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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NO. 0-11007
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0300558
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
- ---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(714) 662-5600
(Registrant's telephone number, including area code)
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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 [ ]
As of February 9, 2001, the registrant had 74,259,427 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 2000 and July 2, 2000 2
Condensed Consolidated Statements of Income
Three and six months ended December 31, 2000
and December 26, 1999 3
Condensed Consolidated Statements of Cash Flows
Six months ended December 31, 2000
and December 26, 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 26
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
December 31, July 2,
2000 2000
------------ --------
Assets
Current assets:
Cash and cash equivalents $ 14,896 $ 23,471
Investments 170,140 128,234
Accounts and other receivables, net 42,274 24,332
Inventories, net 25,276 12,635
Prepaid expenses 1,071 1,021
Deferred taxes 453 453
-------- --------
Total current assets 254,110 190,146
Property and equipment, net 10,791 6,927
Investments 36,812 29,293
Deferred income taxes and other assets 3,502 3,629
-------- --------
$305,215 $229,995
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 35,393 $ 17,869
Accrued liabilities 7,960 6,355
Income taxes payable and other current liabilities 317 320
-------- --------
Total current liabilities 43,670 24,544
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized (150,000 shares designated as Series A
Junior Participating Preferred Stock); none issued
and outstanding -- --
Common stock, $0.10 par value; 240,000,000 shares
authorized; 73,708,484 and 72,466,848 issued
and outstanding at December 31, 2000 and
July 2, 2000, respectively 7,371 7,247
Additional paid-in capital 178,951 155,190
Retained earnings 75,223 43,014
-------- --------
Total stockholders' equity 261,545 205,451
-------- --------
$305,215 $229,995
======== ========
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net revenues $71,075 $33,603 $126,531 $62,499
Cost of sales 33,449 17,910 61,251 33,909
------- ------- -------- -------
Gross profit 37,626 15,693 65,280 28,590
Operating expenses:
Engineering and development 5,160 3,799 9,975 7,149
Selling and marketing 3,802 2,438 6,657 4,778
General and administrative 2,540 1,732 4,733 3,237
------- ------- -------- -------
Total operating expenses 11,502 7,969 21,365 15,164
------- ------- -------- -------
Operating income 26,124 7,724 43,915 13,426
Nonoperating income 5,097 2,017 8,035 3,871
------- ------- -------- -------
Income before income taxes 31,221 9,741 51,950 17,297
Income tax provision 11,864 974 19,741 1,730
------- ------- -------- -------
Net income $19,357 $ 8,767 $ 32,209 $15,567
======= ======= ======== =======
Net income per share:
Basic $ 0.26 $ 0.12 $ 0.44 $ 0.22
======= ======= ======== =======
Diluted $ 0.25 $ 0.11 $ 0.41 $ 0.20
======= ======= ======== =======
Number of shares used in per share
computations:
Basic 73,488 70,557 73,115 69,693
======= ======= ======== =======
Diluted 78,293 76,357 77,771 76,036
======= ======= ======== =======
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
------------------------------
December 31, December 26,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income $ 32,209 $ 15,567
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,509 662
Gain on sale of strategic investment (1,884) --
Loss on disposal of property and equipment 156 17
Deferred income taxes -- (5,643)
Tax benefit from exercise of stock options 19,741 7,373
Impairment of intangibles -- 175
Provision for doubtful accounts 199 326
Changes in assets and liabilities:
Accounts receivable (18,141) (471)
Inventories (12,641) 1,352
Accounts payable 17,524 209
Accrued liabilities 1,605 1,912
Income taxes payable (2) (3)
Prepaid expenses and other assets 77 4
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Net cash provided by operating activities 40,352 21,480
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of property and equipment -- 3
Additions to property and equipment (5,529) (858)
Purchases of investments (294,259) (341,563)
Maturities of investments 241,234 313,806
Proceeds from sale of strategic investment 5,484 --
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Net cash used in investing activities (53,070) (28,612)
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Cash flows from financing activities:
Principal payments under capital leases (1) (7)
Net proceeds from issuance of common stock
under stock option plans 4,144 2,453
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Net cash provided by financing activities 4,143 2,446
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Net decrease in cash and cash equivalents (8,575) (4,686)
Cash and cash equivalents at beginning of period 23,471 22,284
--------- ---------
Cash and cash equivalents at end of period $ 14,896 $ 17,598
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1 $ 15
Income taxes 2 4
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the financial position as of
December 31, 2000, and July 2, 2000, and the results of operations for the
three and six months ended December 31, 2000, and December 26, 1999, and the
statements of cash flows for the six months then ended. Certain
reclassifications have been made to the condensed consolidated statements of
cash flows for the six months ended December 26, 1999, to conform to the
presentation for the six months ended December 31, 2000. Additionally, all
share, per share and related data presented in the condensed consolidated
financial statements and footnotes have been retroactively adjusted to
reflect all stock splits. Interim results for the three and six months ended
December 31, 2000, are not necessarily indicative of the results that may be
expected for the year ending July 1, 2001. The interim financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K
for the fiscal year ended July 2, 2000. References to dollar and share
amounts are in thousands, except per share data, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
December 31, July 2,
2000 2000
------- -------
Raw materials $10,672 $ 1,016
Finished goods 14,604 11,619
------- -------
$25,276 $12,635
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3. Accrued Liabilities
Components of accrued liabilities are as follows:
December 31, July 2,
2000 2000
------------ -------
Payroll and related costs $3,853 $3,213
Warranty and related reserves 1,283 998
Unearned revenue 655 556
Other 2,169 1,588
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$7,960 $6,355
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4. Earnings per Share
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued. The dilutive effect of outstanding stock options is reflected
in diluted net income per share by application of the treasury stock method.
