1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number 000-31517 INRANGE TECHNOLOGIES CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 06-0962862 (State of Incorporation) (I.R.S. Employer Identification No.) 100 Mount Holly By-Pass, P.O. Box 440, Lumberton, NJ 08048 (Address of principal executive offices and zip code) (609) 518-4000 (Registrant's telephone number, including area code) 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 --- --- Common shares outstanding as of August 9, 2001 - 84,488,333 2 INRANGE TECHNOLOGIES CORPORATION INDEX TO FORM 10-Q PAGE NUMBER ----------- PART I FINANCIAL INFORMATION Item 1. Unaudited Consolidated Financial Statements Unaudited Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 3 Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2001 and 2000 4 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 23 2 3 PART I. FINANCIAL INFORMATION ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS INRANGE TECHNOLOGIES CORPORATION UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ ASSETS CURRENT ASSETS: Cash and equivalents ........................................... $ 18,314 $ 22,646 Demand note from SPX ........................................... 49,060 60,956 Accounts receivable, net ....................................... 77,568 79,988 Inventories .................................................... 26,102 29,271 Prepaid expenses and other ..................................... 5,636 5,209 Deferred income taxes .......................................... 4,968 4,968 -------- -------- Total current assets ................................... 181,648 203,038 PROPERTY, PLANT AND EQUIPMENT, net ............................... 18,871 16,103 GOODWILL AND OTHER INTANGIBLES, net .............................. 53,410 44,629 OTHER ASSETS, net ................................................ 38,257 37,288 -------- -------- Total assets ........................................... $292,186 $301,058 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term debt .... $ 2,966 $ 4,438 Accounts payable ............................................... 28,139 23,541 Accrued expenses ............................................... 20,611 29,401 Deferred revenue ............................................... 11,421 10,923 -------- -------- Total current liabilities .............................. 63,137 68,303 -------- -------- LONG-TERM DEBT ................................................... 1,097 1,283 -------- -------- DEFERRED INCOME TAXES ............................................ 918 918 -------- -------- 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 and outstanding..... 89 89 Additional paid-in capital ..................................... 151,478 133,946 Retained earnings .............................................. 74,522 95,155 Accumulated other comprehensive income ......................... 189 608 -------- -------- Total stockholders' equity ............................. 227,034 230,554 -------- -------- Total liabilities and stockholders' equity ......... $292,186 $301,058 ======== ======== The accompanying notes are an integral part of these statements. 3 4 INRANGE TECHNOLOGIES CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share data) Three Months Ended Six Months Ended ---------------------------- ---------------------------- June 30, June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ------------ ------------ ------------ ------------ REVENUE: Product revenue ................................................. $ 55,676 $ 43,666 $ 107,208 $ 81,363 Service revenue ................................................. 13,730 8,609 26,073 17,065 ------------ ------------ ------------ ------------ Total revenue ........................................... 69,406 52,275 133,281 98,428 ------------ ------------ ------------ ------------ COST OF REVENUE: Cost of product revenue ......................................... 34,758 20,824 60,433 39,130 Cost of service revenue ......................................... 8,814 6,286 17,045 11,333 ------------ ------------ ------------ ------------ Total cost of revenue .................................. 43,572 27,110 77,478 50,463 ------------ ------------ ------------ ------------ Gross margin ......................................... 25,834 25,165 55,803 47,965 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Research, development and engineering ........................... 7,012 5,097 14,596 10,060 Selling, general and administrative ............................. 19,551 12,397 38,294 24,534 Special charges ................................................. 8,027 (190) 8,027 (190) Amortization of goodwill and other intangibles .................. 1,295 267 2,336 534 ------------ ------------ ------------ ------------ Operating expenses ...................................... 35,885 17,571 63,253 34,938 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) ........................................... (10,051) 7,594 (7,450) 13,027 INTEREST (INCOME) EXPENSE ......................................... (1,080) 139 (2,353) 316 OTHER (INCOME) EXPENSE ............................................ 101 (17) 60 (111) ------------ ------------ ------------ ------------ Income (loss) before income taxes ............................ (9,072) 7,472 (5,157) 12,822 INCOME TAXES ...................................................... (3,625) 2,989 (2,056) 5,129 ------------ ------------ ------------ ------------ NET INCOME (LOSS) ................................................. $ (5,447) $ 4,483 $ (3,101) $ 7,693 ============ ============ ============ ============ EARNINGS (LOSS) PER SHARE: Basic and diluted ................................................ $ (0.06) $ 0.06 $ (0.04) $ 0.10 ============ ============ ============ ============ Shares used in computing basic and diluted earnings per share .... 84,488,333 75,633,333 84,488,333 75,633,333 ============ ============ ============ ============ The accompanying notes are an integral part of these statements. 4 5 INRANGE TECHNOLOGIES CORPORATION UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) SIX MONTHS ENDED JUNE 30, -------------------- 2001 2000 -------- -------- CASH FLOW FROM (USED IN) OPERATING ACTIVITIES: Net income (loss) ................................................. $ (3,101) $ 7,693 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation .................................................... 