-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCEm/n2rhjCZH/CuGAte6DEq5JI1LSvicGOwLI/wlyzhiN8QomEhonn6Ka2yK3AR PBz9AYbNq+l7A6PjfWtjdA== 0000950137-01-501546.txt : 20010516 0000950137-01-501546.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950137-01-501546 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INRANGE TECHNOLOGIES CORP CENTRAL INDEX KEY: 0001114674 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 060962862 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-31517 FILM NUMBER: 1635338 BUSINESS ADDRESS: STREET 1: 13000 MIDLANTIC DR CITY: LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 8562347900 10-Q 1 c62517e10-q.txt QUARTERLY REPORT 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 March 31, 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 May 9, 2001-84,488,333 1 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 March 31, 2001 and December 31, 2000 3 Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2000 4 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 5. Other Information 17 SIGNATURES 19
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)
MARCH 31, DECEMBER 31, 2001 2000 -------- ------------ ASSETS CURRENT ASSETS: Cash and equivalents ....................................................... $ 22,809 $ 22,646 Demand note from SPX ....................................................... 52,341 60,956 Accounts receivable, net ................................................... 73,069 79,988 Inventories ................................................................ 30,855 29,271 Prepaid expenses and other ................................................. 5,171 5,209 Deferred income taxes ...................................................... 4,968 4,968 -------- -------- Total current assets ............................................... 189,213 203,038 PROPERTY, PLANT AND EQUIPMENT, net ........................................... 17,577 16,103 GOODWILL AND OTHER INTANGIBLES, net .......................................... 45,672 44,629 OTHER ASSETS, net ............................................................ 40,499 37,288 -------- -------- Total assets ....................................................... $292,961 $301,058 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings and current portion of long-term debt................. $ 2,894 $ 4,438 Accounts payable ........................................................... 24,129 23,541 Accrued expenses ........................................................... 19,631 29,401 Deferred revenue ........................................................... 11,409 10,923 -------- -------- Total current liabilities .......................................... 58,063 68,303 -------- -------- LONG-TERM DEBT ............................................................... 1,315 1,283 -------- -------- DEFERRED INCOME TAXES ........................................................ 918 918 -------- -------- COMMITMENTS AND CONTINGENCIES 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 .......................................................... 79,969 95,155 Accumulated other comprehensive income ..................................... 373 608 -------- -------- Total stockholders' equity ......................................... 232,665 230,554 -------- -------- Total liabilities and stockholders' equity ..................... $292,961 $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 MARCH 31, -------------------------------- 2001 2000 ------------ ------------ REVENUE: Product revenue ...................... $ 51,532 $ 37,697 Service revenue ...................... 12,343 8,456 ------------ ------------ Total revenue ................ 63,875 46,153 ------------ ------------ COST OF REVENUE: Cost of product revenue .............. 25,675 18,306 Cost of service revenue .............. 8,231 5,047 ------------ ------------ Total cost of revenue ........ 33,906 23,353 ------------ ------------ Gross margin .............. 29,969 22,800 ------------ ------------ OPERATING EXPENSES: Research, development and engineering ....................... 7,584 4,963 Selling, general and administrative .. 18,743 12,137 Amortization of goodwill and other intangibles........................ 1,041 267 ------------ ------------ Operating expenses ........... 27,368 17,367 ------------ ------------ OPERATING INCOME ....................... 2,601 5,433 INTEREST (INCOME) EXPENSE .............. (1,273) 177 OTHER INCOME ........................... (41) (94) ------------ ------------ Income before income taxes ........ 3,915 5,350 INCOME TAXES ........................... 1,569 2,140 ------------ ------------ NET INCOME ............................. $ 2,346 $ 3,210 ============ ============ EARNINGS PER SHARE: Basic and diluted ..................... $ 0.03 $ 0.04 ============ ============ Shares used in computing basic and diluted earnings per share......... 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)
THREE MONTHS ENDED MARCH 31, ------------------------ 2001 2000 -------- -------- CASH FLOW FROM OPERATING ACTIVITIES: Net income ..................................................... $ 2,346 $ 3,210 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................. 1,632 1,449 Amortization of goodwill and other intangibles................ 1,041 267 Amortization of other assets ................................. 2,144 1,355 Accretion of debt on seller notes ............................ 103 -- Loss on disposal of equipment ................................ 23 -- Changes in operating assets and liabilities: Accounts receivable .......................................... 7,636 3,464 Inventories .................................................. (1,584) (1,449) Prepaid expenses and other current assets .................... 100 (99) Accounts payable ............................................. 818 (2,362) Accrued expenses ............................................. (9,970) (1,011) Deferred revenue ............................................. 486 1,239 Payments of special charges and disposition related accruals............................................ (230) (561) -------- -------- Net cash provided by operating activities ............... 4,545 5,502 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net................. (2,926) (1,451) Cash paid for business acquired, net of cash acquired .......... (2,975) -- Decrease in demand note from SPX Corporation ................... 8,615 -- Capitalized software costs ..................................... (2,170) (1,322) Increase in demonstration equipment and other assets ........... (3,076) (561) Purchase of investment ......................................... -- (3,000) -------- -------- Net cash used in investing activities ....................... (2,532) (6,334) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Net payments under lines of credit ............................. -- (515) Payments on long-term debt ..................................... (1,615) (33) Proceeds from SPX Corporation .................................. -- 1,960 -------- -------- Net cash provided by (used in) financing activities ........ (1,615) 1,412 -------- -------- EFFECT OF FOREIGN CURRENCY TRANSLATION ........................... (235) 108 -------- -------- NET INCREASE IN CASH AND EQUIVALENTS ............................. 163 688 CASH AND EQUIVALENTS AT BEGINNING OF PERIOD ...................... 22,646 1,023 -------- -------- CASH AND EQUIVALENTS AT END OF PERIOD ............................ $ 22,809 $ 1,711 ======== ========
