EXHIBIT 99.2
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................................... $ 14,746 $ 14,758
Demand note from SPX Corporation ............................................... 35,358 15,537
Accounts receivable, net ....................................................... 36,736 61,577
Inventories, net ............................................................... 28,207 27,509
Prepaid expenses and other ..................................................... 9,011 3,311
Property held for sale ......................................................... 1,167 1,167
Deferred income taxes .......................................................... 6,233 6,233
--------- ---------
Total current assets ....................................................... 131,458 130,092
PROPERTY, PLANT AND EQUIPMENT, net .................................................. 14,906 16,641
DEFERRED INCOME TAXES ............................................................... 891 891
GOODWILL ............................................................................ 47,212 47,057
INTANGIBLES ASSETS, net ............................................................. 15,757 17,232
OTHER ASSETS, net ................................................................... 24,690 25,200
--------- ---------
Total assets ............................................................... $ 234,914 $ 237,113
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... 13,708 14,378
Accrued expenses ............................................................... 19,032 20,239
Deferred revenue ............................................................... 20,192 14,982
--------- ---------
Total current liabilities .................................................. 52,932 49,599
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 20,000,000 shares authorized and none
issued and outstanding ..................................................... -- --
Class A common stock, $0.01 par value, 150,000,000 shares authorized,
75,633,333 shares issued and outstanding ................................... 756 756
Class B common stock, $0.01 par value, 250,000,000 shares authorized,
8,855,000 shares issued, of which 2,349,882 are being held as treasury
stock ...................................................................... 89 89
Addition paid-in capital ............................................................ 151,478 151,478
Retained earnings ................................................................... 39,667 45,509
Less: Treasury stock (2,349,882 Class B shares at cost) ............................. (12,585) (12,585)
Accumulated other comprehensive income .............................................. 2,577 2,267
--------- ---------
Total stockholders' equity ................................................. 181,982 187,514
--------- ---------
Total liabilities and stockholders' equity ................................. $ 234,914 $ 237,113
========= =========
</Table>
The accompanying notes are an integral part of these statements
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
------------ ------------
REVENUE
Product revenue ............................................ $ 23,996 $ 43,564
Service revenue ............................................ 16,166 18,338
------------ ------------
Total revenue .......................................... 40,162 61,902
------------ ------------
COST OF REVENUE
Cost of product revenue .................................... 20,231 24,761
Cost of service revenue .................................... 9,860 11,646
------------ ------------
Total cost of revenue ...................................... 30,091 36,407
------------ ------------
Gross margin ........................................... $ 10,071 $ 25,495
------------ ------------
OPERATING EXPENSES:
Research, development and engineering ...................... 4,603 6,447
Selling, general and administrative ........................ 14,316 17,758
Amortization of other intangibles .......................... 214 180
Restructuring and special charges .......................... 240 --
------------ ------------
Operating expenses ......................................... 19,373 24,385
------------ ------------
OPERATING INCOME (LOSS) ......................................... (9,302) 1,110
INTEREST INCOME ................................................. (54) (73)
INTEREST INCOME RELATED PARTY ................................... (296) (484)
INTEREST EXPENSE ................................................ 2 81
INTEREST EXPENSE RELATED PARTY .................................. 49 26
OTHER INCOME .................................................... (15) (34)
------------ ------------
Income (loss) before income taxes .......................... (8,988) 1,594
INCOME TAX EXPENSE (BENEFIT) .................................... (3,146) 622
------------ ------------
NET INCOME (LOSS) ............................................... $ (5,842) $ 972
============ ============
EARNINGS (LOSS) PER SHARE:
Basic and diluted .......................................... $ (0.07) $ 0.01
============ ============
Shares used in computing basic earnings (loss) per share ........ 82,138,451 84,417,277
============ ============
Shares used in computing diluted earnings (loss) per share ...... 82,138,451 84,468,413
============ ============
</Table>
The accompanying notes are an integral part of these statements.
