt networks with
different protocols. Potential
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end-users, particularly those who have invested substantial resources in their
existing data storage and management systems, may be reluctant or slow to adopt
a new approach, like storage area networks, or may want to adopt a more advanced
solution such as gigabit ethernet. If other technologies become predominant or
readily accepted, our business will be significantly harmed. Because of this, it
is difficult to predict the potential size or future growth rate of products
using the Fibre Channel protocol. Our success in penetrating this emerging
market will depend on, among other things, our ability to:
- educate potential original equipment manufacturers, distributors
and end-users about the benefits of Fibre Channel storage area
network technology and overcoming its limitations; and
- predict and base our products on standards that ultimately become
industry standards.
In addition, storage area networks are often implemented in connection
with deployment of new storage systems and servers. Accordingly, our future
success is also substantially dependent on the market for new storage systems
and servers.
IF SALES OF OUR FC/9000 DO NOT GROW AS WE ANTICIPATE, OUR REVENUE AND EARNINGS
GROWTH COULD BE LESS THAN WE ANTICIPATE.
We began shipping the FC/9000 in April 2000. Our future sales growth
and financial results are highly dependent on the growth of sales of the
FC/9000. Sales of the FC/9000 may not grow as quickly as we expect for various
reasons, including:
- storage networks that are used in applications that are critical
to a business' operations may not convert to switches using Fibre
Channel protocol;
- we or our customers may discover problems in the FC/9000 that we
may not be able to fix quickly and cost-effectively, if at all;
and
- other companies may produce products with similar or greater
capabilities which may have more attractive pricing. We may
encounter delays in filling FC/9000 orders if our contract
manufacturer is unable to meet our manufacturing needs.
WE MAY ENCOUNTER DELAYS IN FILLING FC/9000 ORDERS IF OUR CONTRACT
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. If Sanmina Corporation experiences delays,
disruptions, capacity constraints, quality control problems in its manufacturing
operations or financial difficulties, product shipments to our customers could
be delayed. These delays could materially negatively impact our revenue and
earnings growth as well as our competitive position and reputation.
WE RELY ON SOLE SOURCES OF SUPPLY FOR SOME KEY COMPONENTS OF OUR PRODUCTS. ANY
DISRUPTION IN OUR RELATIONSHIPS WITH THESE SOURCES COULD INCREASE OUR PRODUCT
COSTS AND REDUCE OUR ABILITY TO SUPPLY OUR PRODUCTS ON A TIMELY BASIS.
We purchase microchips that are specifically designed for the FC/9000
from QLogic pursuant to the agreements described in Business, Relationship with
QLogic, above. These microchips are referred to as applications specific
integrated circuits, or ASICs. We have also contracted for QLogic to develop new
features and functions for our FC/9000 based on the ASICs and the technology we
license from QLogic. In addition, we have agreed to have QLogic design, license
and supply us, for our next generation FC/9000, with some components containing
QLogic's next generation ASICs. Since we anticipate that a significant amount of
our revenue growth will come from sales of our current and future generation
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FC/9000, any circumstance that results in the failure of QLogic to perform under
our agreements with them could have a material adverse effect on our revenue and
earnings growth.
DUE TO THE NATURE OF OUR PRODUCTS, OUR LARGEST CUSTOMERS IN ANY GIVEN PERIOD MAY
NOT CONTINUE THEIR LEVELS OF PURCHASES IN FUTURE PERIODS, AND, ACCORDINGLY, OUR
RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED IF WE DO NOT DEVELOP
SIGNIFICANT ADDITIONAL CUSTOMERS.
Our twenty largest customers accounted for approximately 37% of our
2000 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.
FAILURE TO EXPAND AND MANAGE OUR DISTRIBUTION CHANNELS, INCLUDING OUR
RELATIONSHIPS WITH ORIGINAL EQUIPMENT MANUFACTURERS, COULD LIMIT OUR ABILITY TO
INCREASE REVENUE AND EARNINGS GROWTH.
We have historically sold the majority of our products through our
direct sales force. To expand our sales, particularly in the storage area
network market, we plan to sell certain of our products to manufacturers who
resell our product using their own brand name, referred to as original equipment
manufacturers (OEMs), and through other indirect sales channels. We only
recently began marketing our products to OEMs, and the OEM evaluation and sale
cycle is substantially longer than the sale cycle to our traditional end user
customers. Even if we reach agreement with OEMs to supply them our products for
resale under the OEM's brand, it may take time before we start to deliver
products to them. In addition, they may not continue to develop, market and sell
products that incorporate our technology and we will not be able to control
their ability or willingness to do so. We intend to sell our products to OEMs
that are active in highly competitive markets, and our success will depend on
their success. If we are not successful in our efforts to sell to and through
OEMs and other indirect sales channels, our revenues and earnings may not grow
as rapidly as those of our competitors who have established OEM relationships.
THE PRICES WE CHARGE FOR OUR PRODUCTS MAY DECLINE, WHICH MAY RESULT IN A
REDUCTION IN OUR PROFITABILITY.
We anticipate that as products in the storage area network market
become more prevalent, the average unit price of our products may decrease in
response to changes in product mix, competitive pricing pressures, the maturing
life cycle of our products, new product introductions by us or our competitors
or other factors. Also, sales through indirect OEM sales channels, which we
expect to grow as a percentage of our revenues, have lower gross margins than
sales through direct sales channels. If we are not successful in our efforts to
reduce the cost of our products through manufacturing efficiencies, design
improvements and cost reductions, as well as through increased sales of higher
margin products, our profitability will decline significantly.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO OUR SUCCESS, OUR REVENUE AND
EARNINGS GROWTH WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
Because our products rely on proprietary technology and will likely
continue to rely on technological advancements for market acceptance, we believe
that the protection of our intellectual property rights is critical to the
success of our business. To protect these rights, we rely on a combination of
patent, copyright, trademark and trade secret laws. We also enter into
confidentiality or license agreements with our employees, consultants and
business partners, and control access to and distribution of our software,
documentation and other proprietary information.
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Despite our efforts to protect our proprietary rights, unauthorized
parties may copy or otherwise obtain and use our products or technology. It is
difficult for us to monitor unauthorized uses of our products. The steps we have
taken may not prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. If we are unable to protect our intellectual property
from infringement, other companies may be able to use our intellectual property
to offer competitive products at lower prices. We may not be able to effectively
compete against these companies.
COMPETITION IN NETWORK MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE.
The markets in which we sell products and services are highly
competitive. Some of the companies with which we compete have substantially
greater resources, greater name recognition and access to larger customer bases
than we do. Our competitors may succeed in adapting more rapidly and effectively
to changes in technology or the market. If we fail to compete effectively, it
could materially adversely affect our revenue and earnings growth.
In particular, the business of providing products and related services
to the storage area network market is highly competitive. Our future growth is
highly dependent on this business. Our primary competitors in the Fibre Channel
switch market are Brocade Communications and McDATA, both of which currently
sell more Fibre Channel switches than we do. The perception by some that these
companies are early leaders in the storage area network market may materially
adversely affect our ability to develop new customer relationships. Other
companies are also providing Fibre Channel switches and other products in our
markets, and their products could become more widely accepted than ours. In
addition, a number of companies are developing, or have developed, Fibre Channel
products other than switches, such as adapters or hubs, that compete with our
products in some applications. These competitors may develop products that are
more advanced than our products. To the extent that these companies have current
supplier relationships with our potential customers, it will be more difficult
for us to win business from these potential customers. If Fibre Channel
technology gains wider market acceptance, it is likely that an increasing number
of competitors will begin developing and marketing Fibre Channel products.
The segment of the data networking market in which we compete is highly
competitive and subject to continual technological changes. In the data
networking market we face competition from major systems integrators and other
established and emerging companies.
In the telecommunications industry, the market for the Signaling System
Seven monitoring system, which captures and provides information about
telecommunications traffic, is relatively new, highly competitive and subject to
rapid technological change, evolving industry standards and regulatory
developments. We compete with a number of U.S. and international suppliers. As
the market for these products grows, we will face competition from other
emerging telecommunications networking providers.
UNDETECTED SOFTWARE OR HARDWARE DEFECTS IN OUR PRODUCTS COULD RESULT IN LOSS OF
OR DELAY IN MARKET ACCEPTANCE OF OUR PRODUCTS AND COULD INCREASE OUR COSTS OR
REDUCE OUR REVENUE.
Our products may contain undetected software or hardware errors when
first introduced or when new versions are released. Our products are complex,
and we have from time to time detected errors in existing products, and we may
from time to time find errors in our existing, new or enhanced products. In
addition, our products are combined with products from other vendors. As a
result, should problems occur, it may be difficult to identify the source of the
problem. These errors could result in a loss of or
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delay in market acceptance of our products and would increase our costs, reduce
our revenue, harm our reputation and cause significant customer relations
problems.
INDUSTRY STANDARDS AFFECTING OUR BUSINESS EVOLVE RAPIDLY, AND IF WE DO NOT
DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE EVOLVING STANDARDS, OUR REVENUE
AND EARNINGS GROWTH WILL SUFFER.