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) designs, manufactures, markets and services networking and switching solutions for storage, data and telecommunications networks. The solutions are targeted for use in large-scale systems that are critical to a business' operations to provide fast and reliable connections among networks of computers and related devices for large scale enterprise applications. The consolidated financial statements include the assets, liabilities, revenue and expenses of Inrange, which is a majority-owned subsidiary of SPX Corporation (SPX), and the assets, liabilities, revenue and expenses of certain other units comprising the storage networking, data communications and telecommunications networking business of SPX, and exclude two of the subsidiaries of Inrange not involved in the business (combined, the Company). The net assets of the other units were transferred to the Company in June 1999 (Tautron) and June 2000 (division of General Signal Limited). The net assets of the two excluded subsidiaries were transferred out of the Company in June 1999 and May 2000. Accordingly, the accompanying financial statements are now presented on a consolidated versus a combined basis. 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). SPX uses a centralized cash management system for all of its domestic operations, including those of the Company. The net amount of daily cash transactions is transferred to SPX and other intercompany transactions between SPX and the Company through the initial public offering were recorded as a component of equity of the Company. Thereafter, these transactions are reflected as an increase or decrease in the demand note due from SPX (see Note 4). 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. 6 7 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 customer base. The Company performs ongoing credit evaluations of its customers' financial condition and maintains reserves for potential bad debt losses. No single customer in the periods presented represented greater than 10% of total revenue. 3. ACQUISITIONS: 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 acquisition was 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 acquisition date. The excess of the purchase price over the net assets acquired has been assigned to goodwill and other intangibles and is being amortized over the estimated useful lives. 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. On May 7, 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. 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 and $25 for the three months ended March 31, 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 of the Company are charged to the Company. The direct costs were $1,774 and $1,418 for the three months ended March 31, 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 March 31, 2001, the demand note from SPX was $52,341. The demand note bears interest at the average rate of the SPX credit facilities and is recorded on a monthly basis as interest income. The accompanying statements of operations for the three months ended March 31, 2001 includes interest income of $1,296 relating to interest income from the demand note from SPX. 7 8 5. INVENTORIES: MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Raw materials............... $10,600 $14,743 Work-in-process............. 2,224 1,984 Finished goods.............. 18,031 12,544 ------- ------- Net inventories........... $30,855 $29,271 ======= ======= 6. OTHER ASSETS: MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Capitalized software........ $18,558 $17,218 Demonstration equipment..... 21,840 18,412 Product rights.............. 9,257 9,053 Investment.................. 3,250 3,250 Other....................... 641 539 ------- ------- Total other assets...... 53,546 48,472 Accumulated amortization -- Capitalized software...... (5,118) (5,045) Demonstration equipment... (7,057) (5,592) Product rights............ (872) (547) -------- -------- Net other assets... $40,499 $37,288 ======= ======= The Company capitalized $2,170 and $1,322 in the three months ended March 31, 2001 and 2000, respectively, of software development costs. Amortization expense was $903 and $668 in the three months ended March 31, 2001 and 2000, respectively. 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. 7. DEBT: Short-term borrowings and long-term debt consist of the following: MARCH 31, DECEMBER 31, 2001 2000 -------- ------------ Seller notes, net of unamortized discount of $291 and $394, respectively................. $ 4,209 $ 4,106 Seller note for working capital adjustment..... -- 1,615 -------- -------- 4,209 5,721 Less -- Current portion of long-term debt...... (2,894) (4,438) -------- -------- Long term debt................................. $ 1,315 $ 1,283 ======== ======== In connection with two acquisitions made in August 2000, of Computerm Corporation and Varcom Corporation, 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 $103 for the three months ended March 31, 2001. Foreign subsidiaries have separate lines of credit with European banks in their local currency with a U.S. value of approximately $5,200. There were no borrowings on the lines of credit as of March 31, 2001 or 2000. The weighted average interest rate on borrowings under the foreign lines of credit was 5.93% for the three months ended March 31, 2000. There were no borrowings during the three months ended March 31, 2001. The lines of credit are guaranteed by SPX. 8 9 8. COMMITMENTS: In March 2001, the Company entered into a memorandum of understanding with a third party for certain technology, licenses and product development activities. In connection with this agreement the Company has committed to minimum royalties, licensing and product development charges of up to $20,000 contingent upon the achievement of certain milestones in 2001. 