3,267 2,896 Amortization of goodwill and other intangibles .................. 2,336 534 Amortization of other assets .................................... 4,978 2,681 Accretion of debt on seller notes ............................... 207 -- Special charges ................................................. 8,027 (190) Changes in operating assets and liabilities: Accounts receivable ............................................. 5,229 (2,009) Inventories ..................................................... 3,169 (3,150) Prepaid expenses and other current assets ....................... (231) (883) Accounts payable ................................................ 4,641 2,267 Accrued expenses ................................................ (11,737) 1,592 Deferred revenue ................................................ 253 (1,861) Payments of special charges and disposition related accrual ..... (532) (753) -------- -------- Net cash from operating activities ......................... 16,506 8,817 -------- -------- CASH FLOW FROM (USED IN) INVESTING ACTIVITIES: Purchases of property, plant and equipment, net .................. (5,184) (2,663) Cash paid for business acquired, net of cash acquired ............. (14,499) -- Decrease in demand note from SPX Corporation ...................... 11,896 -- Capitalized software costs ........................................ (4,073) (2,975) Increase in demonstration equipment and other assets .............. (3,983) (2,696) Payments for product rights ....................................... (2,711) -- Purchase of investment ............................................ -- (7,429) -------- -------- Net cash used in investing activities .......................... (18,554) (15,763) -------- -------- CASH FLOW FROM (USED IN) FINANCING ACTIVITIES: Net payments under lines of credit ................................ -- (2,383) Payments on long-term debt ........................................ (1,865) (41) Proceeds of loan from SPX Corporation ............................. -- 4,429 Proceeds from SPX Corporation ..................................... -- 5,769 -------- -------- Net cash from (used in) financing activities .................. (1,865) 7,774 -------- -------- EFFECT OF FOREIGN CURRENCY TRANSLATION .............................. (419) 383 -------- -------- NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ..................... (4,332) 1,211 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD ......................... 22,646 1,023 -------- -------- CASH AND EQUIVALENTS AT END OF PERIOD ............................... $ 18,314 $ 2,234 ======== ======== The accompanying notes are an integral part of these statements. 5 6 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") provides large-scale, mission critical storage networking products, software and services - -- the IN-VSN family. This includes a unique family of switches, HBA's, directors, storage over WAN and optical networking products that allow storage networks to extend beyond traditional geographic boundaries. The IN-VSN offerings, and INRANGE Global Solutions offerings of consulting and professional services, provide solutions to customers' complex business problems and storage networking applications. The Company is a majority-owned subsidiary of SPX Corporation ("SPX"). The financial statements have been prepared on the historical cost basis and present the Company's financial position, results of operations and cash flows as derived from SPX's historical financial statements. SPX provides certain services to the Company including general management and administrative services for employee benefit programs, insurance, legal, treasury and tax compliance. SPX charges for these services and such costs are reflected in the consolidated statements of operations (see Note 4). The financial information included herein does not necessarily reflect what the financial position and results of operations of the Company would have been had it operated as a stand-alone entity during the periods covered, and may not be indicative of future operations or financial position. In September 2000, the Company completed an initial public offering of 8,855,000 shares of Class B common stock at $16.00 per share and received net proceeds of $128,200. The proceeds were used to repay borrowings of $54,929 from SPX to fund certain acquisitions in the second and third quarters of 2000 and accrued interest thereon of $777. The remaining proceeds are being used for general corporate purposes. However, pending use of the proceeds, the Company invested $15,000 in a money market account and the remaining net proceeds were loaned to SPX under a demand note (see Note 4). 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 generally accepted accounting principles. 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, 2000, as filed with the Securities and Exchange Commission. 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. Revenue from service obligations is derived primarily from maintenance contracts and is deferred and recognized on a straight-line basis over the terms of the contracts. Other service revenue is recognized when the service is provided. 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 6 7 customer base. The Company performs ongoing credit evaluations of its customers' financial condition and maintains reserves for-potential bad debt losses. Recently, one of the Company's customers filed for bankruptcy. While the specifics are being determined, the Company has provided a reserve that management believes is adequate to cover exposure related to this matter. For the three month period ended June 30, 2001, one customer accounted for 10.2% of total revenues. No single customer in any of the other periods presented represented greater than 10% of total revenue and no one customer represents greater than 10% of accounts receivable at June 30, 2001. Recent Accounting Pronouncements On July 20, 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). These pronouncements change the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirement of SFAS 141 is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142 states that goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed for impairment annually (or more frequently if impairment indicators arise). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 20, 3001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. We are currently evaluating the provisions of SFAS 141 and SFAS 142 and the impact that adoption will have on the Company's financial position and results of operations. All of the Company's other purchased intangible assets have been separately identified and recognized in the balance sheet. These intangibles are being amortized over the estimated useful lives or contractual lives as appropriate. Based on historical purchase price allocations or preliminary allocations for business combinations completed prior to June 30, 2001, management estimates that the cessation of goodwill amortization will increase operating income by approximately $3,500 on an annualized basis when the accounting pronouncements are adopted by the Company. 3. ACQUISITIONS: In May 2001, the Company completed the acquisition of Onex, Incorporated ("Onex"). Onex, located in Indianapolis, Indiana, is a technology consulting company that designs mission critical network infrastructure and implements e-Business and enterprise resource planning solutions. In January 2001, the Company completed the acquisition of Prevail Technology ("Prevail"). Prevail, located in Waltham, Massachusetts, provides professional services with expertise in designing and implementing high availability solutions for IT infrastructures and e-business environments. The acquisitions were recorded using the purchase method of accounting and, accordingly, the results of operations have been included in the consolidated results of the Company since the respective acquisition dates. The aggregate purchase price of the acquisitions, net of acquired cash, was $14,499. The purchase price was allocated $3,079 to net tangible assets and the remaining $11,420 was classified as goodwill and other intangibles and is being amortized over the estimated useful lives. The purchase price allocation was based on preliminary estimates, currently available information and certain assumptions that we deem appropriate. Management does not believe that changes to these estimates will be material. Pro forma results of operations have not been included in these interim financial statements as the impact of the acquisitions is not material to the overall consolidated financial statements. 4. TRANSACTIONS WITH SPX: There are no material 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 $50 for the three months ended and $100 for the six months ended June 30, 2001 and 2000, respectively. 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 stand-alone basis. In addition, direct costs incurred by SPX on behalf 7 8 of the Company are charged to the Company. The direct costs were $2,110 and $1,526 for the three months and $3,884 and $2,944 for the six months ended June 30, 2001 and 2000, respectively. Advances and other intercompany accounts between the Company and SPX through the date the Company completed its initial public offering have been recorded as a component of additional-paid in capital in the accompanying balance sheet. Advances and other intercompany charges after such date are recorded as a component of the demand note due from SPX. As of June 30, 2001, the demand note from SPX was $49,060. 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 accompanying statements of operations for the three months and six months ended June 30, 2001 includes interest income of $1,108 and $2,404, respectively, relating to interest income from the demand note from SPX. 5. SPECIAL CHARGES: The Company recorded special charges of $8,027 and $(190) in the six months ended June 30, 2001 and 2000, respectively, for restructuring initiatives. The components of the charges have been computed based on actual cash payouts, management's estimate of the realizable value of the affected tangible assets and estimated exit costs, including severance and other employee benefits based on existing severance policies. The purpose of these restructuring initiatives is to improve profitability, streamline operations, reduce costs and improve efficiency. In the second quarter of 2001, the Company announced a restructuring initiative and its exit of the telecommunications business. As a result, the Company recorded charges of $12,931. The charges include severance, lease abandonment costs, asset impairments and inventory write-offs. The charges for inventory write-offs of $4,904 are recorded as components of cost of sales; all other charges of $8,027 are included as special charges in the accompanying statements of operations. The $8,027 of special charges includes $2,602 for a reduction in sales, marketing, operations and engineering headcount of approximately 77 employees in selected non-strategic product areas. Other costs are $4,773 related to asset write-downs associated with discontinued product lines and $652 associated with existing obligations related to discontinued product lines. The majority of the severance and other payments associated with this initiative are expected to be made in 2001. During the six months ended June 30, 2000, the Company revised its estimates of the remaining 1999 restructuring costs expected to be incurred, resulting in special charges of $(190). As of June 30, 2000, the Company maintained $1,253 of restructuring charges and disposition related accruals. These accruals include $400 from a December 1998 charge for facility holding costs, which the Company expects to use by May 2002, and $900 for the remaining lease obligations related to a former manufacturing facility, which will be used through the expiration of the leases. Disposition related accruals of $60 remain from these charges at June 30, 2001 and are expected to be paid in 2002. The following table details the changes to the Company's disposition related accruals through June 30, 2001: JUNE 30, JUNE 30, 2001 2000 -------- -------- Balance at beginning of period .... $ 291 $ 2,196 Provision ......................... 