All components of a storage area network must comply with the same
standards in order to operate efficiently together. However, there are often
various competing industry standards. We are not able to predict which industry
standard will become predominant. Whether a standard becomes predominant is
often due, in part, to the amount of support these standards receive from
industry leaders, which are generally larger and more influential than we are.
Often, our products are not compatible with all industry standards. If an
industry standard with which our products are not compatible becomes
predominant, sales of our products will suffer or we may have to incur
significant costs to adapt our products to new industry standards and to make
our products adaptable to a wide range of standards.
CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND NEGATIVELY
AFFECT OUR SALES.
Recently, there has been increasing consolidation in the storage
networking industry. Consolidation in the storage networking industry may
strengthen our competitors' positions in our market, cause us to lose customers
and hurt our sales. In addition, acquisitions may strengthen our competitors'
financial, technical and marketing resources and provide access to potential
customers, which may harm our revenue and earnings growth.
THE LOSS OF THE SERVICES OF ANY OF OUR KEY PERSONNEL COULD HAVE A NEGATIVE
IMPACT ON OUR REVENUE AND EARNINGS GROWTH.
Our success depends to a significant degree upon the continued
contributions of our key personnel in engineering, research, sales, marketing,
finance and operations. We do not maintain key person life insurance on our key
personnel and do not have employment contracts with any of our key personnel. If
we lose the services of any of our key personnel, it could have a negative
impact on our business.
IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL, ENGINEERING,
RESEARCH, SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS MAY
SUFFER.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, research,
sales, marketing, finance and operations personnel. Competition for
professionals in our industry is intense and increasing. We may not be able to
attract and retain qualified personnel. If we are unable to attract or retain
qualified personnel in the future, or if we experience delays in hiring required
personnel, particularly qualified engineers and sales personnel, our ability to
develop, introduce and sell our products could be materially harmed. If our
stock price declines or does not increase significantly or options in our
company are not perceived as highly valuable, we may have difficulty in
attracting and retaining qualified personnel, because a portion of our
employees' compensation is stock based.
OUR NON-COMPETITION AGREEMENTS WITH OUR EMPLOYEES MAY NOT BE ENFORCEABLE. IF ANY
OF THESE EMPLOYEES LEAVES OUR COMPANY AND JOINS A COMPETITOR, OUR COMPETITOR
COULD BENEFIT FROM THE EXPERTISE OUR FORMER EMPLOYEE GAINED WHILE WORKING FOR
US.
We currently have non-competition agreements with some of our
employees. These agreements prohibit our employees, in the event they cease to
work for us, from directly competing with us or
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working for our competitors. Under current U.S. law, we may not be able to
enforce some of these non-competition agreements. If we are unable to enforce
any of these agreements, our competitors that employ our former employees could
benefit from the expertise our former employees gained while working for us.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
We have experienced significant fluctuations in sales, revenue and
operating results from quarter to quarter as a result of a combination of
factors. We expect these fluctuations to continue in future periods. Because we
sell high-end products with relatively high costs for each product, our
financial results for each quarter may be materially affected by the timing of
particular orders, and we anticipate that our largest customers in one period
may not be our largest customers in future periods. Numerous other factors that
may cause our results of operations to vary significantly from quarter to
quarter are discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations-Quarterly Financial Information.
MANY OF OUR SALES ARE MADE IN CONJUNCTION WITH SALES BY OTHER VENDORS OR RELATED
PRODUCTS. IF OUR CUSTOMER'S RELATIONSHIP WITH THE VENDOR TERMINATES, OR OUR
RELATIONSHIP WITH THE VENDOR TERMINATES, THE CUSTOMER MAY TERMINATE ITS
RELATIONSHIP WITH US.
We sell components of complicated network systems. Many vendors sell
components, related to our products, that customers purchase when they purchase
our products. If the relationship between the customer and the other vendor
deteriorates or terminates, or if the vendor's products are perceived as not
being state-of-the-art or cost-effective, our relationship with that customer
might be in jeopardy and may be terminated. For example, our 7-View product is
generally purchased in conjunction with network management software that is
often provided by third parties. If a customer decides for any reason to cease
purchasing network management software, that customer would cease to use our
7-View product.
In addition, many times a third party vendor is the prime contractor
for sales of products and related services to our customers. The third party
vendor may choose to terminate its relationship with us, or otherwise choose not
to bring us sales opportunities. If our relationships with these vendors
terminate, we would lose those referral sales opportunities.
ACQUISITIONS THAT WE COMPLETE MAY BE DILUTIVE TO EARNINGS AND MAY NEVER GENERATE
INCOME.
Acquisitions that we have made and may make in the future may be
dilutive to our earnings since the prices being paid for technology companies
are high relative to their earnings. In addition, since we are in a
high-technology business, we are likely to acquire companies whose products are
not yet proven and may never become profitable. As a result, we may pay a high
price for a company that may never produce earnings. For example, some of
Varcom's products have not yet been brought to market and, as a result, Varcom
may not produce the earnings that we anticipate.
WE DERIVE A SUBSTANTIAL AMOUNT OF OUR REVENUE FROM INTERNATIONAL SOURCES, AND
DIFFICULTIES ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD HARM OUR REVENUE
AND EARNINGS GROWTH.
We derived 40% of our 2000 revenue from customers located outside of
the United States. We believe that our continued growth and profitability will
require us to continue to penetrate international markets. If we are unable to
successfully manage the difficulties associated with international operations
and maintain and expand our international operations, our revenue and earnings
growth could be substantially lower than we anticipate. These difficulties are
heightened because we are in a highly technical industry and include:
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- difficulties related to staffing for our highly technical
industry;
- licenses, tariffs, taxes and other trade barriers imposed on
products such as ours;
- reduced or limited protections of intellectual property rights;
- difficulties related to obtaining approvals for products from
foreign governmental agencies that regulate networks; and
- compliance with a wide variety of complex foreign laws and
treaties relating to telecommunications equipment.
In addition, all of our manufacturing is currently performed in the
United States. As a result, an increase in the value of the U.S. dollar relative
to foreign currencies could make our products more expensive and less
competitive in foreign markets. A portion of our international revenue may be
denominated in foreign currencies in the future, which would subject us to risks
associated with fluctuations in those foreign currencies.
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.
SPX beneficially owns 100% of our outstanding Class A common stock and
approximately 89.5% of the total number of outstanding shares of our common
stock. This represents about 97.7% of the combined voting power of all classes
of our voting stock. On February 28, 2001, SPX announced plans to repurchase up
to $50 million of our Class B common stock in open market purchases, which as
and when it occurs, will increase its ownership of Inrange. Because of SPX's
control of our company, investors will be unable to affect or change the
management or the direction of our company. As a result, some investors may be
unwilling to purchase our Class B common stock. If the demand for our Class B
common stock is reduced because of SPX's control of our company, the price of
our Class B common stock could be materially depressed.
Until SPX beneficially owns less than 50% of the combined voting power
of our stock, SPX will be able to elect our entire board of directors and
generally to determine the outcome of all corporate actions requiring
stockholder approval. As a result, SPX will be in a position to control all
matters affecting our company, including decisions as to:
- our corporate direction and policies;
- the composition of our board of directors;
- future issuances of our common stock or other securities;
- our incurrence of debt;
- amendments to our certificate of incorporation and bylaws;
- payment of dividends on our common stock; and
- acquisitions, sales of our assets, mergers or similar
transactions, including transactions involving a change of
control.
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THE LIMITED VOTING RIGHTS OF OUR CLASS B COMMON STOCK COULD IMPACT ITS
ATTRACTIVENESS TO INVESTORS AND ITS LIQUIDITY AND, AS A RESULT, ITS MARKET
VALUE.
The holders of our Class A and Class B common stock generally have
identical rights, except that holders of our Class A common stock are entitled
to five votes per share and holders of our Class B common stock are entitled to
one vote per share on all matters to be voted on by stockholders. We sold Class
B common stock in our initial public offering. The difference in the voting
rights of the Class A and Class B common stock could diminish the value of the
Class B common stock to the extent that investors or any potential future
purchasers of our Class B common stock ascribe value to the superior voting
rights of the Class A common stock. In addition, if SPX distributes our Class A
common stock to its stockholders, the existence of two separate classes of
publicly traded common stock could result in less liquidity for either class of
our common stock than if there were only one class of common stock and could
result in the market price of our Class B common stock being lower than the
market price of our Class A common stock.
WE MAY HAVE CONFLICTS WITH SPX WITH RESPECT TO OUR PAST AND ONGOING
RELATIONSHIPS.
We may have conflicts with SPX 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 certificate of incorporation and
bylaws do not contain any special provisions setting forth rules governing these
potential conflicts.
THE AGREEMENTS BETWEEN SPX AND US WERE NOT MADE ON AN ARM'S-LENGTH BASIS, AND
MAY NOT BE FAIR TO US.
The contractual agreements we have with SPX for SPX to provide us with
various ongoing services were made in the context of an affiliated relationship
and were negotiated in the overall context of our initial public offering. In
addition, these agreements may be amended from time to time upon agreement
between the parties and, as long as SPX is our controlling stockholder, it will
have significant influence over our decision to agree to any such amendments. As
a result of SPX's control of us when these agreements were negotiated or may be
amended, the prices and other terms under these agreements may be less favorable
to us than what we could obtain in arm's-length negotiations with unaffiliated
third parties for similar services.