9. 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 2000-23, 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. 10. 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. At March 31, 2001, there were 8,518,700 options outstanding to purchase Class B common stock at prices ranging from $11.50 to $36.875 per share. These stock options were not included in the earnings per share calculation for the three months ended March 31, 2001, as the impact would be antidilutive. There were no dilutive securities outstanding at March 31, 2000. 11. COMPREHENSIVE INCOME: The components of comprehensive income are as follows: THREE MONTHS ENDED MARCH 31, -------- 2001 2000 ---- ---- Net income......................... $2,346 $3,210 Foreign currency adjustments....... (235) 108 ------ ------ Comprehensive income............... $2,111 $3,318 ====== ====== 9 10 12. 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 MARCH 31, --------------------- 2001 2000 --------- --------- Revenue: Domestic........ $ 42,269 $ 27,488 Foreign......... 16,086 10,927 Export.......... 5,520 7,738 --------- --------- $ 63,875 $ 46,153 ========= ========= MARCH 31, DECEMBER 31, 2001 2000 --------- ----------- Long-lived assets: Domestic........ $ 96,903 $ 91,478 Foreign......... 6,845 6,542 --------- --------- $ 103,748 $ 98,020 ========= ========= 10 11 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 design, manufacture, market and service switching and networking solutions for storage, data and telecommunications networks. Our products provide fast and reliable connections among networks of computers and related devices and are used in large-scale, systems that are critical to the operations of Fortune 1000 businesses and other large enterprises. In August 2000, we acquired the net assets of Varcom Corporation(Varcom) and Computerm Corporation(Computerm). Varcom is located in Fairfax, Virginia and provides network management hardware, software and services. Computerm is located in Pittsburgh, Pennsylvania and offers high performance channel extension products and services that allow storage networking application 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. On January 10, 2001, we acquired Prevail Technology. Prevail is a professional services company with expertise in designing and implementing high availability solutions for IT infrastructures and e-business environments. The acquisition expands the Company's capabilities to directly support storage management and Storage Area Network (SAN) planning and deployment. We have accounted for the acquisition using the purchase method of accounting. On May 7, 2001, we acquired the assets 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. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected operating data as a percentage of revenue: THREE MONTHS ENDED MARCH 31, ----------------- 2001 2000 ------ ------ Revenue................................... 100.0% 100.0% Gross margin.............................. 46.9% 49.4% Research, development and engineering..... 11.9% 10.8% Selling, general and administrative....... 29.3% 26.3% Operating income.......................... 4.1% 11.8% Net income................................ 3.7% 7.0% Comparison of three months ended March 31, 2001 and 2000 Revenue. Revenue for the three months ended March 31, 2001 was $63.9 million, an increase of $17.7 million, or 38.4%, from $46.2 million for the three months ended March 31, 2000. Sales of our open storage 11 12 networking products and services were $21.1 million, an increase of $14.8 million, or 235%, from $6.3 million in the three-month period ended March 31, 2000. Our open storage networking products consist of fibre channel directors and optical networking equipment. The increase was primarily driven by sales of the FC/9000 Director, which was released for general availability during the third quarter of 2000. The remaining increase in revenue was primarily service revenue attributable to the acquisitions of Computerm and Varcom in 2000 and the acquisition of Prevail in 2001. Cost of Revenue. Our cost of revenue for the three months ended March 31, 2001 was $33.9 million, an increase of $10.5 million, or 45.1%, from $23.4 million for the three months ended March 31, 2000. As a percentage of revenue, cost of revenue increased to 53.1% for the three months ended March 31, 2001 from 50.6% for the three months ended March 31, 2000. The increase in cost of revenue was related to increased sales, higher services costs and a change in mix of products. The increase in service cost of $3.2 million was a result of increased service headcount and other related expenses to support the introduction of the FC/9000 and from the acquisitions of Computerm, Varcom and Prevail. Research, Development and Engineering. Research, development and engineering expenses for the three months ended March 31, 2001 were $7.6 million, an increase of $2.6 million from $5.0 million for the three months ended March 31, 2000. As a percentage of revenue, research, development and engineering expenses were 11.9% for the three months ended March 31, 2001 as compared to 10.8% for the three months ended March 31, 2000. The increase was a result of additional headcount primarily to support Fibre Channel initiatives, and other storage networking products, as well as new datacom and telecom programs. The additional headcount for the data networking and telecom networking programs was principally from the acquisitions completed in the second half of 2000. Including capitalized software, research development and engineering spending was $9.8 million for the three months ended March 31, 2001, or 15.3% of revenue, compared to $6.3 million, or 13.7% of revenue, for the three months ended March 31, 2000. Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2001 were $18.8 million, an increase of $6.6 million from $12.1 million for the three months ended March 31, 2000. As a percentage of revenue, selling, general and administrative expenses were 29.3% for the three months ended March 31, 2001, compared to 26.3% for the three months ended March 31, 2000. The increase was primarily due to increased personnel to support the expected sales levels for the FC/9000, spending related to additional marketing and e-commerce initiatives and hiring additional key management. Amortization of Goodwill and Other Intangibles. Amortization of goodwill and other intangibles for the three-month periods ended March 31, 2001 and 2000 was $1.0 million and $0.3 million, respectively. The increase was a result of goodwill and other intangibles associated with the businesses acquired during the last nine months. Interest (Income) Expense. Interest income for the three months ended March 31, 2001 was $1.5 million. There was no interest income for the three months ended March 31, 2000. The interest income for the three months ended March 31, 2001 was principally for interest earned from our demand note with SPX. Interest expense for the three months ended March 31, 2001 was $0.2 million, compared to $0.2 million for the three months ended March 31, 2000. The interest expense for the three months ended March 31, 2001 was principally interest accrued on seller notes related to business acquisitions in 2000. 12 13 Income Taxes. Our effective tax rate for the three months ended March 31, 2001 and 2000 was 40%. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities was $4.5 million for the three months ended March 31, 2001. During this period, cash flow from operations was principally generated from net income and a decrease in accounts receivable, offset by a decrease in accrued expenses related to year end compensation, commission and benefit payments, and an increase in inventories. Cash flow used for investing activities was $2.5 million for the three months ended March 31, 2001. Of that amount, $3.0 million related to the cash paid to acquire a business and the remainder was used for additions of property and equipment, capitalized 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 be obligated 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 ended March 31, 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 three months ended March 31, 2001, net cash used by financing activities was $1.6 million, consisting of net cash outflows related to the 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 charges 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 13 14 available, it may be dilutive or may not be obtainable on terms acceptable to us. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which became effective January 2001, establishes accounting and reporting standards for derivative instruments and hedging contracts. It also requires that all derivatives be recognized as either assets or liabilities in the balance sheet at fair value and changes in fair value be recognized in operating results. The adoption of this statement had no effect on results of operations and financial position as the Company does not have any derivatives. ---------------- The foregoing discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains 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. 14 15 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 March 31, 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 March 31, 2001 was $52.3 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. 15 16 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. 16 17 ITEM 5. OTHER INFORMATION (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)). ++ 17 18 *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 (No. 000-31517). 10.13 - Amendment to Inrange Technologies Corporation Executive EVA Incentive Compensation Plan. 10.14 - Memorandum of Understanding dated March 16, 2001 between Inrange Technologies Corporation and QLogic Corporation.+ * 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. 18 19 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: May 14, 2001 By: /s/ Jay Zager -------------- Jay Zager Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) 19 EX-10.13 2 c62517ex10-13.txt AMENDMENT TO INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.13 AMENDMENT TO THE INRANGE TECHNOLOGIES CORPORATION EXECUTIVE EVA INCENTIVE COMPENSATION PLAN Pursuant to Paragraph 14 of Section V of the Inrange Technologies Corporation Executive EVA Incentive Compensation Plan (the "Plan"), Inrange Technologies Corporation hereby amends the Plan in the following manner: 1. Effective May 1, 2001, Paragraph 6 of Section V is amended by the addition of the following at the end thereof: "In order to receive any amounts provided under this Paragraph 6, a participant must execute a valid release and any other documents the Company may require. The Company may, in its sole discretion, waive the application of the preceding sentence with respect to all or any portion of any amount and with respect to any participant." IN WITNESS WHEREOF, this amendment was executed by the undersigned as of the date shown below. INRANGE TECHNOLOGIES CORPORATION Date: May 1, 2001 /s/ Kenneth H. Koch ----------------------------- By: Kenneth H. Koch -------------------------- Its: Vice President ------------------------ EX-10.14 3 c62517ex10-14.txt MEMORANDUM OF UNDERSTANDING 1 EXHIBIT 10.14 MEMORANDUM OF UNDERSTANDING This Memorandum of Understanding is entered into this 16 March 2001 (the "Effective Date"), between QLogic Corporation, with its principal place of business at 26600 Laguna Hills Drive, Aliso Viejo, California 92656 ("QLogic") and Inrange Technologies Corporation, with its principal place of business at 100 Mt. Holly By-Pass, Lumberton, NJ 08048 ("Inrange"). RECITALS A. QLogic has technical and business expertise in the area of fibre channel ASIC development (collectively referred to as "F/C ASIC"), the development of fibre channel input/output and switching modules and associated firmware and in the marketing and support of products to the OEM channel and to its other channel partners. B. Inrange has technical and business expertise in the development of "director" class switch systems, including power, packaging, back-plane, management software and associated firmware, the "RAS" functionality (reliability, availability and serviceability) required of "director" class products, and in the marketing and support of products to networking equipment resellers, IT systems integrators and end-users. C. The parties, for their mutual benefit, will work with each other to design, manufacture, sell and service fibre channel directors generally in accordance with the following terms: I. CERTAIN DEFINITIONS 1. "Fibre Channel Director" means a fibre channel switch system designed with the RAS functionality required of "director" class products, and that contains firmware, software, a graphical user interface management system, and various hardware components. 2. "Director" means a 1Gb or 2Gb Inrange FC/9000 Fibre Channel Director. 