2
INRANGE TECHNOLOGIES CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
-------- --------
CASH FLOW FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) ................................................................... $ (5,842) $ 972
Adjustments to reconcile net income (loss) to net cash from (used in) operating
activities:
Depreciation ................................................................... 2,282 1,988
Amortization of other intangibles .............................................. 1,519 180
Amortization of other assets ................................................... 3,070 2,769
Accretion of debt on seller notes .............................................. -- 35
Changes in operating assets and liabilities:
Accounts receivable ............................................................ 24,841 701
Inventories .................................................................... (698) 80
Prepaid expenses and other current assets ...................................... (5,700) (422)
Accounts payable ............................................................... (671) (2,587)
Accrued expenses ............................................................... (1,361) (4,795)
Deferred revenue................................................................ 5,210 1,783
-------- --------
Net cash from (used in ) operating activities ................................... 22,650 (6,403)
-------- --------
CASH FLOW FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net ..................................... (547) (2,574)
Decrease (increase) in demand note from SPX Corporation ............................ (19,821) 13,543
Capitalized software costs .......................................................... (1,813) (2,451)
Decrease (increase) in demonstration equipment and other assets ..................... (747) 120
Payments for product rights ......................................................... (44) --
-------- --------
Net cash from (used in) investing activities .................................... (22,972) 8,638
-------- --------
CASH FLOW USED IN FINANCING ACTIVITIES:
Purchase of treasury stock .......................................................... -- (1,897)
-------- --------
Net cash used in financing activities ........................................... -- (1,897)
-------- --------
EFFECT OF FOREIGN CURRENCY TRANSLATION ................................................... 310 (220)
-------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .......................................... (12) 118
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD .............................................. 14,758 17,029
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD .................................................... $ 14,746 $ 17,147
======== ========
</Table>
The accompanying notes are an integral part of these statements.
3
INRANGE TECHNOLOGIES CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION:
Inrange Technologies Corporation ("Inrange" or the "Company") designs,
manufactures, markets and services switching and networking products for storage
and data networks. Inrange's products provide fast and reliable connections
among networks of computers and related devices, allowing customers to manage
and expand large, complex storage networks efficiently, without geographic
limitations. The Company serves Fortune 1000 businesses and other large
enterprises that operate large-scale systems where reliability and continuous
availability are critical. Inrange's solutions solve the growing data storage
challenges facing IT organizations, while providing investment protection and a
proven foundation for future growth.
The Company was a majority-owned subsidiary of SPX Corporation ("SPX"
or the "Parent") until May 5, 2003, when it was acquired by Computer Network
Technology Corporation. SPX provides certain services to the Company, including
general management and administrative services for employee benefit programs,
insurance, legal, treasury and tax compliance. SPX charges for these services
and such costs are reflected in the consolidated statements of operations (see
Note 3).
The financial information included herein does not necessarily reflect
what the financial position and results of operations of the Company would have
been had it operated as a stand-alone entity during the periods covered, and may
not be indicative of future operations or financial position.
On April 6, 2003, SPX entered into a definitive agreement to sell
approximately 91% of the issued and outstanding shares of the Company to
Computer Network Technology Corporation for approximately $2.31 per share and
$173 million in the aggregate. On May 5, 2003, the transaction was completed
pursuant to the definitive agreement, and the Company became a wholly subsidiary
of Computer Network Technology Corporation. The remaining capital stock owned by
the other Inrange shareholders was converted into the right to receive
approximately $2.31 per share in cash, resulting in a total payment of
approximately $190 million for all of the outstanding capital stock of the
Company.
In the opinion of management, the accompanying interim balance sheet
and related interim statements of operations and cash flows include adjustments
(consisting only of normal and recurring items) necessary for the fair
presentation in conformity with accounting principles generally accepted in the
United States of America. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates. Interim results are not necessarily indicative of results for a full
year.
These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Form 10-K for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission.
4
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Certain reclassifications have been made to prior period balances to
conform to the current period presentation.
2. SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The Company recognizes revenue upon shipment of products with standard
configurations. Revenue from products with other than standard configurations is
recognized upon customer acceptance or when all of the terms of the sales
agreement have been fulfilled. Amounts billed for shipping and handling are
included in revenue and the related costs are included in cost of revenue. The
Company accrues for warranty costs, sales returns, and other allowances at the
time of shipment based on its experience. Service revenue is derived primarily
from maintenance contracts and professional consulting arrangements. Maintenance
contract revenue is recognized on a straight-line basis over the terms of the
contracts and revenue from professional consulting arrangements is recognized
when the service is provided.