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WE ARE SUBJECT TO RESTRICTIONS CONTAINED IN SPX'S CREDIT AGREEMENT.
Under the terms of SPX's credit agreement, even after our initial
public offering, we continue to be considered a subsidiary of SPX for as long as
SPX holds more than 50% of the combined voting power of our common stock. As a
result, we continue to be subject to the covenants contained in SPX's credit
agreement that restrict SPX and its subsidiaries, including covenants limiting
acquisitions, issuances of stock and options, indebtedness, liens, sale of
assets and capital expenditures. These covenants could restrict our ability to
operate our business; moreover, we may have conflicts with SPX as to our ability
to take advantage of baskets and other provisions contained in the credit
agreement which SPX may want to utilize for itself or its other subsidiaries.
WE LEND THE EXCESS CASH WE GENERATE ON A DAILY BASIS TO SPX. SPX'S ABILITY TO
REPAY THESE AMOUNTS IS SUBJECT TO SPX'S FINANCIAL CONDITION
As part of our cash management system, we lend, on a daily basis, our
cash and cash equivalents in excess of $15 million to SPX. We lend these amounts
to SPX under a loan agreement that allows us to demand repayment of outstanding
amounts loaned under the agreement at any time. However, even after SPX repays
us the amount due under the loan agreement, as part of our cash management
system we will continue to lend, on a daily basis, all of our cash and cash
equivalents in excess of $15 million to SPX until the termination of the loan
agreement. The loan agreement will terminate when SPX owns less than 50% of our
outstanding shares of Class A common stock and Class B common stock or if there
is an event of default under SPX's credit agreement. Amounts loaned under the
loan agreement will be unsecured. Loans made prior to October 1, 2000, accrued
interest quarterly at a rate of 8 1/2% and, loans made on or after October 1,
2000, accrue interest quarterly at the weighted average rate of interest paid by
SPX for revolving loans under its credit agreement for the prior quarter. SPX's
ability to repay the amounts that we lend will be subject to SPX's financial
condition and liquidity, including its ability to borrow under its credit
agreement or otherwise. SPX is more leveraged than we are and, because it is in
businesses that are different from ours, is subject to different risks. Many of
its businesses, such as its automotive business, are cyclical and subject to
pricing pressures and environmental risks. In the event that SPX files for
bankruptcy protection, SPX's ability to repay the loans will be subject to
bankruptcy laws as well as other applicable laws, and we cannot be certain that
we would be able to recover amounts loaned to SPX. In addition, any amounts paid
or repaid to us by SPX during the one-year period prior to any bankruptcy filing
by SPX may be subject to recovery by SPX or a trustee in SPX's bankruptcy case
as a preferential payment.
A NUMBER OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS OR EXECUTIVE OFFICERS OF SPX OR OWN SPX STOCK.
Five members of our board of directors are directors or executive
officers of SPX and all of our directors were appointed by SPX. 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, a number of
our directors, executive officers and other employees own SPX stock and options
on SPX stock that they acquired as employees of SPX. This ownership could
create, or appear to create, potential conflicts of interest when these
directors and officers are faced with decisions that could have different
implications for our company and SPX. Our certificate of incorporation and
bylaws do not have special provisions to deal with these potential conflicts and
we intend to deal with conflicts on a case-by-case basis.
WE ARE PART OF SPX'S CONSOLIDATED GROUP FOR FEDERAL INCOME TAX PURPOSES. AS A
RESULT, SPX'S ACTIONS MAY ADVERSELY AFFECT US.
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As long as SPX owns 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, we will pay SPX the
amount of federal, state and local income taxes that we would be required to pay
to the relevant taxing authorities if we were a separate taxpayer not included
in SPX's consolidated, unitary or combined returns. In addition, by virtue of
its controlling ownership and the tax sharing agreement, SPX will effectively
control substantially all of our tax decisions. Under the tax sharing agreement,
SPX will have sole authority to respond to and conduct all tax proceedings,
including tax audits, relating to SPX's consolidated, unitary or combined income
tax returns in which we are included. Moreover, even though we have a tax
sharing agreement with SPX, federal law provides that each member of a
consolidated group is liable for the group's entire tax obligation. Thus, to the
extent SPX or other members of SPX's consolidated group fail to make any federal
income tax payments required of them by law, we could be liable for the
shortfall. Similar principles may apply for state or local income tax purposes
RISKS RELATING TO OUR CLASS B COMMON STOCK
THE MARKET PRICE OF OUR CLASS B COMMON STOCK MAY FLUCTUATE WIDELY AND RAPIDLY.
The market price of our Class B common stock could fluctuate
significantly as a result of:
- changes in and failures to meet financial estimates and
recommendations by securities analysts following our stock;
- changes in business or regulatory conditions affecting companies
in the networking industry; and
- introductions or announcements, by us or our competitors, of
technological innovations or new products.
The securities of many companies, particularly those in the
high-technology industry, have experienced extreme price and volume fluctuations
in recent months, often unrelated to the companies' operating performance. These
price and volume fluctuations are likely to continue for the securities of
high-technology companies, and may not bear any relationship to these companies'
operating performances.
THE ACTUAL OR POSSIBLE SALE OF OUR SHARES BY SPX, WHICH OWNS NEARLY 90% OF OUR
OUTSTANDING SHARES, 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 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
and 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 the 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.
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In addition, as of March 23, 2001, there were outstanding options to
acquire 8,516,200 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.
ANTI-TAKEOVER PROVISIONS UNDER OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
THE DELAWARE GENERAL CORPORATION LAW MAY ADVERSELY AFFECT THE PRICE OF OUR CLASS
B COMMON STOCK, OR DISCOURAGE THIRD PARTIES FROM MAKING A BID FOR US.
Our certificate of incorporation and our bylaws and various provisions
of the Delaware General Corporation Law may make it more difficult to effect a
change in control of our company, even if SPX were no longer our controlling
stockholder. Our certificate of incorporation, our bylaws, and the various
provisions of Delaware General Corporation Law may materially adversely affect
the price of our Class B common stock, discourage third parties from making a
bid for our company or reduce any premium paid to our stockholders for their
Class B common stock. For example, our certificate of incorporation authorizes
our board of directors to issue blank check preferred stock. The authorization
of this preferred stock will enable us to create a poison pill and otherwise may
make it more difficult for a third party to acquire control of us in a
transaction not approved by our board. Our certificate of incorporation also
provides for the division of our board of directors into three classes as nearly
equal in size as possible with staggered three-year terms. This classification
of our board of directors could have the effect of making it more difficult for
a third party to acquire our company, or of discouraging a third party from
acquiring control of our company.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
This report and statements we or our representatives make contain
forward-looking statements that involve risks and uncertainties, including those
discussed under the caption Factors That May Affect Future Results in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this report. We develop forward-looking statements
by combining currently available information with our beliefs and assumptions.
These statements often contain words like believe, expect, anticipate, intend,
contemplate, seek, plan, estimate or similar expressions. Forward-looking
statements do not guarantee future performance. Recognize these statements for
what they are and do not rely upon them as facts.
Forward-looking statements involve risks, uncertainties and
assumptions, including, but not limited to, those discussed above and elsewhere
in this report. We make these statements under the protection afforded them by
Section 21E of the Securities Exchange Act of 1934, as amended. Because we
cannot predict all of the risks and uncertainties that may affect us, or control
the ones we do predict, these risks and uncertainties can cause our results to
differ materially from the results we express in our forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We utilize a cash management program administered by SPX and have
demand notes receivable from SPX. Interest accrued quarterly on this loan to SPX
at 8 1/2% through October 1, 2000. After October 1, 2000, interest on the loan
adjusts quarterly and accrues at the weighted average rate of interest paid by
SPX for revolving loans under its credit agreement for the prior quarter. The
interest rate at December 31, 2000 was 8%. The loan to SPX is unsecured, and
SPX's ability to repay the amount due will be subject to its financial condition
and liquidity, including its ability to borrow under its credit agreement or
otherwise. The loan balance at the end of the year was $61.0 million and a one
percentage point decrease in the interest rate would result in approximately
$0.6 million less interest income, assuming the loan balance did not change.