3. "Components" means the various hardware components that make up the 1Gb or 2Gb Director, excluding the QLogic F/C ASICs. "Components" in the 1Gb Director include the FCM, FIO and FSW/FWI printed circuit boards ("blades"), power supplies, chassis, cabinet, back-plane, GBICs and other components. "Components" in the 2Gb Director include S-16 Blades, or as applicable, the FWI blade, power supplies, chassis, cabinet, back-plane, GBICs and other components. 4. "FCM blade" means a printed circuit board in a Director that functions principally to control the operation of the Director and allow an operator to monitor and manage the operation of the Director. -1- 2 5. "FIO blade" means a printed circuit board in a Director that functions principally to receive and transmit fibre channel frames. 6. "FSW blade" means a printed circuit board in a Director that functions principally to switch fibre channel frames. 7. "FWI blade" means an [ ]* blade for use initially in [ ]* Directors 8. "S-4 Chip" means QLogic's proprietary 1Gb F/C ASIC. 9. "S-16 Chip " means QLogic's proprietary 2Gb F/C ASIC. 10. "Fibre Channel Port Adapter" or "FCPA" means Inrange's 4 port Ficon/FC port adapter card containing one or more S-4 Chips. 11. "S-4 Blade" means any FIO, FSW or FCPA blade that incorporates one or more S-4 Chips. 12. "S-16 Blade" means any FIO or FSW blade that incorporates one or more S-16 Chips. 13. "1Gb Director" means a Director that uses one or more of S-4 Blades. 14. "2Gb Director" means the next generation Director that will use one or more of QLogic's S-16 Blades and will be designed and built as set forth below. 15. "Products" means Directors, Components and other products, designated by the parties from time to time, that are designed, manufactured, distributed and sold pursuant to the parties' collaborative efforts. 16. "OEM" means the entities (to be identified by QLogic) that purchase the Products for resale under the OEM's name. The term "OEM" does not include [ ]*. 17. "OEM Directors" means any Director purchased by QLogic from Inrange for resale to an OEM. 18. "EOL" means a Product's end-of-life program. - ------------------------- * Omitted pursuant to an application for confidential treatment. -2- 3 II. 1GB DIRECTOR A. Manufacturing; Pricing and Other Terms 19. The 1Gb Director will be manufactured by Inrange, or a contract manufacturer chosen by Inrange and reasonably acceptable to QLogic. 20. QLogic (or QLogic's approved distributors) will supply Inrange's requirements for S-4 Chips through the EOL for the 1Gb Director, and as necessary thereafter to enable Inrange to provide service or spares to its customers. 21. Inrange will purchase its requirements of S-4 Chips from QLogic or QLogic's authorized distributors. The price to Inrange for S-4 Chips will not exceed the price currently charged Inrange by its S-4 Chip supplier, LSI, or the price charged to other QLogic customers purchasing S-4 Chips to its other customers purchasing the Components in substantially the same volumes and under similar terms of purchase. If QLogic's price to Inrange for the S-4 Chips, at any time, exceeds the current price charged Inrange by LSI, Inrange will have the option, at its sole discretion to continue to purchase the S-4 Chips from QLogic, or to purchase the S-4 Chips from LSI, or LSI's authorized distributors. 22. QLogic will not be restricted from selling the S-4 Chips to any other customer. 23. QLogic will purchase the 1GB Director from Inrange at mutually agreed pricing and terms. QLogic will re-sell the 1GB Director only to its OEM customers. QLogic will refer to Inrange all other customers for the 1Gb Director. B. Intellectual Property Rights 24. The IP rights and licenses of the parties, with respect to the 1Gb Director, the 1Gb Components and the S-4 Chip, and the extended credit and addressing facility "XCAF" will be as set forth in the attached Appendix A. 25. Inrange will have a non-exclusive, non-transferable, license to use the S-4 Chip, in the 1Gb Director in accordance with this Agreement; the license will extend after termination or expiration of this Agreement as the parties may agree to enable Inrange to provide service or spares to its customers. 26. The parties agree to terminate the existing source code escrow agreements and execute new escrow agreements containing mutually agreed terms. -3- 4 C. Royalties (i) Royalty and Product Development Payments for 1Gb Director in 2001 27. Inrange will pay royalties to QLogic on all Sales by Inrange of S-4 Blades (other than Sales to [ ]*). The term "Sales" means any revenue bearing transfer by Inrange of the S-4 Blades, either separately or incorporated into a Product, other than through a sale to [ ]*. 28. [ ]*. 29. Royalties will accrue on the date of the Sale by Inrange. 30. The royalty rates for the S-4 Blades are as follows; [ ----------- ----------- ----------- ----------- ----------- ----------- ]* 31. The royalty due to QLogic[ ]* is computed on a calendar quarter basis ("Quarter") per the following formula: [(i) (ii) (iii) ]* 32. In addition to royalties, Inrange will pay QLogic a quarterly Product Development Charge ("P/D Charge") based on QLogic's achievement of the quarterly milestones ("Deliverables") as set forth below. QLogic will use its best commercial efforts to complete the Deliverables as set forth below, in accordance with the schedule set forth in the applicable FRD, and the P/D Charges will not be earned or payable unless and until the Deliverables are met. The Deliverables commence January 2001, and the first P/D Charge payment in connection therewith accrues at the end of 1Q/2001. - ------------------------- * Omitted pursuant to an application for confidential treatment. -4- 5 P/D Payment Quarter Deliverables ($000's) ------- ------------ ----------- [ --------- ]* 33. QLogic will design and deliver the [ ]* Deliverables described above in accordance with mutually-agreed specifications as set forth in the Functional Requirements Document ("FRD") applicable to the development of this Firmware attached and incorporated by reference as Appendix B. QLogic will own all of the Deliverables described in paragraph 32. Inrange will have a perpetual, world-wide, non-exclusive, non-transferable, fully paid-up, royalty free right and license to these Deliverables for use on the Boards and Inrange Products as defined in Appendix A. 34. Inrange will pay QLogic each Quarter, commencing at the end of Q1/2001, the greater of the Actual Payment for the Quarter and the applicable Minimum Quarterly Payment. (i) "Actual Payment" in any Quarter means the Actual Royalty together with the applicable P/D Charge. (ii) "Minimum