The Company sells its products and services to a large number of customers in
various industries and geographical areas. The Company's trade accounts
receivable are exposed to credit risk; however, the risk is limited due to the
general diversity of the customer base. The Company performs ongoing credit
evaluations of its customers' financial condition and maintains reserves for
potential bad debt losses. One customer represented 20.3% of total revenue in
the three-month period ended March 31, 2003. The same customer represented 25.4%
of accounts receivable at March 31, 2003. No customer represented greater than
ten percent of total revenue for the three-month period ended March 31, 2002. No
single customer in the three-month period ended March 31, 2002 represented
greater than ten percent of accounts receivable.
Goodwill
Goodwill representing the excess of the costs over the net tangible and
identifiable intangible assets of acquired businesses is stated at cost.
Goodwill was $47,212 and $47,057 at March 31, 2003, and December 31, 2002,
respectively (See Note 7).
Long-lived assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company records impairment losses on
long-lived assets used in operations whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment is
recognized to the extent that the sum of undiscounted estimated future cash
flows expected to result from use of the assets is less than the carrying value.
Should impairment be identified, a loss would be reported to the extent that the
carrying value of the impaired assets exceeds their fair values as determined by
valuation techniques appropriate in the circumstances that could include the use
of similar projections on a discounted basis. For a depreciable long-lived
asset, the new cost basis shall be depreciated (amortized) over the remaining
useful life of that asset. Long-lived assets to be disposed of by sale as
determined under the guidelines established by SFAS No. 144 are carried at the
lower of their carrying amount or fair value less cost to sell. These assets are
no longer depreciated (amortized).
5
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Income taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the liability method of accounting for income taxes. Deferred tax
assets and liabilities are determined based on the differences between the
financial statement and tax bases of assets and liabilities. Deferred tax assets
or liabilities at the end of each period are determined using the tax rate
expected to be in effect when taxes are actually paid or recovered. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits that are not expected to be realized.
Supplemental Cash Flow Disclosure
The Company paid interest of $2 and $81 for the three months ended
March 31, 2003 and 2002, respectively.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141 "Business Combinations" (SFAS No. 141) and SFAS No. 142 "Goodwill
and Other Intangible Assets" (SFAS No. 142). These pronouncements changed the
accounting for business combinations, goodwill, and intangible assets. Effective
July 1, 2001 all business combinations should be accounted for under the
purchase method of accounting. The requirements of SFAS No. 141 are effective
for any business combination that is completed after June 30, 2001, and the
amortization provisions of SFAS No. 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, the Company adopted the provisions of SFAS No.
142, as required, on January 1, 2002. See Note 7 for further discussion on the
impact of adopting SFAS No. 141 and SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" (SFAS No. 143). The provisions of SFAS No. 143 require
that asset retirement obligations that are identifiable upon acquisition and
construction, and during the operating life of a long-lived asset, be recorded
as a liability using the present value of the estimated cash flows. A
corresponding amount would be capitalized as part of the asset's carrying amount
and amortized to expense over the asset's useful life. As required, the Company
has adopted the provisions of SFAS No. 143 effective January 1, 2003. The
adoption of SFAS No. 143 did not have a material impact on the Company's
financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment and Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
supersedes SFAS No. 121 and also supersedes the provisions of Accounting
Principles Board Opinion No. 30 "Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual,
and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the
requirements of SFAS No. 121 to (a) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flow and (b) measure an impairment loss as the difference between the
carrying amount and fair value of the asset. SFAS No. 144 establishes a single
model for accounting for long-lived assets to be disposed of by sale. The
Company adopted the provisions of SFAS No. 144 effective January 1, 2002.
6
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The provisions of SFAS No. 144 are applied prospectively and the Company does
not expect its ongoing applications to materially affect its financial position
or results of operations.
In July 2002, the FASB issued SPAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). This standard
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at a date of commitment to an exit
or disposal plan. SFAS No. 146 is effective prospectively for exit and disposal
activities initiated after December 31, 2002. As the provisions of SFAS No. 146
are to be applied prospectively after the adoption date, the Company cannot
determine the potential effects that the adoption of SFAS No. 146 will have on
its financial statements.