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We are exposed to foreign currency fluctuation relating to our foreign
subsidiaries. We do not maintain any derivative financial instruments or hedges
to mitigate this fluctuation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants........... 39
Consolidated Balance Sheets........................ 40
Consolidated Statements of Operations.............. 41
Consolidated Statements of Stockholders' Equity.... 42
Consolidated Statements of Cash Flows.............. 43
Notes to Consolidated Financial Statements......... 44
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Inrange Technologies Corporation:
We have audited the accompanying consolidated balance sheets of Inrange
Technologies Corporation (a Delaware corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Inrange
Technologies Corporation and subsidiaries as of December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 12, 2001
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INRANGE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
----------------------
2000 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 22,646 $ 1,023
Demand note from SPX Corporation.................. 60,956 --
Accounts receivable, net.......................... 79,988 51,037
Inventories....................................... 29,271 27,624
Prepaid expenses and other........................ 5,209 1,314
Deferred income taxes............................. 4,968 4,650
--------- ---------
Total current assets...................... 203,038 85,648
PROPERTY, PLANT AND EQUIPMENT, net.................. 16,103 10,117
PROPERTY HELD FOR SALE.............................. -- 4,256
GOODWILL AND OTHER INTANGIBLES, net................. 44,629 7,710
OTHER ASSETS, net................................... 37,288 24,619
--------- ---------
Total assets.............................. $ 301,058 $ 132,350
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current portion of
long-term debt................................... $ 4,438 $ 4,111
Accounts payable.................................. 23,541 20,458
Accrued expenses.................................. 29,401 15,363
Deferred revenue.................................. 10,923 10,401
--------- ---------
Total current liabilities................. 68,303 50,333
---------- ---------
LONG-TERM DEBT...................................... 1,283 20
---------- ---------
DEFERRED INCOME TAXES............................... 918 3,499
---------- ---------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 20,000,000
shares authorized and none issued and
outstanding.................................... -- --
Class A common stock, $0.01 par value, 150,000,000
shares authorized, 75,633,333 shares issued and
outstanding.................................... 756 756
Class B common stock, $0.01 par value,
250,000,000 shares authorized, 8,855,000 shares
issued and outstanding at December 31, 2000.... 89 --
Additional paid-in capital........................ 133,946 (5,335)
Retained earnings................................. 95,155 82,426
Net equity of combined units...................... -- 730
Accumulated other comprehensive income (loss)..... 608 (79)
--------- ---------
Total stockholders' equity................ 230,554 78,498
---------- ---------
Total liabilities and
stockholders' equity.................. $ 301,058 $ 132,350
========== =========
The accompanying notes are an integral part of these statements.
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INRANGE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
REVENUE:
Product revenue.................... $ 194,200 $ 166,556 $ 192,535
Service revenue.................... 39,446 34,066 33,134
----------- ----------- -----------
Total revenue.............. 233,646 200,622 225,669
----------- ----------- -----------
COST OF REVENUE:
Cost of product revenue............ 92,014 78,803 95,151
Cost of service revenue............ 25,026 20,838 20,165
----------- ----------- -----------
Total cost of revenue..... 117,040 99,641 115,316
----------- ----------- -----------
Gross margin............... 116,606 100,981 110,353
----------- ----------- -----------
OPERATING EXPENSES:
Research, development and 22,589 18,928 25,067
engineering......................
Selling, general and administrative 58,898 48,269 62,449
Amortization of goodwill and other
intangibles....................... 2,263 1,068 1,068
Special charges.................... (540) 10,587 6,971
Write off of acquired in-process
technology from Varcom
acquisition....................... 10,000 -- --
Gain on sale of real estate........ -- (2,829) --
----------- ----------- -----------
Operating expenses.............. 93,210 76,023 95,555
----------- ----------- -----------
OPERATING INCOME..................... 23,396 24,958 14,798
INTEREST (INCOME).................... (1,759) (28) --
INTEREST EXPENSE..................... 1,411 953 1,391
OTHER (INCOME) EXPENSE............... (22) (13,726) 178
----------- ----------- -----------
Income before income taxes...... 23,766 37,759 13,229
INCOME TAXES......................... 9,506 15,459 5,873
----------- ----------- -----------
NET INCOME........................... $ 14,260 $ 22,300 $ 7,356
=========== =========== ===========
BASIC AND DILUTED EARNINGS PER
COMMON SHARE:
Basic and diluted earnings per
common share...................... $ 0.18 $ 0.29 $ 0.10
============ =========== ===========
Shares used in computing basic
earnings per common share...... 77,961,004 75,633,333 75,633,333
============ =========== ===========
Shares used in computing diluted
earnings per common share......... 78,674,645 75,633,333 75,633,333
============ =========== ===========
The accompanying notes are an integral part of these statements.
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INRANGE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Accumulated
Net Other
Additional Retained Equity of Comprehensive
Preferred Common Stock Paid-in Earnings Combined Income
Stock Class A Class B Capital (Deficit) Units (Loss) Total
--------- ------- ------- ----------- -------- ----------- -------------- --------
BALANCE AT DECEMBER 31, 1997............... $ -- $ 756 $ -- $ 3,385 (518) $ 46,623 (419) $ 49,827
--------
Comprehensive Income:
Net income............................. -- -- -- -- 358 6,998 -- 7,356
Other comprehensive income--
Foreign currency translation......... -- -- -- -- -- -- 601 601
Unrealized gain on investment,
net of taxes........................ -- -- -- -- -- -- 960 960
--------
Total comprehensive income........... 8,917
Net change in intercompany accounts......
with Parent......................... -- -- -- 14,831 -- 878 -- 15,709
------- ------ ------- -------- ------- -------- ------ --------
BALANCE AT DECEMBER 31, 1998............... -- 756 -- 18,216 (160) 54,499 1,142 74,453
--------
Comprehensive Income:
Net income (loss)...................... -- -- -- -- 24,978 (2,678) -- 22,300
Other comprehensive income--
Foreign currency translation......... -- -- -- -- -- -- (261) (261)
Unrealized gain on investment,
net of taxes........................ -- -- -- -- -- -- (960) (960)
--------
Total comprehensive income......... 21,079
Net change in intercompany
accounts with Parent.................. -- -- -- (17,310) -- 276 -- (17,034)
Transfer of Tautron to Inrange......... -- -- -- (6,241) 57,608 (51,367) -- --
------- ------ ------- -------- ------- -------- ------ --------
BALANCE AT DECEMBER 31, 1999............... -- 756 -- (5,335) 82,426 730 (79) 78,498
--------
Comprehensive Income:
Net income (loss)...................... -- -- -- -- 14,294 (34) -- 14,260
Other comprehensive income--
Foreign currency translation......... -- -- -- -- -- -- 687 687
--------
Total comprehensive income......... 14,947
Net change in intercompany accounts
with Parent............................ -- -- -- 8,297 -- 112 -- 8,409
Transfer of a division of General
Signal Limited to Inrange................ -- -- -- 2,373 (1,565) (808) -- --
Net proceeds from initial public
offering............................... -- -- 89 128,111 -- -- -- 128,200
Stock options issued to non-employees.... -- -- -- 500 -- -- -- 500
------- ------ ------- -------- ------- -------- ------- --------
BALANCE AT DECEMBER 31, 2000............... $ -- $ 756 $ 89 $133,946 $95,155 $ -- $ 608 $230,554
======= ====== ======= ======== ======= ======== ====== ========
The accompanying notes are an integral part of these statements.
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INRANGE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------- ---------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................... $ 14,260 $ 22,300 $ 7,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation........................... 5,956 5,870 6,362
Amortization of goodwill and other
intangibles.......................... 2,263 1,068 1,068
Amortization of other assets........... 5,938 3,596 5,730
Accretion of interest on seller notes.. 161 -- --
Special charges........................ (540) 10,587 6,971
Deferred income taxes.................. (2,899) 4,646 (2,358)
Write off of acquired in-process
technology from Varcom acquisition.... 10,000 -- --
Gain on sale of real estate............ -- (2,829) --
Gain on sale of investment............. -- (13,914) --
Changes in operating assets and
liabilities, net of the
effects of acquisitions:
Accounts receivable.................... (23,068) (8,217) (4,354)
Inventories............................ 1,051 (5,310) (5,091)
Prepaid expenses and other
current assets....................... (3,762) 191 168
Accounts payable....................... 2,709 4,966 827
Accrued expenses....................... 12,826 703 (2,993)
Deferred revenue....................... (673) 1,297 3,397
Payments of special charges and
disposition related accruals......... (865) (11,636) --
-------- -------- --------
Net cash provided by operating
activities...................... 23,357 13,318 17,083
-------- -------- --------
Cash Flow from Investing Activities:
Purchases of property, plant and
equipment, net......................... (5,193) (5,469) (7,394)
Cash paid for businesses acquired
including transaction costs, net of cash (55,376) -- --
acquired...............................
Net loan to SPX Corporation.............. (60,956) -- --
Proceeds from sale of real estate........ 5,233 6,358 --
Net proceeds from sale of investment..... -- 14,735 --
Capitalized software costs............... (6,693) (5,097) (5,044)
Increase in demonstration equipment and
other assets........................... (6,051) (3,677) (1,410)
Payment for product rights............... (2,863) (3,120) (5,300)
Purchase of investment................... (3,000) -- (821)
-------- -------- --------
Net cash provided by (used in)
investing activities............... (134,899) 3,730 (19,969)
-------- -------- --------
Cash Flow from Financing Activities:
Net borrowings (payments) under lines
of credit.............................. (4,067) 376 (2,663)
Proceeds from initial public
offering, net.......................... 128,200 -- --
Payments on long-term debt............... (64) (1,567) (8,300)
Proceeds from (payments to) Parent....... 8,409 (17,034) 15,709
-------- -------- --------
Net cash provided by (used in)
financing activities............... 132,478 (18,225) 4,746
-------- -------- --------
Effect of Foreign Currency Translation..... 687 (261) 601
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents.............................. 21,623 (1,438) 2,461
Cash and Cash Equivalents at
Beginning of Year........................ 1,023 2,461 --
-------- -------- --------
Cash and Cash Equivalents at End of Year... $ 22,646 $ 1,023 $ 2,461
======== ======== ========
The accompanying notes are an integral part of these statements.