Quarterly Payment" in any Quarter means the Minimum Quarterly Royalty together with the applicable P/D Charge as follows: - ------------------------- * Omitted pursuant to an application for confidential treatment. -5- 6 [ -------- -------- -------- -------- ---------- ]* 35. Pursuant to section 3.2 of the Technology License Agreement Inrange and Ancor Communications, Inc. on 24 September 1998 (the "TLA"), Inrange pre-paid certain royalties, and in exchange therefore received a discount to be applied against future royalties [ ]*. The parties agree to cancel any remaining unused portion of this discount. (ii) Royalty and Product Development Payments for 1Gb Director beyond 2001 36. The minimum payment payable from Inrange to QLogic in 2002 (the "2002 Minimum Payment") is [ ]*. The 2002 Minimum Payment will be achieved through a combination of (a) 1Gb Royalty and Product Development payments, using a methodology similar to that employed in 2001 to achieve the 2001 Minimum Payment; (b) supplemented by P/D Charges allocable to the further development of S-16 Blades; and, (c) other mutually agreed revenue sources, [ ]*. The mix of product royalty, 1Gb and 2Gb P/D Charges and other revenue sources, and the timing and amount of the 2002 Minimum Payments, will be determined by 10/15/01, based on the future Director delivery schedules and sales forecasts. The mix of the products and payment methodology is not material as long as the 2002 Minimum Payment is achieved. The 2002 Minimum Payment is based on Inrange achieving [ ]* in 2002 Director revenue. Both parties recognize that, due to market uncertainties, and uncertainties in new product introductions and Component deliverables, the actual Inrange Director revenue may be lower than planned. If Director revenue falls below the current [ ]*, the 2002 Minimum Payment will be adjusted to 20% of the projected Inrange Director revenue for 2002. If the 2002 Minimum Payment falls below [ ]*, the parties agree that the deliverables required in any then outstanding FRD documents may be reviewed and adjustments made to features and schedules required by the applicable FRDs to reflect then current market conditions. 37. All royalties and P/D Charges will paid in U.S. Dollars, on a quarterly basis, within thirty (30) days of the end of each Quarter. - ------------------------- * Omitted pursuant to an application for confidential treatment. -6- 7 38. Payments will be accompanied by a report which includes the following information and details pertaining to Sales of S-4 Blades: (i) Serial Numbers and configurations (blades) of 1Gb Directors Sold to [ ]* (ii) Serial Numbers and configurations (blades) of 1Gb Directors Sold to [ ]* (iii) Reconciliation to Revenue Reported. 39. Inrange will keep adequate records of its Sales for a period of five years after the last Sale of 1Gb Directors or S-4 Blades. Inrange will provide such documentation (including source documents) and information as QLogic may reasonably require to substantiate the Sales by Inrange and the royalties due to QLogic. 40. QLogic may, at its expense, and upon reasonable prior written notice, audit Inrange records to verify the accuracy of payments made by Inrange to QLogic. Inrange will receive a copy of the audit report. If the audit determines that Inrange owes QLogic payments in excess of ten percent of the audit cost, Inrange will bear a proportionate share of the cost of the audit in addition to payment of any amounts the audit determines as due to QLogic. Audits will not be conducted more than once in any consecutive twelve month period. Upon Inrange request, the audit will be performed by a mutually agreed third party auditor. III. 2GB DIRECTOR A. Development. ----------- 41. Each party will appoint one member of its management to act as the Project Director for development of the 2Gb Director. 42. The parties will develop new blades for the 2Gb Director as follows: (i) QLogic will design [ ]*, in accordance with mutually-agreed specifications as set forth in the Functional Requirements Document ("FRD") applicable to the development of these blades attached and incorporated by reference as Appendix C. Each of these 2Gb blades to be developed will contain S-16 Chips. QLogic will work with Inrange to add software and hardware interfaces to add functionality directly to the 2Gb [ ]* blades. QLogic will own the design of the [ ]*, subject to Inrange's perpetual, world-wide, non-exclusive, non-transferable, and fully paid-up, royalty free right and license to the design for the Inrange Products incorporating QLogic technology. (ii) Inrange will develop the [ ]* for the 2Gb Director, and the [ ]* for the 1Gb and 2Gb Directors. Inrange will own the design of the [ ]*, exclusive of the QLogic software, firmware and other technology embedded therein. - ------------------------- * Omitted pursuant to an application for confidential treatment. -7- 8 43. The parties will from time to time establish, through mutually agreed FRDs, a schedule of products to be developed, including [ ]*, pricing, design completion dates and prototype delivery dates for the [ ]* and other mutually agreed upon deliverables. The parties will review the FRDs quarterly and more frequently as they deem necessary. Each FRD will be a supplement to this Agreement. The parties will jointly provide the resources necessary to accomplish the product development set forth in an agreed FRD in accordance with the applicable schedule. 44. Inrange will provide QLogic with such technical information pertinent to physical connectivity and functionality requirements for the [ ]* as QLogic may reasonably require in designing 2Gb [ ]* blades for the 2Gb Director. 45. QLogic will provide Inrange with such technical information pertinent to the S-16 Chip and the [ ]* as Inrange may reasonably require in designing [ ]*, and the 2Gb Director. Such information includes: [ ]*. 46. Each party will bear its own costs in the collaboration and development of the 2Gb Director, and each party will retain all ownership interest in its technical information disclosed to the other under this Agreement. 47. QLogic will also license Inrange to use these S-16 Chip and [ ]* specifications and designs and, to the extent that Inrange uses the S-16 Chip in the [ ]*, QLogic will provide the firmware object (binary) code. If a mutually agreed FRD to develop the FWI requires that Inrange be provided with S-16 Chip source code, QLogic will license the source code to Inrange pursuant to a separate software license containing commercially reasonable and mutually acceptable terms. In any event, Inrange will receive the licenses necessary to develop the [ ]* blades and to do further development of the [ ]* as required to improve, maintain and upgrade the 2Gb Director. 