In November 2002, the FASB issued Financial Interpretation No. 45 (FIN
45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Others." FIN 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The adoption of this
standard did not have a material impact on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123" (SFAS No. 148). This statement provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and it requires prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As of December 31, 2002, the Company had adopted the
disclosure-only provisions of SFAS No. 148 and will continue to account for
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees." The adoption of SFAS No. 148 had no impact on the Company's
financial position or results of operations.
In December 2002, the EITF reached a consensus on EITF 00-21, "Revenue
Arragements with Multiple Deliverables". This Issue addresses certain aspects
of the accounting by a vendor for arragements under which it will perform
multiple revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficently separable and
there exists sufficient evidence of their fair values to seperately account
for some or all of the deliverables (that is, there are separate units of
accounting). In other arrangements, some or all of the deliverables are not
independently functional, or there is not sufficient evidence of their fair
values to account for them seperately. This Issue addresses when and, if so,
how an arrangement involving multiple deliverables should be divided into
seperate units of accounting. This Issue does not change otherwise applicable
revenue recognition criteria. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company does not expect the adoption of EITF 00-21 to have a material
effect on its financial statements.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
No. 150). SFAS No. 150 requires issuers to classify as liabilities (or assets in
some circumstance) three classes of freestanding financial instruments that
embody obligations for the issuer. Generally, the Statement is effective for
financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The Company is in the process of evaluating the impact that will
result from the adoption of SFAS No. 150 on the Company's financial statements.
3. TRANSACTIONS WITH SPX:
There are no intercompany purchase or sale transactions between SPX and
the Company. SPX incurs costs for various matters for Inrange and other
subsidiaries, including administration of common employee benefit programs,
insurance, legal, accounting and other items that are attributable to the
subsidiaries' operations. These costs are allocated based on estimated time
incurred to provide the services to each subsidiary. The unaudited consolidated
financial statements reflect allocated charges from SPX for these services of
$38 for the three months ended March 31, 2003 and 2002. Management of SPX and
the Company believe that the allocated costs are reasonable and reflect the
effort involved in providing the services and also represent what the costs
would have been on a standalone basis. In addition, direct costs incurred
7
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
by SPX on behalf of the Company are charged to the Company. The direct costs
were $2,280 and $2,372 for the three months ended March 31, 2003 and 2002,
respectively.
Advances and other intercompany charges after the initial public
offering are recorded as a component of the demand note due from SPX. As of
March 31, 2003, the demand note from SPX was $35,358. The demand note bears
interest at the average rate of the SPX credit facilities and the interest is
recorded on a monthly basis as interest income. The interest rate was 4.40% and
5.56% at March 31, 2003 and 2002, respectively. The accompanying statements of
operations for the three months ended March 31, 2003 and 2002 include interest
income of $296 and $484, respectively, relating to interest income from the
demand note from SPX.
4. RESTRUCTURING AND SPECIAL CHARGES:
We recorded restructuring and special charges totaling $0.2 million in
the three months ended March 31, 2003 in accordance with SFAS No. 146. The
charges related to the Company's continued efforts to improve profitability,
streamline operations, reduce costs and improve efficiency. The charges include
severance costs of $0.1 million. A total of ten employees were terminated and
left the Company as of March 31, 2003 related to this cost reduction initiative.
Also included are $0.1 million of employee relocation charges associated with
the Company's 2002 facility consolidation.
For the year ended December 31, 2002, the Company recorded
restructuring and special charges in accordance with EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs incurred in a Restructuring)", which was
adopted by the Company in connection with restructurings through December 31,
2002. EITF No. 94-3 provided specific requirements as to the appropriate
recognition of costs associated with employee termination benefits and other
exit costs. Employee termination costs were recognized when management, having
the appropriate level of authority to involuntarily terminate employees approves
and committed the Company to the plan of termination, established the benefits
that current employees would receive upon termination, and prior to the date of
the financial statements, the benefit arrangement was communicated to employees.