3,204 (190) Charges ........................... (532) (753) ------- ------- Balance at end of period .......... $ 2,963 $ 1,253 ======= ======= 6. INVENTORIES: JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Raw materials ..................... $13,709 $14,743 Work-in-process ................... 2,376 1,984 Finished goods .................... 10,017 12,544 ------- ------- Total inventories ............... $26,102 $29,271 ======= ======= 8 9 7. OTHER ASSETS: JUNE 30, DECEMBER 31, 2001 2000 --------- ------------ Capitalized software ............... $ 17,065 $ 17,218 Demonstration equipment ............ 22,355 18,412 Product rights ..................... 10,516 9,053 Investment ......................... 3,250 3,250 Other .............................. 546 539 -------- -------- Total other assets ....... 53,732 48,472 Accumulated amortization-- Capitalized software ............. (5,855) (5,045) Demonstration equipment .......... (8,423) (5,592) Product rights ................... (1,197) (547) -------- -------- Net other assets .......... $ 38,257 $ 37,288 ======== ======== The Company capitalized $4,073 and $2,975 in the six months ended June 30, 2001 and 2000, respectively, of software development costs. Amortization expense was $1,801 and $1,339 in the six months ended June 30, 2001 and 2000, respectively. The Company capitalized $1,903 and $1,653 in the three months ended June 30, 2001 and 2000, respectively, of software development costs. Amortization expense was $898 and $671 in the three months ended June 30, 2001 and 2000, respectively. In 2001, the Company wrote-off $3,336 of net capitalized software costs in connection with the discontinuance of certain product lines (see Note 5). Demonstration equipment represents equipment at customer locations for demonstration purposes and is amortized on a straight-line basis over a period not to exceed three years. Product rights represent technology licenses and prepaid royalties for three product lines. Amortization of the technology licenses commences upon general availability of the products and continues through the term of the license, not to exceed five years. 8. DEBT: Short-term borrowings and long-term debt consist of the following: JUNE 30, DECEMBER 31, 2001 2000 -------- ------------ Seller notes, net of unamortized discount of $187 and $394, respectively .... $ 4,063 $ 4,106 Seller note for working capital adjustment .... -- 1,615 ------- ------- 4,063 5,721 Less -- Current portion of long-term debt ..... (2,966) (4,438) ------- ------- Long-term debt ................................ $ 1,097 $ 1,283 ======= ======= In connection with the acquisitions of Computerm Corporation and Varcom Corporation in August 2000, the Company issued non-interest bearing notes payable to the sellers. The notes due to the sellers of the acquired businesses are $3,000 and $1,500 and are due in August 2001 and August 2002, respectively. The notes were discounted at 10% and imputed interest expense was $104 and $207 for the three months and six months ended June 30, 2001, respectively. Foreign subsidiaries have separate lines of credit with European banks in their local currency with a U.S. value of approximately $5,200, of which $1,684 was outstanding as of June 30, 2000. There were no borrowings on the lines of credit as of June 30, 2001. The weighted average interest rate on borrowings under the foreign lines of credit was 6.11% for the six months ended June 30, 2000. There were no borrowings during the six months ended June 30, 2001. The lines of credit are guaranteed by SPX. 9 10 9. COMMITMENTS AND CONTINGENCIES: In March 2001, the Company entered into a memorandum of understanding with a third party for certain technology, license and product development activities. In connection with this agreement, the Company has committed to minimum royalties, licensing and product development costs of up to $20,000 contingent upon the achievement of certain milestones. In June 2001, the Company filed suit against a customer for breach of contract following its refusal to pay the Company for approximately $5,000 of equipment. While the case is in early stages, management believes the amount is collectible. 10. STOCKHOLDERS' EQUITY: On June 29, 2000, the Company issued options to purchase 1,331,000 shares of Class B common stock to directors and employees of SPX. The options were granted at $13.00 per share and were fully vested on the grant date. During the third and fourth quarters of 2000, the Company recorded charges to the statement of operations to reflect the fair value of these options as measured on a rolling quarterly basis. In connection with the issuance of Financial Accounting Standards Board's Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25," (FIN 44) and interpretations thereof, the accounting for options granted to parent company employees has been modified. Under interpretations outlined in Emerging Issue Task Force Issue 00-23, the Company is no longer required to record a charge for the options granted to parent company employees and such options should be treated as a dividend to the parent. On January 1, 2001, the Company recorded a non-cash "deemed dividend" of $17,532, which represents the value of the previously granted options at that date as measured by the Black-Scholes option pricing model. 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 (loss) by the weighted average number of shares of common stock outstanding during the period while diluted earnings (loss) per share reflects the potential dilution from the exercise or conversion of securities into common stock. At June 30, 2001, there were 8,186,000 options outstanding to purchase Class B common stock at prices ranging from $7.74 to $36.88 per share. These stock options were not included in the earnings per share calculation for the three or six months ended June 30, 2001, as the impact would be antidilutive. There were no dilutive securities outstanding at June 30, 2000. 