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INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
1. BASIS OF PRESENTATION:
Inrange Technologies Corporation (Inrange) designs, manufactures,
markets and services networking and switching solutions for storage, data and
telecommunications networks. The solutions are targeted for use in large-scale
systems that are critical to a business' operations to provide fast and reliable
connections among networks of computers and related devices for large-scale
enterprise applications.
The financial statements include the assets, liabilities, revenue and
expenses of Inrange, which is a majority-owned subsidiary of SPX Corporation
(SPX), and the assets, liabilities, revenue and expenses of certain other units
comprising the storage networking, data communications and telecommunications
networking business of SPX, and exclude two of the subsidiaries of Inrange not
involved in the business (combined, the Company). The net assets of the other
units were transferred to the Company in June 1999 (Tautron) and June 2000
(division of General Signal Limited). The net assets of the two excluded
subsidiaries were transferred out of the Company in June 1999 and May 2000.
Accordingly, the accompanying financial statements are now presented on a
consolidated versus a combined basis.
Prior to October 6, 1998, Inrange was a subsidiary of General Signal
Corp. (GSX). GSX merged into a subsidiary of SPX and the merger was accounted
for as a reverse acquisition whereby GSX was treated as the acquirer and SPX as
the acquiree. As GSX was treated as the acquirer for financial reporting
purposes and no units of SPX were added to Inrange's financial statements as a
result of the merger, the financial statements of Inrange reflect the same
reporting entity before and after the merger and do not reflect purchase
accounting from this merger transaction. GSX and SPX are herein referred to as
the Parent. Upon completion of the merger SPX implemented certain restructuring
initiatives. See Note 5 for a description of the initiatives that were committed
to and announced relating to the Company.
The 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 SPX's historical financial statements. SPX provides
certain services to the Company including general management and administrative
services for employee benefit programs, insurance, legal, treasury and tax
compliance. SPX charges for these services and such costs are reflected in the
consolidated statements of operations (see Note 4).
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.
In September 2000, the Company completed an initial public offering of
8,855,000 shares of Class B Common stock at $16.00 per share and received net
proceeds of $128,200. The proceeds were used to repay borrowings of $54,929 from
SPX to fund certain acquisitions in the second and third quarters of 2000 (see
Note 3) and accrued interest thereon of $777. The remaining proceeds will be
used for general corporate purposes. However, pending use of the proceeds, the
Company invested $15,000 in a money market account and the remaining net
proceeds were loaned to SPX under a demand note (see Note 4).
The Parent uses a centralized cash management system for all of its
domestic operations,
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including those of the Company. The net amount of daily cash transactions is
transferred to the Parent and other intercompany transactions between the Parent
and the Company through the initial public offering were recorded as a component
of equity of the Company. Thereafter, these transactions are reflected as an
increase or decrease in the demand note due from SPX (see Note 4).
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an
original maturity of 90 days or less to be cash equivalents. Cash equivalents
consist principally of cash deposited in money market accounts of $12,637 at
December 31, 2000. There were no cash equivalents at December 31, 1999.
Investment
In connection with the purchase of product rights (see Note 8), 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 stockholders' equity, net of tax. As of 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 14).
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 three to 10 years for machinery, equipment and furniture to 40 years
for the building.
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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 periods ranging from 10 to 20 years, the
estimated future period to be benefited. Goodwill was $51,798 and $21,366 at
December 31, 2000 and 1999 and accumulated amortization was $15,524 and $13,656,
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. 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.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company
records impairment losses on long-lived assets used in operations whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment is recognized to the extent that the sum of
undiscounted, estimated future cash flows expected to result from use of the
assets is less than the carrying value. As of December 31, 2000 and 1999,
management evaluated the Company's asset base, under the guidelines established
by SFAS No. 121, and believes that no impairment has occurred.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires the liability method of accounting for
income taxes. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered.
Revenue Recognition
The Company recognizes revenue upon shipment of products with standard
configurations. Revenue from products with other than standard configurations is
recognized upon customer acceptance or when all of the terms of the sales
agreement have been fulfilled. Amounts billed for shipping and handling are
included in revenue and the related costs are included in cost of revenue. 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.
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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 stockholders'
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 losses were $217,
$134 and $159 in 2000, 1999 and 1998, respectively, and are included in other
(income) expense in the accompanying consolidated statements of operations.
Post-employment Benefits Other than Pensions
The Parent provides certain severance benefits to former or inactive
employees during the period following employment but before retirement,
including the employees of the Company. The Parent accrues the costs of such
benefits over the expected service lives of the employees in accordance with
SFAS No. 112, "Employers' Accounting for Post-employment Benefits". Severance
benefits resulting from actions not in the ordinary course of business are
accrued when those actions occur. The Parent has not allocated any of the costs
of the post-employment benefits other than pensions to the Company. Management
believes that an allocation of the costs would not result in a material charge
to the consolidated statements of operations and would not be material to the
consolidated balance sheets.
Earnings per Common Share
The Company has presented earnings per common share under SFAS No. 128,
"Earnings Per Share." Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period while diluted earnings per share reflects the potential
dilution from the exercise or conversion of securities into Common stock. The
shares used in the computation of earnings per common share retroactively
reflect the recapitalization discussed in Note 12. Diluted earnings per share in
2000 reflects the effect of outstanding stock options which increased the
weighted average shares used in the basic calculation by 713,641. There were no
dilutive securities outstanding in 1999 and 1998.
Reclassifications
Certain reclassifications have been made to prior year balances to
conform to the current year presentation.
Supplemental Cash Flow Disclosure
The Company paid income taxes of $12,357, $12,445 and $6,401 in 2000,
1999 and 1998, respectively. The Company paid interest of $1,411, $953 and
$1,391 in 2000, 1999 and 1998, respectively.
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which became effective January 2001, establishes accounting and
reporting standards for derivative instruments and hedging contracts. It also
requires all derivatives to be recognized as either assets or liabilities in the
balance sheet at fair value and changes in fair value to be recognized in
operating results. Management
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believes that the impact of this statement will not have any effect on the
Company's results of operations and financial position.
3. ACQUISITIONS:
On June 30, 2000, the Company acquired two European distribution
businesses for an aggregate purchase price of approximately $6,400. The Company
paid $4,100 at closing and an additional $1,600 and $700, respectively, are
payable after the first and second years from the closing of the acquisitions
based upon the achievement of certain sales targets. If the future sales targets
are met, the payments will be made and additional goodwill will be recorded.
In August 2000, the Company completed the acquisitions of the net
assets of Varcom Corporation (Varcom) and Computerm Corporation (Computerm).
Varcom is located in Fairfax, Virginia and provides network management hardware,
software and services. Computerm is located in Pittsburgh, Pennsylvania and
offers high performance channel extension products and services that allow
storage networking applications to operate over wide area networks. The purchase
price of Varcom was $25,000, which includes a non-interest bearing seller note
of $1,500 due in August 2002. The purchase price of Computerm was $30,000, which
includes a non-interest bearing seller note of $3,000 due in August 2001. The
Computerm acquisition agreement contains a net asset target of $10,661 as of the
closing date of the acquisition. A liability of $1,615 has been recorded in
purchase accounting for the preliminary estimate of the excess of the net assets
received versus the target.
All of the acquisitions were recorded using the purchase method of
accounting. The accompanying statements of operations include the operating
results for these acquisitions from the acquisition date through December 31,
2000. The notes due to the sellers have been discounted at an imputed interest
rate of 10% (see Note 11). A summary of the allocation of purchase price to the
net assets acquired is as follows:
COMPUTERM VARCOM TCS/STI TOTAL
--------- ------ ------- -----
Purchase price--
Cash paid for acquisition including
transaction costs of $816....... $ 27,265 $ 23,611 $ 4,540 $ 55,416
Purchase price adjustment due to
seller.......................... 1,615 -- -- 1,615
Due to seller (at discounted
value).......................... 2,716 1,229 -- 3,945
---------- ---------- ---------- ----------
$ 31,596 $ 24,840 $ 4,540 $ 60,976
========== ========== ========== ==========
Purchase price allocation--
Cash................................ $ -- $ -- $ 40 $ 40
Accounts receivable................. 5,262 -- 621 5,883
Inventories......................... 2,061 -- 637 2,698
Prepaid expenses and other.......... 75 -- 58 133
Property, plant and equipment....... 6,276 120 378 6,774
Purchased research and development.. -- 10,000 -- 10,000
Identifiable intangibles............ 2,750 6,000 -- 8,750
Goodwill............................ 16,967 8,720 4,745 30,432
Accounts payable.................... (374) -- -- (374)
Accrued expenses.................... (285) -- (1,880) (2,165)
Deferred revenue.................... (1,136) -- (59) (1,195)
----------- ---------- ---------- ----------
$ 31,596 $ 24,840 $ 4,540 $ 60,976
=========== ========== ========== ==========
The allocation of the purchase price to identifiable intangible assets,
acquired in-process technology and goodwill has been determined by management
based on an analysis of factors such as historical operating results, discounts
of cash flow projections and specific evaluations of products, customers and
other information. These allocations are preliminary and are based on
information available at this time.