The communication of the benefit arrangement included sufficient detail to
enable employees to determine the type and amount of benefits they would receive
if they were terminated. Other exit costs are costs resulting from an exit plan
that are not associated with, or that do not benefit, activities that will be
continued, The Company recorded that cost if it is not associated with, or is
not incurred to generate, revenues after the exit plan's commitment date, and it
met either of the following criteria: (1) the cost was incremental to other
costs that the Company incurred in the conduct of its activities prior to the
commitment date and would be incurred as a direct result of the exit plans, or
(2) the cost represented amounts that the Company would incur under a
contractual obligation that existed prior to the commitment date and would
either continue after the exit plan was completed with no economic benefit to
the Company or be a penalty incurred by the Company to cancel the contractual
obligation.
8
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following table details the changes to the Company's disposition
related accruals:
<Table>
<Caption>
EMPLOYEE FACILITY
TERMINATION CONSOLIDATION
COSTS COSTS TOTAL
----------- ------------- -------
Balance at December 31, 2002: .............................. $ 2,627 $ 3,358 $ 5,985
Restructuring and special charges .......................... 121 -- 121
Cash payments .............................................. (1,908) (116) (2,024)
------- ------- -------
Balance at March 31, 2003: ................................. $ 840 $ 3,242 $ 4,082
======= ======= =======
</Table>
5. INVENTORIES:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
-------- ------------
Raw materials ................ $13,539 $12,780
Work-in-process .............. 1,680 813
Finished goods ............... 12,988 13,916
------- -------
Total inventories ....... $28,207 $27,509
======= =======
</Table>
6. OTHER ASSETS:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Capitalized software .............. $ 25,648 $ 23,759
Demonstration equipment ........... 16,747 19,669
Investment ........................ 300 300
Other ............................. 1,211 782
-------- --------
Total other assets ........... 43,906 44,510
Accumulated amortization .......... --
Capitalized software ......... (9,665) (8,041)
Demonstration equipment ...... (9,551) (11,269)
-------- --------
Net other assets ......... $ 24,690 $ 25,200
======== ========
</Table>
The Company capitalized software development costs of $1,813 and $2,451
in the three months ended March 31, 2003 and 2002, respectively. Amortization
expense was $1,522 and $935 in the three months ended March 31, 2003 and 2002,
respectively, and is reflected in cost of product revenue on the Consolidated
Statements of Operations.
Demonstration equipment represents equipment at customer locations for
demonstration purposes and equipment used for internal testing purposes.
Demonstration equipment is amortized on a straight-line basis over a period not
to exceed three years.
7. GOODWILL AND OTHER INTANGIBLES
In June 2001, the FASB issued SFAS No. 141 "Business Combinations"
(SFAS No. 141) and SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS No.
142). These pronouncements changed the accounting for business combinations,
goodwill, and intangible assets. SFAS No. 141 eliminated the
pooling-of-interests method of accounting for business
9
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
combinations and further clarifies the criteria to recognize intangible assets
separately from goodwill. SFAS No. 142 states that goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are reviewed
for impairment annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives and assessed for impairment
under the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets."
The requirements of SFAS No. 141 and amortization provisions of SFAS
No. 142 were effective for any business combination initiated after July 1,
2001. The Company has not amortized goodwill and indefinite-lived intangibles
for acquisitions completed after this date. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, companies are required to
adopt SFAS No. 142 in their fiscal year beginning after December 15, 2001. The
Company adopted the remaining provisions of SFAS No. 142 effective January 1,
2002. Upon adoption of this standard, the Company ceased amortizing all
remaining goodwill and intangible assets deemed to have indefinite useful lives.
In accordance with the transition rules of SFAS No. 142 effective
January 1, 2002, the Company established its reporting units based on its
current reporting structure. The Company then assigned all existing goodwill to
the reporting units, as well as other assets and liabilities that relate to the
reporting unit. The Company further completed a review of previously acquired
intangible assets and reclassified intangible assets that did not meet the
contractual or separable criteria of SFAS No. 141 as goodwill. In total, $1,250
was reclassified as goodwill on January 1, 2002.
The Company performed its transition impairment testing as of January
1, 2002. Step one involved comparing the carrying values of the reported net
assets of our reporting units to their fair values. Fair value was primarily
based on discounted cash flow projections but the Company also considered
factors such as market capitalization and recent merger transactions involving
similar businesses. No reporting units had net assets with carrying values in
excess of their fair values, therefore it was not necessary to perform step two
of the impairment testing provisions.