12. COMPREHENSIVE INCOME: The components of comprehensive income (loss) are as follows: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 2001 2000 2001 2000 -------- ------- -------- ------- Net income (loss)............... $(5,447) $4,483 $(3,101) $7,693 Foreign currency adjustments.... (184) 275 (419) 383 ------- ------ ------- ------ Comprehensive income (loss)..... $(5,631) $4,758 $(3,520) $8,076 ======= ====== ======= ====== 10 11 13. GEOGRAPHIC INFORMATION: SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information," establishes additional standards for segment reporting in the financial statements. Management has determined that all of the operations have similar economic characteristics and may be aggregated into a single segment for disclosure under SFAS 131. Information concerning geographic information of the Company as prescribed by SFAS 131 is provided below. THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- ---------------------- 2001 2000 2001 2000 -------- --------- --------- --------- Revenue: United States ... $ 39,538 $ 33,423 $ 81,066 $ 60,911 Europe........... 20,326 10,940 36,435 21,867 Export........... 9,542 7,912 15,780 15,650 -------- --------- --------- --------- $ 69,406 $ 52,275 $ 133,281 $ 98,428 ======== ========= ========= ========= JUNE 30, DECEMBER 31, 2001 2000 -------- ----------- Long-lived assets: Domestic........... $101,940 $ 91,478 Foreign............ 8,598 6,542 -------- -------- $110,538 $ 98,020 ======== ======== 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the Company's unaudited consolidated financial statements and related notes. OVERVIEW We provide large-scale, mission critical storage networking products, software and services -- the IN-VSN family. This includes a unique family of switches, HBA's, directors, storage over WAN and optical networking products that allow storage networks to extend beyond traditional geographic boundaries. The IN-VSN offerings, and INRANGE Global Solutions offerings of consulting and professional services, provide solutions to customers' complex business problems and storage networking applications. In August 2000, we acquired the net assets of Varcom Corporation (Varcom) and Computerm Corporation (Computerm). Varcom, at the time of acquisition, provided network management hardware, software and services. Computerm was engaged in the manufacture, sale and service of high performance channel extension products and services that allow storage networking applications to operate over wide area networks. The purchase price of Varcom was $25.0 million. The purchase price of Computerm was $30.0 million. Both acquisitions were recorded using the purchase method of accounting. To expand our professional service capabilities, we have acquired two professional services companies in 2001. In January 2001, we purchased the assets of Prevail Technology, which designs and implements high availability solutions for IT infrastructures and e-business environments. In May 2001, we acquired the assets of Onex, Incorporated. Onex, located in Indianapolis, Indiana, is a technology consulting company that designs mission critical network infrastructure and implements e-Business and enterprise resource planning solutions. The acquisitions expand the Company's capabilities to directly support storage management and Storage Area Network (SAN) planning and deployment. We have accounted for both acquisitions using the purchase method of accounting. In the second quarter 2001, the Company decided to focus on its storage networking business and announced that it will restructure its operations and exit the telecommunications business by December 31, 2001. In connection with this decision, the Company recorded restructuring and special charges that totaled $12.9 million. The charges include severance, lease abandonment costs, asset impairments and inventory write-offs, and the charges are reflected in the accompanying statements of operations. The charges for inventory write-offs ($4.9 million) are recorded as components of cost of sales; all other charges ($8.0 million) are included as special charges in the statements of operations. 12 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected operating data as a percentage of revenue: THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2001 2000 2001 2000 ------ ------ ------ ------- Revenue.................................. 100.0% 100.0% 100.0% 100.0% Gross margin............................. 37.2% 48.1% 41.9% 48.7% Research, development and engineering.... 10.1% 9.8% 11.0% 10.2% Selling, general and administrative...... 28.2% 23.7% 28.7% 24.9% Operating income (loss).................. (14.5)% 14.5% (5.6)% 13.2% Net income (loss)........................ (7.8)% 8.6% (2.3)% 7.8% Comparison of three months ended June 30, 2001 and 2000 Revenue. Revenue for the three months ended June 30, 2001 was $69.4 million, an increase of $17.1 million, or 32.8%, from $52.3 million for the three months ended June 30, 2000. Sales of our open storage networking products and services were $26.9 million, an increase of $16.2 million, or 151.4%, from $10.7 million in the three-month period ended June 30, 2000. Our open storage networking products consist primarily of fibre channel directors and optical networking equipment. The increase in total revenues was primarily driven by sales of the FC/9000 Director, other optical networking equipment and increases in service revenues offset by decreases in telecommunications and other proprietary storage products and the impact of general pricing pressures. Revenue growth attributable to the acquisitions completed in 2000 and 2001 was approximately $11.1 million. Cost of Revenue. Our cost of revenue for the three months ended June 30, 2001 was $43.6 million, which reflects a charge of $4.9 million relating to the inventory write-offs associated with the restructuring and the exit of the telecommunications business. Excluding this charge, cost of sales for the three months ended June 30, 2001 was $38.7 million, an increase of $11.6 million, or 42.8%, from $27.1 million for the three months ended June 30, 2000. As a percentage of revenue, cost of revenue increased to 55.7% (excluding special charges) for the three months ended June 30, 2001 from 51.9% for the three months ended June 30, 2000. The increase in cost as a percentage of revenue was primarily related to an increased amount of revenue from indirect channels, increased technology costs of certain open storage networking products and a change in product mix. These cost increases were partially offset by decreased service costs as a percentage of revenues due to cost containment initiatives and increased margins on professional services. Research, Development