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As of the acquisition date, Varcom had in-process technology projects
that had not reached technological feasibility and did not have any alternative
future uses. A value of $10,000 has been assigned to these in-process technology
projects. This value excludes the efforts to be expended on the development
projects, and solely reflects progress made as of the acquisition date. The
in-process technology projects are for the development of two new products.
Based on an assessment of factors including time spent on the project compared
to total expected project time and expenses incurred to date compared to total
project expenses, management estimates that the projects were 77% and 48%
complete, respectively. The total cost incurred for these projects was
approximately $4,000 as of the acquisition date. Total expected costs to
complete these projects are approximately $1,500. In accordance with SFAS No. 2,
"Accounting for Research and Development Costs," as clarified by FASB
Interpretation No. 4, amounts assigned to acquired in-process technology meeting
the above criteria have been charged to expense as part of the allocation of the
purchase price of the acquisition.
Management anticipates that successful completion of the in-process
technology projects will allow for the ongoing enhancement of product offerings.
There are risks associated with the projects that may prevent them from becoming
viable products that result in revenues. These risks include, but are not
limited to, the successful development of the underlying technology and the
ability to market these products.
The other identified intangibles recorded in purchase accounting
consist of developed technology, customer lists and assembled workforce. These
intangible assets are being amortized over five to 12 years based on their
estimated useful lives. As of December 31, 2000, the gross value of the other
identified intangibles and accumulated amortization was $8,750 and $395,
respectively. Goodwill is being amortized over 10 to 20 years (see Note 2).
Amortization of goodwill and other intangible assets was $2,263, $1,068 and
$1,068 in 2000, 1999 and 1998, respectively.
The following unaudited pro forma information presents the results of
the Company's operations for the years ended December 31, 2000 and 1999 as
though each of the acquisitions had been completed as of January 1, 1999:
YEAR ENDED DECEMBER 31,
2000 1999
---- ----
Total revenue....................... $ 252,240 $ 236,875
========== ==========
Net income.......................... $ 14,756 $ 21,182
========== ==========
Basic and diluted net
income per common share........... $ 0.19 $ 0.28
========== ==========
The pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the actual results of operations had the
acquisitions been completed as of January 1, 1999, or the results that may occur
in the future.
In January 2001, the Company completed the acquisition of Prevail
Technologies, a professional services company with expertise in designing and
implementing high availability solutions for IT infrastructures and e-business
environments, for approximately $3,200.
4. 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. The direct costs were $7,457,
$6,059 and $3,063 in 2000, 1999 and 1998, respectively, excluding the direct
costs of employee retirement plans discussed in Note 17. The indirect costs are
allocated based on estimated time incurred to provide the services to each
subsidiary. The consolidated financial statements reflect allocated charges from
the Parent for these services of $100, $85 and $50 in 2000, 1999 and 1998,
respectively. Management of the Parent believes
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that the allocated costs are reasonable and reflect the effort involved in
providing the services and also represent what the costs would have been on a
stand-alone basis.
Advances and other intercompany accounts between the Company and SPX
through the date the Company completed its initial public offering were recorded
as a component of stockholders' equity in the accompanying consolidated balance
sheet, with the exception of borrowings from SPX of $54,929 to fund the
acquisitions discussed in Note 3. These borrowings and accrued interest thereon
of $777 were repaid upon completion of the initial public offering. The Company
invested $15,000 of the proceeds from the initial public offering in a money
market account and loaned the balance to SPX. The loan to SPX is due on demand.
Advances and intercompany charges after the initial public offering are recorded
as a component of the demand note due from SPX. As of December 31, 2000, the
demand note from SPX was $60,956. The demand note bears interest at the average
rate of the SPX credit facilities and is recorded on a monthly basis as interest
income. The interest rate was 8% at December 31, 2000. The accompanying
statement of operations for the year ended December 31, 2000 reflects related
party interest expense of $777 relating to the acquisition borrowings from SPX
and interest income of $1,292 from the demand note from SPX.
5. SPECIAL CHARGES:
The Company recorded special charges of $10,587 and $6,971 in 1999 and
1998, 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. The second facility was sold in October 2000 resulting in a gain
of $952. The Company leased back a portion of the second facility and,
therefore, the resulting gain has been deferred and will be recognized as income
over the ten year term of the facility lease.
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 were further consolidated. In connection
therewith, the Company recorded a charge of $900, which covered the remaining
payments for the existing leases from the abandonment date through the
expiration of the lease. In November 2000, an agreement was entered into with
the landlord to settle the remaining lease obligations for $200. This payment
will be made in 2001. The Company reduced the restructuring charges and
disposition related accruals by $1,040 to reflect this settlement and revised
estimates for the remaining abandoned costs to be incurred.
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In June 2000, the Company issued options to purchase shares of Class B
common stock to directors and employees of SPX (see Note 19). In connection with
these outstanding options, the Company recorded a special charge of $500 to the
consolidated statement of operations to reflect the fair value of these options
as measured on a rolling quarterly basis.
6. INVENTORIES:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Raw materials............... $ 14,743 $ 14,175
Work-in-process............. 1,984 4,646
Finished goods.............. 12,544 8,803
--------- ---------
Total inventories $ 29,271 $ 27,624
========= =========
7. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Land........................ $ 200 $ --
Building.................... 3,343 --
Leasehold and building
improvements.............. 2,242 1,925
Machinery, equipment
and furniture............. 44,387 35,923
--------- ---------
50,172 37,848
Accumulated depreciation
and amortization.......... (34,069) (27,731)
--------- ---------
Net property, plant and
equipment................. $ 16,103 $ 10,117
========= =========
Depreciation and amortization expense was $5,956, $5,870 and $6,362 in
2000, 1999 and 1998, respectively.
8. OTHER ASSETS:
DECEMBER 31,
----------------------
2000 1999
--------- ---------
Capitalized software........... $ 17,218 $ 11,466
Demonstration equipment........ 18,412 10,665
Product rights................. 9,053 9,249
Investment..................... 3,250 250
Other.......................... 539 556
--------- ---------
Total other assets .......... 48,472 32,186
Accumulated amortization.......
Capitalized software......... (5,045) (3,021)
Demonstration equipment...... (5,592) (3,442)
Product rights............... (547) (1,104)
--------- ---------
Net other assets............. $ 37,288 $ 24,619
========= =========
The Company capitalized $6,693, $5,097 and $5,044 in 2000, 1999 and
1998, respectively, of software development costs (see Note 2). Amortization
expense was $2,965, $2,291 and $3,111 in 2000, 1999 and 1998, respectively. In
1999 and 1998, the Company wrote-off $1,422 and $1,304 of net capitalized
software costs, respectively, in connection with the discontinuance of certain
product lines (see Note 5).
Demonstration equipment represents equipment at customer locations for
demonstration purposes and is amortized on a straight-line basis over a period
not to exceed three years.
Product rights represent technology licenses and pre-paid royalties for
two product lines. 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.
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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 consolidated balance sheet.
9. Accrued Expenses:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Payroll and other compensation........... $ 7,392 $ 3,649
Accrued income taxes..................... 5,359 --
Accrued commissions...................... 3,195 2,223
Other accrued expenses................... 13,164 7,295
Special charges and disposition related
accruals................................. 291 2,196
-------- --------
Total accrued expenses......... $ 29,401 $ 15,363
======== ========
10. Valuation Accounts and Disposition-Related Accruals:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- --------
Allowance for doubtful accounts:
Balance at beginning of year...... $ 1,270 $ 1,147 $ 925
Provision......................... 943 1,822 550
Acquisitions (Note 3)............. 82 -- --
Charges........................... (282) (1,699) (328)
----- -------- --------
Balance at end of year............ $ 2,013 $ 1,270 $ 1,147
======= ======== ========
Disposition-related accruals:
Balance at beginning of year..... $ 2,196 $ 5,667 $ --
Provision........................ (1,040) 8,165 5,667
Charges.......................... (865) (11,636) --
------- -------- ---------
Balance at end of year........... $ 291 $ 2,196 $ 5,667
======= ======== =========
11. Debt:
Short-term borrowings and long-term debt consist of the following:
DECEMBER 31,
--------------------
2000 1999
-------- --------
Seller notes, net of unamortized
discount of $394......................... $ 4,106 $ --
Seller note for working capital
adjustment (Note 3)...................... 1,615 --
Borrowings under lines of credit........... -- 4,067
Other...................................... -- 64
-------- --------
5,721 4,131
Less--Current portion of long-term
debt..................................... (4,438) (4,111)
-------- --------
Long term debt............................. $ 1,283 $ 20
======== ========
In connection with the acquisitions discussed in Note 3, the Company
issued notes payable to the sellers. The notes due to Computerm and Varcom are
$3,000 and $1,500, and are due in August 2001 and August 2002, respectively.
Interest was imputed on the notes at 10% and imputed interest expense in 2000
was $161.