Developed technology represents technology acquired through the
Company's 2000 acquisitions of Varcom Corporation and Computerm Corporation. The
technology acquired from Varcom Corporation totaling $5,500 is being amortized
over eight years. Technology totaling $2,000 from the Company's acquisition of
Computerm Corporation is being amortized over five years.
Product rights represent technology licenses for three product lines.
Amortization of the technology licenses is included in cost of product revenue
and commences upon general availability of the products and continues through
the term of the license, not to exceed five years.
The following tables reflect the initial identification of goodwill and
intangible assets to the reporting units and category of intangible assets as of
January 1, 2002. Thereafter, activity reflects purchase price for acquisitions
completed not more than one year prior to the date of adjustment and
amortization. This information is presented on a consolidated basis.
10
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
<Table>
<Caption>
UNAMORTIZED AMORTIZED
------------ -------------------------
DEVELOPED PRODUCT
GOODWILL TECHNOLOGY RIGHTS TOTAL
------------ ----------- ----------- ------------
Weighted Average Useful Life 9 4
January 1, 2002 gross balance............................. $ 45,432 $ 7,500 $ 15,370 $ 68,302
Adjustments............................................... 1,625 -- 3,652 5,277
------------ ----------- ----------- ------------
December 31, 2002 gross balance........................... 47,057 7,500 19,022 73,579
Adjustments............................................... 155 -- 44 199
------------ ----------- ----------- ------------
March 31, 2003 gross balance.............................. $ 47,212 $ 7,500 $ 19,066 $ 73,778
============ =========== =========== ============
January 1, 2002 accumulated amortization....................... $ 1,203 $ 2,609 $ 3,812
Amortization................................................... 854 4,624 5,478
----------- ----------- ------------
December 31, 2002 accumulated
amortization................................................... $ 2,057 $ 7,233 $ 9,290
Amortization................................................... 215 1,304 1,519
----------- ----------- ------------
March 31, 2003 accumulated
amortization................................................... $ 2,272 $ 8,537 $ 10,809
----------- ----------- ------------
Estimated Amortization Expense:
For year ending December 31,
2003...................................................... $ 854 $ 5,350
2004...................................................... 854 4,636
2005...................................................... 799 1,592
2006...................................................... 688 211
2007...................................................... 688 --
</Table>
As policy, the Company will conduct annual impairment testing of all
goodwill and indefinite-lived intangibles during the fourth quarter. Goodwill
and indefinite-lived intangibles will be reviewed for impairment more frequently
if impairment indicators arise. Intangible assets that are subject to
amortization shall be reviewed for impairment in accordance with the provisions
of SFAS No. 121 as superceded by SFAS No. 144 whenever events or a change in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As of December 31, 2002, management evaluated whether an impairment
had occurred under the guidelines established and believes that no impairment
has occurred.
8. WARRANTY
The Company provides for the estimate of warranty cost based on
contract terms and historical warranty loss experience that is periodically
adjusted for recent actual experience. The accrual for warranty expense is
included in accrued expenses on the Company's Unaudited Consolidated Balance
Sheets. The following table is an analysis of our product warranty accrual:
11
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
<Table>
<Caption>
THREE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
2003 2002
------------ -------------
Balance at beginning of period .... $ 1,617 $ 1,793
Provisions ........................ 1,316 3,905
Usage ............................. (1,396) (4,081)
------- -------
Balance at end of period .......... $ 1,537 $ 1,617
======= =======
</Table>
9. COMMITMENTS AND CONTINGENCIES:
There are contingent liabilities for lawsuits and various other matters
occurring in the ordinary course of business. Management believes, after
consultation with legal counsel, that none of these contingencies will
materially impact the Company's financial condition or results of operations.