and Engineering. Research, development and engineering expenses for the three months ended June 30, 2001 were $7.0 million, an increase of $1.9 million from $5.1 million for the three months ended June 30, 2000. As a percentage of revenue, research, development and engineering expenses were 10.1% for the three months ended June 30, 2001 as compared to 9.8% for the three months ended June 30, 2000. The increase was a result of additional headcount primarily to support Fibre Channel initiatives, and other storage networking products. Including capitalized software, research development and engineering spending was $9.2 million for the three months ended June 30, 2001, or 13.2% of revenue, compared to $6.8 million, or 13.0% of revenue, for the three months ended June 30, 2000. Selling, General and Administrative. Selling, general and administrative expenses for the three months ended June 30, 2001 were $19.6 million, an increase of $7.2 million from $12.4 million for the three months ended June 30, 2000. As a percentage of revenue, selling, general and administrative expenses were 28.2% for 13 14 the three months ended June 30, 2001, compared to 23.7% for the three months ended June 30, 2000. The increase was primarily due to increased personnel to support the increased sales levels, spending related to additional product marketing initiatives and hiring additional key management. Special charges. Special charges for the three months ended June 30, 2001 were $8.0 million. The special charges were attributable to restructuring costs associated with our actions to streamline operations and improve efficiencies and exit from the telecommunications business. The charges include $2.6 million for a reduction in sales, marketing, operations and engineering headcount of approximately 77 employees in selected non-strategic product areas. The majority of the severance and other payments associated with this restructuring are expected to be completed in 2001. Other costs included in special charges were $4.8 million related to asset write-downs associated with discontinued product lines and $0.6 million associated with continuing obligations related to discontinued product lines. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles for the three month periods ended June 30, 2001 and 2000 was $1.3 million and $0.3 million, respectively. The increase was a result of goodwill and other intangibles associated with the five businesses acquired during the last twelve months. Interest (Income) Expense. Interest income for the three months ended June 30, 2001 was $1.3 million. There was no interest income for the three months ended June 30, 2000. The interest income for the three months ended June 30, 2001 was principally for interest earned from our demand note with SPX. Interest expense for the three months ended June 30, 2001 was $0.2 million, compared to $0.1 million for the three months ended June 30, 2000. The interest expense for the three months ended June 30, 2001 was principally interest accrued on our notes to sellers related to business acquisitions in 2000. Income Taxes. Our effective tax rate for the three months ended June 30, 2001 and 2000 was 40%. Comparison of six months ended June 30, 2001 and 2000 Revenue. Revenue for the six months ended June 30, 2001 was $133.3 million, an increase of $34.9 million, or 35.5%, from $98.4 million for the six months ended June 30, 2000. Sales of our open storage networking products and services were $48.0 million, an increase of $31.0 million, or 182.4%, from $17.0 million in the six-month period ended June 30, 2000. Our open storage networking products consist primarily of fibre channel directors and optical networking equipment. The increase in total revenue was primarily driven by sales of the FC/9000 Director, other optical networking equipment and increases of service revenues offset by decreases in telecommunications and other proprietary storage products and the impact of general pricing pressures. Revenue growth attributable to the acquisitions completed in 2000 and 2001 was approximately $20.6 million. Cost of Revenue. Our cost of revenue for the six months ended June 30, 2001 was $77.5 million, which reflects a charge of $4.9 million relating to the inventory write-offs associated with the restructuring and the exit of the telecommunications business. Excluding this charge, cost of sales for the six months ended June 30, 2001 was $72.6 million, an increase of $22.1 million, or 43.8%, from $50.5 million for the six months ended June 30, 2000. As a percentage of revenue, cost of revenue increased to 54.5% (excluding special charges) for 14 15 the six months ended June 30, 2001 from 51.3% for the six months ended June 30, 2000. The increase in cost as a percentage of revenue was primarily related to an increased amount of revenue from indirect channels, increased technology costs of certain open storage networking products and a change in product mix. These cost increases were partially offset by decreased service costs as a percentage of revenues due to cost containment initiatives and increased margins on professional services. Research, Development and Engineering. Research, development and engineering expenses for the six months ended June 30, 2001 were $14.6 million, an increase of $4.5 million from $10.1 million for the six months ended June 30, 2000. As a percentage of revenue, research, development and engineering expenses were 11.0% for the six months ended June 30, 2001 as compared to 10.2% for the six months ended June 30, 2000. The increase was a result of additional headcount primarily to support Fibre Channel initiatives, and other storage networking products. Including capitalized software, research development and engineering spending was $18.9 million for the six months ended June 30, 2001, or 14.2% of revenue, compared to $13.0 million, or 13.2% of revenue, for the six months ended June 30, 2000. Selling, General and Administrative. Selling, general and administrative expenses for the six months ended June 30, 2001 were $38.3 million, an increase of $13.8 million from $24.5 million for the six months ended June 30, 2000. As a percentage of revenue, selling, general and administrative expenses were 28.7% for the six months ended June 30, 2001, compared