48. The QLogic license will extend beyond termination or expiration of this Agreement as the parties may agree to enable Inrange to provide service or spares to its customers. 49. The parties agree that, in developing Products, they will adhere to industry standards and assure interoperability. Each party may, at its expense, pursue its own interoperability testing provided that (a) it shares test plans and results, (b) accepts and supports the certifications of the other party, (c) any third party certifications - ------------------------- * Omitted pursuant to an application for confidential treatment. -8- 9 from industry firms (i.e. Medusa, UNH, etc.) or alliance partners will be applicable to both parties for use in their sales, marketing and support efforts of Products. B. Manufacturing 50. The 2 Gb Director will be manufactured by Inrange, or a contract manufacturer chosen by Inrange and reasonably acceptable to QLogic. 51. QLogic will supply Inrange's requirements of S-16 Blades for the 2Gb Director. The S-16 Blades will be manufactured by QLogic, or a contract manufacturer chosen by QLogic. Inrange will be entitled to manufacture the FWI blade, or have it manufactured by a contract manufacturer reasonably acceptable to QLogic. C. Pricing of [ ]* 52. QLogic's prices for the [ ]* will be provided in the pricing Appendix D, [ ]*. 53. [ ]* 54. Inrange will provide, on QLogic's request, such information concerning its shipments of the 2Gb Directors and Components to the [ ]* as QLogic may reasonably require.QLogic may audit Inrange's records, as provided in paragraph 40, to verify sales [ ]* of 2Gb Directors and [ ]*. 55. Inrange will keep adequate records relating to its sales to the [ ]* Market for a period of five years after the last sale of 2Gb Directors and Components. 56. [ ]* - ------------------------- * Omitted pursuant to an application for confidential treatment. -9- 10 D. Intellectual Property Rights 57. QLogic retains all of the IP rights in its S-16 Chip, [ ]* and improvements thereto developed by it, regardless of which party pays NRE for their development. QLogic agrees that it will sell the [ ]* developed under this Agreement for incorporation into the 2Gb Director only to Inrange. QLogic may sell [ ]* separately only to OEMs as spares or upgrades. 58. QLogic will not be restricted from selling the S-16 Chip, or blades incorporating the S-16 Chip, to its other customers, including other manufacturers of Fibre Channel Directors or switches; provided that QLogic agrees that the prices charged to Inrange for S-16 Chips, or blades incorporating S-16 Chips, will be no higher than those charged by QLogic to its other customers purchasing the S-16 Chips, or blades incorporating S-16 Chips, for similar Director-class applications, in the same volumes and under similar terms of purchase. 59. Inrange retains all of the IP rights in its 2Gb Director and Components developed by it[ ]* and improvements thereto developed by it, irrespective of which party pays the NRE associated with their development. IV. CERTAIN AGREEMENTS APPLICABLE TO ALL PRODUCTS A. Product Sales 60. QLogic will sell the Directors to OEMs exclusively, and market the Products to its Channel Partners. 61. Inrange will sell the Directors to everyone other than OEMs. 62. QLogic may purchase 2Gb Directors (other than 2Gb Directors containing [ ]*) from Inrange for resale to OEMs, at [ ]*. The price to QLogic for all 2Gb Directors containing the [ ]* will be mutually agreed. 63. QLogic may purchase Components from Inrange to supply OEMs at Inrange's fully burdened cost (inclusive of contract manufacturer margins, if applicable) for the Components plus a fixed fee to be negotiated by the parties. The parties agree that the prices charged to QLogic for such Components will be no higher than those charged by Inrange to its other customers purchasing the Components in the same volumes and under similar terms of purchase. 64. QLogic will be responsible for the warranty and warranty service to OEMs. Inrange will provide QLogic with its standard warranty. 65. QLogic will bear the commission cost for its sales team in respect of OEM sales. - ------------------------- * Omitted pursuant to an application for confidential treatment. -10- 11 66. Inrange will bear the commission cost for its sales team in respect of its sales of the Products. 67. QLogic will market, and solicit sales of, the Products to its usual and customary resellers, distributors and systems integrators ("Channel Partners"), but Inrange will fill any Channel Partner orders for the Products (each a "referral sale"). 68. [ ]* 69. All Directors, other than those sold to OEMs that have requested their own badging, will contain the Inrange logo. The parties will agree on an appropriate QLogic logo to affix to all of the Directors, indicating that the Directors incorporate QLogic ASICs or blades, as the case may be. The QLogic logo will be visible on the outside front of the Directors, directly beside or directly below the Inrange logo and no less than 50% of the size of the Inrange logo. 70. Both the QLogic and Inrange sales teams will receive full quota commission for sales of directors to QLogic's Channel Partners. Each party will bear the commission cost for its respective sales team. 71. Except as otherwise provided herein, each party will independently determine the sales price of the Products. B. NRE's 72. QLogic may request modifications to the Products from time to time to address perceived opportunities for the OEM market. 73. Inrange will respond to the QLogic request in a timely manner and provide QLogic with (a) an estimate of the NRE charges associated with the proposal, (b) a schedule of the time required to implement the design change and commence manufacture of Products incorporating the modification and (c) an estimate of the cost impact the modification will have on the Product. 74. QLogic (or its OEM customer) will pay for mutually agreed NRE charges associated with any QLogic-approved modification to the OEM Products. 75. Inrange may also request QLogic make modifications to the Products from time to time to address perceived opportunities for the Products. - ------------------------- * Omitted pursuant to an application for confidential treatment. -11- 12 76. QLogic will respond to the Inrange request in a timely manner and provide Inrange with (a) an estimate of the NRE charges associated with the proposal, (b) a schedule of the time required to implement the design change and commence manufacture of the blades incorporating the modification and (c) an estimate of the cost impact the modification will have on the Product. 