The Company has been named as a defendant in the case SBC Technology Resources,
Inc. v. Inrange Technologies Corp., Eclipsys Corp. and Resource Bancshares
Mortgage Group, Inc., No. 303-CV-418-N, pending in the United States District
Court for the Northern District of Texas, Dallas Division. The action was
commenced on February 27, 2003. The complaint alleges The Company is infringing
the SBC patent by manufacturing and selling storage area networking equipment,
including Fibre Channel directors and switches, for use in storage networks that
embody certain inventions claimed in a patent owned by SBC. The complaint asks
for judgment that SBC's patent is infringed by the defendants in the case, an
accounting for actual damages, actual damages, attorneys fees, costs of suit and
other relief. Additionally, Eclipsys has demanded that the Company indemnify and
defend Eclipsys pursuant to documentation under which it acquired the product
from the Company. Hitachi Data Systems Corporation has informed the Company that
it has also received a demand from Eclipsys that Hitachi indemnify and defend
Eclipsys for this action. Hitachi has put the Company on notice that it will
tender any claim by Eclipsys for indemnification and defense of this action to
the Company. The case is in its preliminary stages and management is evaluating
the litigation.
The Company has also been named as a defendant in the case Onex, Inc.,
Joseph P. Huffine, and Sally Huffine Breen v. Inrange Technologies Corporation,
No. CV-0593LJM-WTL, pending in the United States District Court, Southern
District of Indiana. The action was commenced on April 23, 2003. The complaint
alleges breach of the contract pursuant to which the Company acquired certain
assets of Onex, Inc. The contract includes a provision for additional payments
of purchase price based on the performance of the business acquired over a two
year period. The contract requires the payments be made at the end of each year
in such two year period. Specifically, the complaint alleges, among other
things, that the Company did not conduct the business in a commercially
reasonable manner and the pay out for the first year should have been $6 million
and that the payment for the second year will be substantially smaller. The
complaint also alleges the plaintiffs were harmed by the failure to provide
accurate data with respect to the business acquired and the Company's failure to
pay certain liabilities harmed the plaintiffs. The case is in its preliminary
stages and management is evaluating the litigation.
12
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
A shareholder class action was filed against the Company and certain of its
officers on November 30, 2001, in the United States District Court for the
Southern District of New York, seeking recovery of damages caused by the
Company's alleged violation of securities laws, including section 11 of the
Securities Act of 1933 and section 10(b) of the Exchange Act of 1934. The
complaint, which was also filed against the various underwriters that
participated in the Company's initial public offering (IPO), is identical to
hundreds of shareholder class actions pending in this Court in connection with
other recent IPOs and is generally referred to as In re Initial Public Offering
Securities Litigation. The complaint alleges, in essence, (a) that the
underwriters combined and conspired to increase their respective compensation in
connection with the IPO by (i) receiving excessive, undisclosed commissions in
exchange for lucrative allocations of IPO shares, and (ii) trading in the
Company's stock after creating artificially high prices for the stock post-IPO
through "tie-in" or "laddering" arrangements (whereby recipients of allocations
of IPO shares agreed to purchase shares in the aftermarket for more than the
public offering price for Inrange shares) and dissemination of misleading market
analysis on our prospects; and (b) that the Company violated federal securities
laws by not disclosing these underwriting arrangements in its prospectus. The
defense has been tendered to the carriers of the Company's director and officer
liability insurance, and a request for indemnification has been made to the
various underwriters in the IPO. At this point the insurers have issued a
reservation of rights letter and the underwriters have refused indemnification.
The court has granted the Company's motion to dismiss claims under Section 10(b)
of the Securities Exchange Act of 1934 because of the absence of a pleading of
intent to defraud. The court granted plaintiffs leave to replead these claims,
but no further amended complaint has been filed. The court also denied the
Company's motion to dismiss claims under Section 11 of the Securities Act of
1933. The court has also dismissed the Company's individual officers without
prejudice, after they entered into a tolling agreement with the plaintiffs. At
this point, it is too early to form a definitive opinion concerning the ultimate
outcome.
10. CAPITAL STOCK:
In December 2001, the Board of Directors authorized the repurchase of
up to $20,000 of Class B common stock. The purchases will be made at
management's discretion in the open market at prevailing prices, or in privately
negotiated transactions at then-prevailing prices. The Company has repurchased a
total of 2,349,882 Class B shares at a weighted average price of $5.32 per share
for a total of $12,585. No repurchases were made during the three months ended
March 31, 2003.
11. EARNINGS PER SHARE:
The Company has presented earnings per common share under SFAS No. 128,
"Earnings Per Share." Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period while diluted earnings per share reflects the potential
dilution from the exercise or conversion of securities into common stock.