to 24.9% for the six months ended June 30, 2000. The increase was primarily due to increased personnel to support the increased sales levels for the FC/9000, spending related to additional product marketing initiatives and hiring additional key management. Special charges. Special charges for the six months ended June 30, 2001 were $8.0 million. The special charges were attributable to restructuring costs associated with our actions to streamline operations and improve efficiencies and the exit from the telecommunications business. The charges include $2.6 million for a reduction in sales, marketing, operations and engineering headcount of approximately 77 employees in selected non-strategic product areas. The majority of the severance and other payments associated with this restructuring are expected to be completed in 2001. Other costs included in special charges were $4.8 million related to asset write-downs associated with discontinued product lines and $0.6 million associated with continuing obligations related to discontinued product lines. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles for the six-month periods ended June 30, 2001 and 2000 was $2.3 million and $0.5 million, respectively. The increase was a result of goodwill and other intangibles associated with the five businesses acquired during the last twelve months. Interest Income. Interest income for the six months ended June 30, 2001 was $2.8 million. There was no interest income for the six months ended June 30, 2000. The interest income for the six months ended June 30, 2001 was principally for interest earned from our demand note with SPX. Interest expense for the six months ended June 30, 2001 was $0.4 million, compared to $0.3 million for the six months ended June 30, 2000. The interest expense for the six months ended June 30, 2001 was principally interest accrued on our notes to sellers related to business acquisitions in 2000. Income Taxes. Our effective tax rate for the six months ended June 30, 2001 and 2000 was 40%. 15 16 LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities was $16.5 million for the six months ended June 30, 2001. During this period, cash flow from operations was principally generated from a decrease in accounts receivable and inventories and an increase in accounts payable, offset by a decrease in accrued expenses related to year-end compensation, commission and benefit payments. Cash flow used for investing activities was $18.6 million for the six months ended June 30, 2001. Of that amount, $14.5 million related to the cash paid to acquire businesses and the remainder was used to purchase property and equipment, software and other assets. Amounts utilized for investing activities were offset by the reduction in the demand note from SPX. 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 to lend, on a daily basis, all of our cash and cash equivalents in excess of $15 million to SPX until the termination of the loan agreement. The loan agreement will terminate when SPX owns less than 50% of our outstanding shares of Class A common stock and Class B common stock, or if there is an event of default under SPX's credit agreement. Amounts loaned under the loan agreement are unsecured. Interest accrues quarterly at the weighted average rate of interest paid by SPX for revolving loans under its credit agreement for the prior quarter. For the quarter and six months ended June 30, 2001, the weighted average interest rate was 8.48%. 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. For the six months ended June 30, 2001, net cash used by financing activities was $1.9 million, consisting primarily of net cash outflows related to our payment of the seller note for the working capital adjustment associated with the acquisition of Computerm. In March 2001, we entered into a memorandum of understanding with a third party for certain technology, licenses and product development activities. In connection with this agreement we have committed to minimum royalties, licensing and product development costs of up to $20.0 million contingent upon the achievement of certain milestones in 2001. We believe that the demand note from SPX, 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 financings or from other sources. Our ability to issue equity may be limited by SPX's desire to preserve its ability in the future to effect a tax-free spin-off and by limitations under SPX's credit agreement. In addition, our ability to borrow money may be limited by restrictions under SPX's credit agreement. Additional financing may not be available, or, if it is available, it may be dilutive or may not be obtainable on terms acceptable to us. 16 17 RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"). These pronouncements change the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. The requirement of SFAS 141 is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS 142 states that goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed for impairment annually (or more frequently if impairment indicators arise). The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 20, 3001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt the pronouncement in their fiscal year beginning after December 15, 2001. We are currently evaluating the provisions of SFAS 141 and SFAS 142 and the impact that adoption will have on our financial position and results of operations. All of our other purchased intangible assets have been separately identified and recognized in our balance sheet. These intangibles are being amortized over their estimated useful lives or contractual lives as appropriate. Based on historical purchase price allocations or preliminary allocations for business combinations completed prior to June 30, 2001, we estimate that the cessation of goodwill amortization will increase our operating income by approximately $3.5 million on an annualized basis when the accounting pronouncements are adopted by the Company. -------------------- Certain portions of this report, including the foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the "Notes to Unaudited Consolidated Financial Statements", contain forward looking statements, within the meaning of Section 21E of the Securities exchange Act of 1934, as amended, that are subject to the safe harbor created thereby. These forward looking statements, which reflect management's current views with respect to future events and financial performance, are subject to certain risks and uncertainties, including but not limited to those matters discussed above. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward looking statements, which speak only as of the date hereof. Reference is made to the Company's Form 10-K for the year ended December 31, 2000 for additional cautionary statements and discussion of certain important factors as they relate to forward looking statements. In addition, management's estimates of future operating results are based on the current business, which is constantly subject to change as management implements its strategy. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We utilize a cash management program administered by SPX and have demand notes receivable from SPX. Interest accrues quarterly at the weighted average rate of interest paid by SPX for revolving loans under its credit agreement for the prior quarter. The interest rate at June 30, 2001 was 8.48%. The loan to SPX is unsecured, and SPX's ability to repay the amount due will be subject to its financial condition and liquidity, including its ability to borrow under its credit agreement or otherwise. The loan balance at June 30, 2001 was $49.1 million and a one percentage point decrease in the interest rate would result in approximately $0.5 million less interest income on an annual basis, assuming the loan balance did not change. We are exposed to foreign currency fluctuation relating to our foreign subsidiaries. We do not maintain any derivative financial instruments or hedges to mitigate this fluctuation. 18 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. We are not a party to any pending legal proceedings that we believe will materially impact the Company's financial condition, liquidity or results of operations, other than as follows: We recently filed a breach of contract lawsuit against a customer following that customer's refusal to pay us for approximately $5 million of equipment. It is too early in the proceeding to express an opinion concerning the ultimate outcome, but we believe that the amount is collectible. 19 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We held our Annual Meeting of Shareholders on April 20, 2001 at which shareholders elected three directors to three-year terms expiring in 2004 and ratified the appointment of Arthur Andersen LLP as our independent public accountants. The results of the voting in connection with the above items were as follows: For Withheld/Against --- ---------------- Proposal 1 - Election of Directors David L. Chapman 381,932,218 74,072 Robert B. Foreman 381,604,636 401,654 Christopher J. Kearney 381,907,393 98,897 For Against Abstain --- ------- ------- Proposal 2 - Ratification of appointment of accountants 381,995,895 8,500 1,895 20 21 Item 6. Exhibits and Reports on Form 8-K (a) EXHIBITS: *3.2 - Amended and Restated By-Laws of Inrange Technologies Corporation (Exhibit 3.2 to the Form S-1 Registration Statement (No. 333-38592)). *3.3 - Amended and Restated Certificate of Incorporation of Inrange Technologies Corporation (Exhibit 3.2 to the Form S-1 Registration Statement (No. 333-38592)). *4.1 - Form of Inrange Technologies Corporation Class B common stock certificate (Exhibit 3.2 to the Form S-1 Registration Statement (No. 333-38592)). *10.1 - Tax Sharing Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.1 to the Form S-1 Registration Statement (No. 333-38592)). *10.2 - Management Services Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.2 to the Form S-1 Registration Statement (No. 333-38592)). *10.3 - Registration Rights Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.3 to the Form S-1 Registration Statement (No. 333-38592)). *10.4 - Trademark License Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.4 to the Form S-1 Registration Statement (No. 333-38592)). *10.5 - Reseller Agreement, dated October 29, 2000, between Inrange Technologies Corporation and Ancor Communications, Inc. (Exhibit 10.5 to the Form S-1 Registration Statement (No. 333-38592)). ++ *10.6 - Technology License Agreement, dated September 24, 1998, between Inrange Technologies Corporation and Ancor Communications Inc. (Exhibit 10.6 to the Form S-1 Registration Statement (No. 333-38592)). ++ 21 22 *10.7 - Letter Agreement, dated November 23, 2000 between Inrange Technologies Corporation and Ancor Communications Inc. (Exhibit 10.7 to the Form S-1 Registration Statement (No. 333-38592)). ++ *10.8 - Loan Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.9 to the Form S-1 Registration Statement (No. 333-38592)). *10.9 - Employee Matters Agreement between Inrange Technologies Corporation and SPX Corporation (Exhibit 10.10 to the Form S-1 Registration Statement (No. 333-38592)). *10.10 - Inrange Technologies Corporation 2000 Stock Compensation Plan (Exhibit 10.8 to the Form S-1 Registration Statement (No. 333-38592)). *10.11 - Inrange Technologies Corporation Employee Stock Purchase Plan (Exhibit 4.3 to the Company's Form S-8 Registration Statement (No. 333-46402)). *10.12 - Inrange Technologies Corporation Executive EVA Incentive Compensation Plan (Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 (File No. 000-31517)). *10.13 - Amendment to Inrange Technologies Corporation Executive EVA Incentive Compensation Plan - (Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 (File No. 000-31517)). *10.14 - Memorandum of Understanding dated March 16, 2001 between Inrange Technologies Corporation and QLogic Corporation (Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2001 (File No. 000-31517)).+ * Incorporated by reference, as indicated. + Portions of this exhibit have been omitted pending the Commission's review of a request for confidential treatment. ++ Portions of these exhibits have been omitted pursuant to the Commission's grant of a request for confidential treatment (b) REPORTS ON FORM 8-K Not applicable. 22 23 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INRANGE TECHNOLOGIES CORPORATION Date: August 14, 2001 By: /s/ Jay Zager ----------------------------------- Jay Zager, Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 23