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
$4,067 was outstanding as of December 31, 1999. The revolving credit loans were
classified in the accompanying consolidated balance sheet as short-term
borrowings in 1999 and were repaid in 2000. The weighted-average interest rate
on borrowings under the foreign lines of credit was 5.63%, 6.11% and 7.88% in
2000, 1999 and 1998, respectively. The lines of credit are guaranteed by the
Parent.
52
54
In 1999 and 1998, the Company had debt outstanding under Connecticut
Development Authority Bonds. The weighted-average interest rate was 6.11% and
5.75% in 1999 and 1998, respectively. The bonds were repaid in 1999.
12. CAPITAL STOCK:
On June 29, 2000, a recapitalization was completed whereby the Company
authorized 20,000,000 shares of $0.01 par value preferred stock, 150,000,000
shares of $0.01 par value Class A common stock and 250,000,000 shares of $0.01
par value Class B common stock. The 1,000 outstanding shares of $0.01 par value
common stock held by the Parent were converted into an aggregate of 75,633,333
shares of Class A common stock. All references to shares outstanding have been
retroactively adjusted for this conversion.
The terms of the preferred stock are to be established by the board of
directors, and any or all series of preferred stock could have preferences over
the common stock with respect to voting and conversion rights, dividends and
other distributions and upon liquidation.
The Class A common stock and Class B common stock are identical except
that the holders of Class A common stock are entitled to five votes for each
share held while the holders of the Class B common stock are entitled to one
vote for each share held. The Class A common stock is convertible into Class B
common stock upon certain events.
On September 27, 2000, the Company completed an initial public offering
of 8,855,000 shares of Class B common stock at $16.00 per share. The Company
received net proceeds of $128,200.
13. INCOME TAXES:
The Company has been included in the consolidated federal income tax
return of the Parent. Under the terms of the tax sharing agreement with the
Parent, the following provision for income taxes was determined as if the
Company were a separate taxpayer.
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- ------- -------
Current
provision
(benefit):
Federal........... $ 8,189 $ 7,631 $ 6,727
Foreign........... 2,441 876 (122)
State and local... 1,775 2,306 1,626
------- ------- -------
12,405 10,813 8,231
------- ------- -------
Deferred
provision
(benefit):
Federal.......... (2,427) 3,808 (1,648)
State and local.. (472) 838 (710)
-------- ------- -------
(2,899) 4,646 (2,358)
-------- ------- -------
Total... $ 9,506 $15,459 $ 5,873
======== ======= =======
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:
53
55
DECEMBER 31,
------------------
2000 1999
------- -------
Deferred tax assets:
Inventories................ $ 3,002 $ 2,048
Purchased intangibles...... 4,125 --
Warranty accrual........... 451 504
Bad debt reserve........... 781 423
Special charges and 115 847
disposition accruals.....
Other...................... 1,218 828
------- -------
Total deferred
tax assets............. 9,692 4,650
------- -------
Deferred tax liabilities:
Accelerated depreciation... 781 69
Capitalized software....... 4,861 3,354
Other...................... -- 76
------- -------
Total deferred
tax liabilities........ 5,642 3,499
------- -------
Net deferred tax assets.... $ 4,050 $ 1,151
======= =======
Undistributed earnings of the Company's foreign subsidiaries of $5,048
at December 31, 2000, 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, income before income taxes include
the following components:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Income before income
taxes:
United States.... $ 18,049 $ 35,666 $ 13,575
Foreign.......... 5,717 2,093 (346)
-------- -------- --------
$ 23,766 $ 37,759 $ 13,229
======== ======== ========
Components of the effective income tax rate are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Tax at U.S. federal
statutory rate................... 35.0% 35.0% 35.0%
State and local income taxes, net
of U.S. federal benefit.......... 3.6 5.4 7.0
Goodwill........................... 1.9 1.1 3.3
Foreign Sales Corporation.......... (1.3) (3.1) (3.7)
Foreign taxes...................... 1.6 2.3 --
Other.............................. (0.8) 0.2 2.8
----- ---- ----
40.0% 40.9% 44.4%
----- ---- ----
Tax provisions are settled through the intercompany account and the
Parent made payments and received refunds on behalf of the Company. In the
fourth quarter of 2000, the income tax accounts through the date of the initial
public offering were settled with SPX resulting in a reduction of additional
paid-in capital.
14. GAIN ON INVESTMENT:
Included in comprehensive income in 1998 in the consolidated statement
of stockholders' equity 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 consolidated
statement of operations.
54
56
15. FOREIGN CURRENCY CONTRACTS:
The Parent utilized natural hedges and offsets to reduce foreign
currency exposures and also consolidated positions to reduce the cost of
hedging. The Parent entered into forward foreign exchange contracts and
purchased currency options to hedge net consolidated currency transaction
exposure for periods consistent with the terms of the underlying transactions
including consideration given to Inrange foreign operations. At December 31,
2000, the Parent did not have any forward foreign exchange contracts
outstanding.
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. On forward exchange and option
contracts which specifically hedge an underlying transaction, gains or losses
are deferred and recorded when the underlying transaction occurs. While it is
not the practice of the Parent to enter into contracts to hedge anticipatory
transactions, any gains or losses on forward foreign exchange and option
contracts that do not hedge a specific transaction are recognized currently.
16. COMMITMENTS AND CONTINGENCIES:
The Company has various operating lease agreements for facilities and
equipment that expire at various times through 2011. The lease agreements
generally contain renewal options. The future minimum rental payments under
leases with remaining noncancellable terms in excess of one year are:
YEAR ENDING DECEMBER 31,
----------------------------
2001 $ 4,362
2002 4,022
2003 4,099
2004 4,200
2005 4,332
2006 and thereafter 22,541
--------
$ 43,556
========
Rent expense was $3,035, $3,104 and $2,980 in 2000, 1999 and 1998,
respectively.
There are contingent liabilities for lawsuits and various other matters
occurring in the ordinary course of business. Management believes, after
consultation with legal counsel, that none of these contingencies will
materially impact the Company's financial condition or results of operations.
17. EMPLOYEE RETIREMENT PLANS:
As discussed in Note 4, 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 $3,417, $4,485 and $3,069 in 2000, 1999 and 1998,
respectively.
18. FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments
The carrying amount of the demand note from SPX, accounts receivable,
accounts payable and
55
57
accrued expenses reported in the consolidated 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, 2000 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 4%, 9% and
17% of total revenue in 2000, 1999 and 1998, respectively, and accounts
receivable from this customer was $1,699 at December 31, 2000. No other customer
accounted for greater than 10% of total revenue in 2000, 1999 and 1998.
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.
19. STOCK OPTIONS:
SPX Stock Options
SPX 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 2000, options to purchase 55,750
shares of stock were granted to employees and options to purchase 6,750 shares
of stock were cancelled with weighted average exercise prices of $81.58 and
$79.96, respectively. 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. These options vest over a three year period.
Stock options of SPX issued to employees of the Company outstanding at
December 31, 2000 and related price and life information is as follows:
OUTSTANDING OPTIONS
-----------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE PRICE OPTIONS LIFE (YEARS)
--------------- ------- ------------
$ 64.88....... 5,000 8.01
$ 77.81....... 45,750 9.01
$ 81.81....... 3,000 8.60
$ 85.00....... 2,000 8.70
$ 86.50....... 28,000 8.58
$102.00....... 8,000 9.41
------
91,750 8.84
======
At December 31, 2000, none of the SPX stock options issued to Company
employees were exercisable and the weighted average exercise price of
outstanding stock options was $82.15.
56
58
Company Stock Options
In June 2000, the Company established the 2000 Stock Compensation Plan
(the 2000 Plan). The 2000 Plan provides for the issuance of up to 11,530,000
shares of Class B common stock for incentive stock options, nonqualified stock
options, stock appreciation rights, performance units and restricted stock, to
employees, non-employee directors or consultants of the Company, the Parent or
any direct or indirect subsidiary of the Company. The 2000 Plan was administered
by the Board of Directors of the Parent prior to the initial public offering
and, after the initial public offering, is administered by a committee
established by the Board of Directors of the Company. Subject to the specific
provisions of the 2000 Plan, the committee determines award eligibility, timing
and the type, amount and terms of the awards. Options granted generally vest
over four to six years.
On June 29, 2000, the Company issued options to purchase 1,331,000 shares
of Class B common stock to directors and employees of SPX. The options were
granted at $13.00 per share and are fully vested on the grant date. In
connection with these outstanding options, the Company recorded a special charge
of $500 to the consolidated statement of operations to reflect the fair value of
these options as measured on a rolling quarterly basis.