13
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The following is a reconciliation of the basic and diluted earnings per
share calculations:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
------------ ------------
Net income (loss) ........................... $ (5,842) $ 972
============ ============
Weighted average share outstanding .......... 82,138,451 84,417,277
Dilutive effect of stock options ............ -- 51,136
------------ ------------
Diluted shares outstanding .................. 82,138,451 84,468,413
============ ============
Basic and diluted earnings per share ........ $ (0.07) $ 0.01
============ ============
</Table>
At March 31, 2003, there were outstanding options to purchase 6,936,000
shares of Class B common stock at prices ranging from $1.77 to $25.63 per share.
Outstanding stock options to purchase 6,684,600 of these shares were excluded
from the earnings per share calculation for the three months ended March 31,
2002, as the impact would be antidilutive. Shares underlying all stock options
were excluded from the earnings per share calculation for the three months ended
March 31, 2003, as the impact would be antidilutive.
12. STOCK OPTIONS:
The Company has applied the intrinsic value based method of accounting
prescribed by APB Opinion No. 25 and related interpretations in accounting for
stock-based compensation plans. Accordingly, no compensation cost is reflected
in net income for stock option awards as all options granted had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
The Company follows the disclosure provisions of SFAS No. 148 and the
following table illustrates the pro forma effect on net income and income per
share for the three months ended March 31, 2003 and 2002 had the fair value
recognition provisions of SFAS No. 123 been applied to stock-based employee
compensation during those periods:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
-------------- ------------
Net income (loss):
As reported................................................ $ (5,842) $ 972
Pro forma compensation expense, net of tax................. 1,495 1,357
Pro forma net loss......................................... $ (7,337) $ (385)
Basic and diluted net income (loss) per common share:
As reported................................................ $ (0.07) $ 0.01
Pro forma.................................................. $ (0.09) $ 0.00
</Table>
14
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
The fair values of the Company options granted during 2003 and 2002
were estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
<Table>
<Caption>
2003 2002
------- -------
Risk free interest rate......................................... 3.15% 4.60%
Expected life .................................................. 6 years 6 years
Expected volatility............................................. 95.0% 95.0%
Expected dividend yield......................................... 0% 0%
</Table>
13. COMPREHENSIVE INCOME (LOSS):
The components of comprehensive income (loss) are as follows:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
------- -------
Net income (loss): ................ $(5,842) $ 972
Foreign currency adjustments ...... 310 (220)
------- -------
Comprehensive income (loss) ....... $(5,532) $ 752
======= =======
</Table>
14. SEGMENT INFORMATION:
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," establishes additional standards for segment reporting in the
financial statements. Management has determined that operations may be
aggregated into two segments for disclosure under SFAS No. 131. Inrange
Technologies Corporation designs, manufactures, markets and services switching
and networking products for storage and data networks. Inrange Global
Consulting, Inc. is comprised of the three consulting businesses acquired in
2001 to help customers plan, assess and implement SANs and business continuance
strategies. Information concerning segment information of the Company as
prescribed by SFAS No. 131 is provided below:
<Table>
<Caption>
MARCH 31,
--------------------------------
2003 2002
-------- --------
Revenue:
Inrange Technologies Corporation ....... $ 34,582 $ 54,536
Inrange Global Consulting, Inc. ........ 5,580 7,366
-------- --------
$ 40,162 $ 61,902
======== ========
Operating income (loss):
Inrange Technologies Corporation ....... $ (8,179) $ (306)
Inrange Global Consulting, Inc. ........ (1,123) (804)
-------- --------
$ (9,302) $ (1,110)
======== ========
</Table>
15
INRANGE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
Information concerning geographic information of the Company as prescribed by
SFAS No. 131 is provided below:
<Table>
<Caption>
MARCH 31,
---------------------
2003 2002
------- -------
Revenue:
United States ...... $23,223 $39,160
Germany ............ 7,877 8,111
Other Foreign ...... 5,081 7,527
Export ............. 3,981 7,104
------- -------
$40,162 $61,902
======= =======
</Table>
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Long-lived assets:
Domestic ........... $ 93,238 $ 96,385
Foreign ............ 9,327 9,744
-------- --------
$102,565 $106,129
======== ========
</Table>
16