77. Inrange will pay for mutually agreed NRE charges associated with any Inrange approved modifications to the blades or the Products. 78. The party who pays for the NRE associated with the development of any improvements to the other party's IP, receives a perpetual, world-wide, non-exclusive, non-transferable, fully paid-up, royalty free right and license to the improvements covered by that NRE. C. Product Service 79. Inrange will offer product service, professional services and systems engineering (`SE") support for the Products and will be QLogic's preferred product service provider for those QLogic Channel Partners and OEM's that request a third party service provider. 80. With certain Channel Partner and OEM accounts, the parties recognize that QLogic may prefer to be the primary product service and support provider, in which case, Inrange will offer to provide QLogic with product service and support, as a subcontractor, on its standard service terms. 81. Inrange agrees to provide levels of services (LOS) equal to or better than the service Inrange provides to its largest end user customer. Inrange agrees to negotiate the minimum commitments for response time, spare parts, replacement times, management escalation process etc. with QLogic. Each party will, at mutually agreed times provide to the other information regarding the "field" status of Products, including actual field failure rates, number of problems reported, time to close and such other information as the parties may deem pertinent. 82. QLogic will be paid a reasonable and customary commission (to be negotiated) on service contracts it procures for Inrange in connection with sales of the Products to the QLogic sales channel, but no commission will be paid to QLogic in connection with a service contract in which QLogic is providing primary support and subcontracting the service thereafter to Inrange, as provided in paragraph 80. The amount of the commission payments paid by Inrange will be no less than the service commissions that Inrange offers to its other service partners. 83. Each party will promptly notify the other of any actual or potential design or manufacturing related defect in the Products. -12- 13 84. The parties will explore whether Inrange can or should offer service and support for QLogic's HBAs and Edge Switches. D. Marketing 85. The parties will work together on a host of collaborative marketing initiatives, including trade shows, press releases, advertising campaigns, brochures and collateral materials to promote the Products, each other and the benefits of this collaborative arrangement. 86. The parties will, to the extent permitted by law, present a unified "front" to the analyst community and marketplace generally with respect to the Director so that Product shipments, Product certifications, customer-install base, and market share statistics, are consistently reported regardless of the Director branding. 87. Inrange will be responsible for integrating/certifying Directors for other than OEM markets and QLogic will provide reasonable assistance. The parties will work together for integrating and certifying Directors for OEM markets and for certifying interoperability of the Directors with other QLogic-branded products. 88. The parties will work together to keep each other properly informed and support each other, for example by encouraging customers to consider the other's branded products, by jointly using "cross-reference accounts", and by keeping each other informed in advance of press releases relating to joint products, features and plans. E. Miscellaneous Terms; Termination 89. The term of this agreement will continue through the EOL of the Products. 90. Either party may terminate this Agreement for default if the other fails to correct breach of this Agreement within a reasonable time after receipt of written notice of default. Upon termination for default, all right of the breaching party to use the technology of the other party will cease; except as necessary to enable the each party to continue to provide its customers with services or spares. Each party agrees to provide the other with such licenses as are reasonably necessary to fulfill service and support obligations to customers. This obligation shall survive any termination or expiration of this Memorandum of Understanding 91. The parties may execute separate agreements which authorize Inrange to sell the QLogic HBA's and 2Gb edge switches and such other equipment and products as the parties may agree. 92. All appendices and schedules are incorporated by reference. -13- 14 93. Inrange and QLogic will execute appropriate proprietary information non-disclosure agreements to protect proprietary information exchanged or disclosed under this agreement. 94. This Memorandum of Understanding modifies, amends, or supersedes, as applicable: (a) the Technology License Agreement executed by Inrange and Ancor Communications, Inc. on 24 September 1998, including all amendments thereto ("TLA"), and (b) the Reseller Agreement executed by Inrange and Ancor Communications Inc. on 29 October 1999 including all amendments thereto (the "Reseller Agreement"), to the extent each is inconsistent with this Memorandum of Understanding. 95. The parties will use their best efforts to prepare, within 90 days from the date hereof, such amendments to this Memorandum of Understanding and such supplemental agreements as the parties deem appropriate to further the understandings set forth herein, and terminate the TLA and the Reseller Agreement. Failure of the parties to reach agreement on these amendments and supplemental agreements will not affect the enforceability of this Memorandum of Understanding. 96. California law, without regard to its choice of law provisions, will govern this Memorandum of Understanding, amendments thereto and any supplemental agreements. IN WITNESS WHEREOF, the parties have signed this Memorandum of Understanding as of the 16 March, 2001. QLOGIC CORPORATION INRANGE TECHNOLOGIES CORPORATION By: /s/ Mark Edwards By: /s/ Gregory R. Grodhaus ------------------------------- ------------------------------ Name: Mark Edwards Name: Gregory R. Grodhaus ----------------------------- --------------------------- Title: SR. V.P. Title: President and CEO ----------------------------- --------------------------- -14- -----END PRIVACY-ENHANCED MESSAGE-----