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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