Stratos certainly has a growing business, but their products seem to be nuts and bolts sub-systems similar to those produced by Molex and not cutting-edge optical components like those of NUFO and AVNX. Correct me if I'm wrong.
I pulled out a few segments from their most recent SEC filing. I would be most concerned about the number of shares being released when Methode spins off shares to their own shareholders. These represent 86.1% of outstanding shares.
Stratos Lightwave
freeedgar.com
OUR RELATIONSHIP WITH METHODE ELECTRONICS
Prior to this offering, we were a wholly-owned subsidiary of Methode Electronics. After the completion of this offering, Methode will own approximately 86.1% of the outstanding shares of our common stock, or approximately 84.3% if the underwriters exercise their over-allotment option in full.
Methode has announced that it currently plans to divest its remaining equity interest in us by means of a distribution to its stockholders in a transaction intended to be tax-free to Methode and those stockholders. This transaction is sometimes referred to in this prospectus as the spin-off. While Methode expects the spin-off to occur six to twelve months after this offering, Methode is not obligated to complete the divestiture of its remaining equity interest in us, and the spin-off may not occur by the contemplated time or at all. Methode will determine the timing, structure and all of the terms of its distribution of our common stock.
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Customers:
Our success will depend on our continued ability to develop and manage relationships with significant customers. For the 2000 fiscal year, our three largest customers and their respective contract manufacturers accounted for 44% of our net sales, with Cisco, Nortel and Alcatel accounting for 26%, 10% and 8% of our net sales, respectively. For the 1999 fiscal year, our three largest customers and their respective contract manufacturers accounted for 43% of our net sales, with Nortel, Cisco and Alcatel accounting for 27%, 10% and 6% of our net sales, respectively. We expect our dependence on sales to a small number of large customers to continue.
Competition:
The markets for optical subsystems and components are highly competitive and are expected to intensify in the future. For optical subsystems, we compete primarily with Agilent Technologies, Inc., Finisar Corporation, Infineon Technologies Corp., International Business Machines Corporation and Optical Communications Products, Inc. For optical components, we compete primarily with Infineon Technologies Corp, Lucent Technologies Inc., Molex, Inc. and Tyco International, Ltd. and numerous other smaller companies.
Lawsuits:
Methode is a plaintiff in two lawsuits relating to our intellectual property rights. The first lawsuit was filed by Methode in April 1999 and is against Agilent Technologies, Inc., Finisar Corporation and Hewlett-Packard Company, Inc. The second lawsuit was filed by Methode in October 1999 and is against Infineon Technologies Corp. and Optical Communications Products, Inc. In these actions, Methode alleges that optoelectronic products sold by the defendants infringe upon between two and five Methode patents. The defendants in these lawsuits have filed various affirmative defenses. In addition, Finisar has filed counterclaims. For a description of these lawsuits, see "Business--Litigation." As part of our separation from Methode, the Methode patents which are the subject of these lawsuits and Methode's rights in these lawsuits will be contributed to us and we will agree to indemnify Methode against all costs, expenses and liabilities associated with these lawsuits. These lawsuits are in the preliminary stage, and we cannot predict their outcome with certainty. We use the technologies covered by the patents that are the subject of this litigation in the manufacture of optical subsystems which represented approximately 58% of our net sales in the 2000 fiscal year. If one or more of these patents were found to be invalid or unenforceable, we would lose the ability to prevent others from using the technologies covered by the invalidated patents. This could result in significant decreases in our sales and gross margins for our products that use these technologies. In addition, we would lose the future royalty payments from our current licensees of these patents. We could also be required to pay significant monetary damages to one or more of the defendants or be required to reimburse them for their legal fees. Accordingly, if one or more of these patents were found to be invalid or unenforceable, our business would be significantly harmed.
Control by Methode:
After the completion of this offering, Methode will own approximately 86.1% of our outstanding shares of common stock, or approximately 84.3% if the underwriters exercise their over-allotment option in full. As long as Methode owns a majority of our outstanding common stock, it will continue to be able to elect our entire board of directors and generally be able to determine the outcome of all corporate actions requiring stockholder approval. As a result, Methode will be in a position to continue to control all matters affecting our company, including:
- a change of control of our company, including a merger;
- the acquisition or disposition of assets by our company;
- future issuances of common stock or other securities of our company;
- the incurrence of debt by our company;
- the payment of dividends on our common stock; and
- some determinations with respect to the treatment of items in our tax
returns which are consolidated or combined with Methode's tax returns.
Methode's ability to control our company may result in the market price of our common stock trading at a price lower than the price at which it would trade if Methode did not own a controlling interest in our company.
Methode has indicated that it currently intends to divest its remaining equity interest in our company six to twelve months after this offering, although it is not obligated to do so. We cannot give any assurance that Methode will complete the divestiture of its equity interest in our company in this time frame or at all. There are no restrictions on Methode's ability to sell a controlling interest in our company to a third party.
. . .
We have agreed to contractual limitations under our separation agreements with Methode which place restrictions on our ability to conduct our business. Under our tax sharing and indemnification agreement with Methode, we have agreed to limit our ability to complete acquisitions and divestitures and issue capital stock. The purpose of these provisions is to preserve Methode's ability to distribute its shares in our company to its stockholders on a tax-free basis. These restrictions in the tax sharing and indemnification agreement generally expire two years after Methode completes its proposed spin-off of its equity interest in us. Under our initial public offering and distribution agreement with Methode, we have agreed not to take any action which would limit Methode's ability to sell our shares or its rights as a stockholder of our company in a manner which is not applicable to our stockholders generally. In addition, we have agreed not to issue, prior to the proposed spin-off, any shares of common stock or rights, warrants or options to acquire our stock, if such issuance would result in Methode owning less than 80.5% of our common stock. These restrictions in the initial public offering and distribution agreement will be binding on us as long as Methode owns at least 50% of our outstanding common stock or until Methode notifies us that it no longer intends to proceed with the proposed spin-off.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK IN THE OPEN MARKET COULD CAUSE OUR STOCK PRICE TO DECLINE.
After this offering, we will have 62,779,807 shares of common stock outstanding. This includes the 8,750,000 shares of common stock we are selling in this offering, which may be resold in the public market immediately after this offering. The remaining 54,029,807 shares, representing approximately 86.1% of our total outstanding shares of common stock following this offering, will be owned by Methode. If Methode distributes these shares to the holders of its Class A and Class B common stock through the proposed spin-off, they would be eligible for immediate resale in the public market, other than shares held by our affiliates. We are unable to predict whether significant amounts of our common stock will be sold in the open market in anticipation of, or following, this spin-off. Methode has the sole discretion to determine the timing, structure and the terms of the spin-off, all of which may affect the trading levels of our common stock. In addition, if Methode does not proceed with the spin-off, it will have the right to require us to register its shares of our common stock under the U.S. federal securities laws for sale into the public market. Any sales of substantial amounts of our common stock in the open market, or the perception that these sales might occur, whether as a result of the spin-off or otherwise, could cause the market price for our common stock to decline. See "Shares Eligible for Future Sale."
Provisions that could prevent re-sale of company:
Our restated certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include a classified board of directors and limitations on actions by our stockholders by written consent. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquiror. Delaware law also imposes some restrictions on mergers and business combinations between us and any holder of 15% or more of our outstanding common stock. These provisions apply even if the offer may be considered beneficial by some stockholders.
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