A summary of stock option activity under the 2000 Plan is as follows:
WEIGHTED
AVERAGE
EXERCISE
EXERCISE PRICE AGGREGATE
OPTIONS PER SHARE SHARE PROCEEDS
--------- --------------- ----------- ------------
Balance at December 31, 1999 -- -- -- --
Granted 8,543,200 $13.00 - 36.88 $15.54 $ 132,803
Cancelled (120,300) $16.00 16.00 (1,925)
--------- ---------
Balance at December 31, 2000 8,422,900 $13.00 - 36.88 $15.54 $ 130,878
========= =========
Options exercisable - December 31, 2000 1,331,000 $13.00
=========
As of December 31, 2000, there are 3,107,100 shares of Class B Common
stock available for grant under the 2000 Plan. The following table summarizes
information about stock options outstanding under the 2000 Plan as of December
31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
WEIGHTED
AVERAGE WEIGHTED WEIGHTED AVERAGE
REMAINING AVERAGE EXERCISE PRICE
CONTRACTUAL EXERCISE OF EXERCISABLE
EXERCISE PRICES NUMBER LIFE (YEARS) PRICE NUMBER OPTIONS
- -------------------------------------------------------------------------------------
$13.00 1,331,000 9.5 $13.00 1,331,000 $ 13.00
$14.44 16,500 9.9 $14.44 -- --
$15.25 4,000 9.9 $15.25 -- --
$16.00 7,050,200 9.7 $16.00 -- --
$16.94 6,500 9.9 $16.94 -- --
$17.88 3,000 9.9 $17.88 -- --
$19.06 2,000 9.9 $19.06 -- --
$21.38 700 9.9 $21.38 -- --
$21.63 5,000 9.8 $21.63 -- --
$36.88 4,000 9.8 $36.88 -- --
--------- ---------
8,422,900 9.7 $15.54 1,331,000 $ 13.00
========= =========
57
59
The Company follows the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for stock options issued to employees. Had compensation cost for
both the Parent and Company 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 and basic and diluted net income per common
share for the years ended December 31, 2000 and 1999 would have been as follows:
YEAR ENDED DECEMBER 31, 2000 1999
------- --------
Net income:
As reported..................................... $14,260 $ 22,300
Pro forma....................................... $ 6,802 $22,125
Basic and diluted net income per common share:
As reported..................................... $0.18 $ 0.29
Pro forma....................................... $0.09 $ 0.29
The fair value of each SPX option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions in 2000 and 1999: 0% dividend yield, 33.5% - 41.5% expected
volatility, 5.29% risk free interest rate, 75% expected vesting and 6 year
expected option life. The weighted-average fair value of options granted during
2000 and 1999 was $39.24 and $35.63, respectively. The fair value of each
Company 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, 75.0% expected volatility, 6.06% risk free interest rate, 75%
expected vesting and 6 year expected option life. The weighted-average fair
value of Company options granted during 2000 was $10.04.
20. 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.
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------------- ---------- -----------
Revenue:
United States... $ 139,879 $122,972 $ 158,520
Europe.......... 60,361 40,062 38,884
Export.......... 33,406 37,588 28,265
---------- -------- ---------
$ 233,646 $200,622 $ 225,669
========== ======== =========
DECEMBER 31,
----------- ----------
2000 1999
----------- ----------
Long-lived Assets:
United States..... $ 91,478 $ 44,798
Europe............ 6,542 1,904
--------- --------
$ 98,020 $ 46,702
========= ========
58
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning our directors is included in our Proxy Statement
for the 2001 Annual Meeting of Stockholders under Election of Directors and is
incorporated by reference into this report.
Information concerning our executive officers is included in Part I of
this report on page 17.
Information regarding compliance with Section 16(a) of the Exchange Act is
included in our Proxy Statement for the 2001 Annual Meeting of Stockholders
under Section 16(a) Beneficial Ownership Reporting Compliance and is
incorporated by reference into this report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning the compensation of our executive officers and
directors is included in our Proxy Statement for the 2001 Annual Meeting of
Stockholders under Director Compensation and Executive Compensation and is
incorporated by reference into this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
Information regarding the ownership of our Class B common stock and SPX
common stock by officers, directors and 10% holders is included in our Proxy
Statement for the 2001 Annual Meeting of Stockholders under Ownership of Common
Stock and is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in our Proxy Statement for the 2001 Annual Meeting of Stockholders
under Certain Relationships Between Inrange and SPX and is incorporated by
reference into this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Our financial statements and Arthur Andersen LLP's report dated
February 12, 2001 on the financial statements are included on pages 39 through
58 of this report.
59
61
(a)(2) Financial Statement Schedules
None required.
(a)(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.2 Amended and Restated By-Laws of Inrange Technologies
Corporation, filed as Exhibit 3.2 to the Form S-1
Registration Statement (No. 333-38592) and incorporated
herein by reference.
3.3 Amended and Restated Certificate of Incorporation of Inrange
Technologies Corporation, filed as Exhibit 3.3 to the Form
S-1 Registration Statement (No. 333-38592) and incorporated
herein by reference.
4.1 Form of Inrange Technologies Corporation Class B common
stock certificate, filed as Exhibit 4.1 to the Form S-1
Registration Statement (No. 333-38592) and incorporated
herein by reference.
10.1 Tax Sharing Agreement, between Inrange Technologies
Corporation and SPX Corporation, filed as Exhibit 10.1 to
the Form S-1 Registration Statement (No. 333-38592) and
incorporated herein by reference.
10.2 Management Services Agreement, between Inrange Technologies
Corporation and SPX Corporation, filed as Exhibit 10.2 to
the Form S-1 Registration Statement (No. 333-38592) and
incorporated herein by reference.
10.3 Registration Rights Agreement, between Inrange Technologies
Corporation and SPX Corporation, filed as Exhibit 10.3 to
the Form S-1 Registration Statement (No. 333-38592) and
incorporated herein by reference.
10.4 Trademark License Agreement, between Inrange Technologies
Corporation and SPX Corporation, filed as Exhibit 10.4 to
the Form S-1 Registration Statement (No. 333-38592) and
incorporated herein by reference.
10.5 Reseller Agreement, dated October 29, 1999 between Inrange
Technologies Corporation and Ancor Communications, Inc.,
filed as Exhibit 10.5 to the Form S-1 Registration Statement
(No. 333-38592) and incorporated herein by reference.++
10.6 Technology License Agreement, dated September 24, 1998
between Inrange Technologies Corporation and Ancor
Communications Inc., filed as Exhibit 3.2 to the Form S-1
Registration Statement (No. 333-38592) and incorporated
herein by reference.++
10.7 Letter Agreement dated November 23, 1999 between Inrange
Technologies Corporation and Ancor Communications Inc.,
filed as Exhibit 10.7 to the Form S-1 Registration Statement
(No. 333-38592) and incorporated herein by reference.
60
62
10.8* Inrange Technologies Corporation 2000 Stock Compensation
Plan, filed as Exhibit 10.8 to the Form S-1 Registration
Statement (No. 333-38592) and incorporated herein by
reference.
10.9 Loan Agreement, between Inrange Technologies Corporation and
SPX Corporation, filed as Exhibit 10.9 to the Form S-1
Registration Statement (No. 333-38592) and incorporated
herein by reference.
10.10* Employees Matters Agreement, between Inrange Technologies
Corporation and SPX Corporation, filed as Exhibit 10.10 to
the Form S-1 Registration Statement (No. 333-38592) and
incorporated herein by reference.
10.11* Inrange Technologies Corporation Employee Stock Purchase
Plan, filed as Exhibit 4.3 to the Form S-8 Registration
Statement (No. 333-46402) and incorporated herein by
reference.
10.12* Inrange Technologies Corporation Executive EVA Incentive
Compensation, filed as Exhibit 10.12 to Inrange's Quarterly
Report on Form 10-Q for the quarterly period ended September
30, 2000 (Commission File No. 000-31517) and incorporated
herein by reference.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney
- --------------
* Indicates management contract or compensatory plan or arrangement.
++ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(b) Reports on Form 8-K
We have not filed any Reports on Form 8-K during the three months ended
December 31, 2000.
61
63
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 30th day of
March 2001.
INRANGE TECHNOLOGIES CORPORATION
By: /s/ Gregory R. Grodhaus
-----------------------------------------
Gregory R. Grodhaus
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities indicated on this 30th day of March 2001.
/s/ Gregory R. Grodhaus /s/ Jay Zager
- ------------------------------------ --------------------------------------
Gregory R. Grodhaus Jay Zager
President and Chief Executive Vice President and Chief
Executive Officer Director Financial Officer (Principal Financial
and Accounting Officer)
/s/ John B. Blystone* /s/ Lewis M. Kling*
- ------------------------------------ --------------------------------------
John B. Blystone Lewis M. Kling
Chairman of the Board Director
/s/ David L. Chapman* /s/ Patrick J. O'Leary*
- ------------------------------------ --------------------------------------
David L. Chapman Patrick J. O'Leary
Director Director
/s/ Robert B. Foreman* /s/ Bruce J. Ryan*
- ------------------------------------ --------------------------------------
Robert B. Foreman Bruce J. Ryan
Director Director
/s/ Christopher J. Kearney* /s/ David B. Wright*
- ------------------------------------ --------------------------------------
Christopher J. Kearney David B. Wright
Director Director
* By his Attorney-In-Fact pursuant to the Power of Attorney filed as Exhibit
24.1 to this Form 10-K.
S-1
64
EXHIBIT INDEX
ANNUAL REPORT ON FORM 10-K
2000
EXHIBIT
NUMBER DESCRIPTION
------- -----------
21.1 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP (dated March 29, 2001)
24.1 Power of Attorney (dated March 5, 2001)
E-1