The following table sets forth the computation of basic and diluted net
income per share:
Three Months Ended Six Months Ended
------------------------------ -----------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Numerator:
Net income $ 19,357 $ 8,767 $ 32,209 $15,567
========= ========= ========= =======
Denominator:
Denominator for basic net income per
share - weighted average shares outstanding 73,488 70,557 73,115 69,693
Effect of dilutive securities:
Dilutive options outstanding 4,805 5,800 4,656 6,343
--------- --------- --------- -------
Denominator for diluted net income per
share - adjusted weighted average shares 78,293 76,357 77,771 76,036
========= ========= ========= =======
Basic net income per share $ 0.26 $ 0.12 $ 0.44 $ 0.22
========= ========= ========= =======
Diluted net income per share $ 0.25 $ 0.11 $ 0.41 $ 0.20
========= ========= ========= =======
Antidilutive options 625 488 1,203 508
========= ========= ========= =======
Average market price $ 70.69 $ 36.72 $ 55.79 $ 26.16
========= ========= ========= =======
The antidilutive options were excluded from the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares during the respective periods.
5. Common Stock Split
On December 15, 2000, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common Stock
for each share of common stock outstanding to stockholders of record on
November 30, 2000. All share, per share and related data presented in the
condensed consolidated financial statements and footnotes have been
retroactively adjusted to reflect this stock split. As the par value of the
Company's common stock remained at $0.10 per share, all periods presented
reflect a reclass from additional paid-in capital to common stock.
6. Commitments and Contingencies
The Company is currently undergoing an examination by the California
Franchise Tax Board for the Company's 1989, 1990 and 1991 California income
tax returns. The Company is also undergoing examination by the Internal
Revenue Service of Emulex Caribe's 1995 U.S. tax return. It is management's
belief that the outcome of these examinations will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
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7. Business Combination
On December 7, 2000, the Company entered into an agreement to acquire
Giganet, Inc. ("Giganet"), a privately-held developer of Virtual Interface
Internet Protocol networking solutions, for approximately 8 million shares
of Emulex common stock. Under the terms of the agreement, each issued and
outstanding share of Giganet's common stock, preferred stock, and warrant to
purchase common stock of Giganet will be converted into shares of Emulex
common stock. In addition, each outstanding option to acquire shares of
Giganet common stock shall become an option to acquire the number of shares
of Emulex common stock calculated based on the same conversion ratio
applicable to the Giganet common stock. A condition to the closing of the
merger is that the average closing price of the Company's common stock over
the 15 trading days ending three calendar days prior to the effective date
of the merger be equal to or greater than $50.00 per share (e.g., total
transaction value of $400 million); provided, however, that the Company
shall have the right to pay cash or increase the number of shares issuable
in connection with the merger in order to satisfy this condition. The merger
is expected to be treated as a tax-free reorganization for federal income
tax purposes and to be accounted for using the purchase method of
accounting. The Company expects to incur an in-process research and
development charge of approximately $25 million related to the merger. The
merger is subject to certain customary conditions to closing, including
approval by the stockholders of Giganet.
8. Investments
As of December 31, 2000, the Company's total investments of $206,952
included a $25,000 strategic investment in Giganet, Inc.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the discussions in this
Form 10-Q in general may contain certain forward-looking statements. In
addition, when used in this Form 10-Q, the words "anticipates," "in the
opinion," "believes," "intends," "expects" and similar expressions are intended
to identify forward-looking statements. Actual future results could differ
materially from those described in the forward-looking statements as a result of
factors discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below, as well as in "Risk Factors" set
forth herein, and in the Company's most recently filed Annual Report on Form
10-K. These factors include, but are not limited to, the following: the fact
that the Company's markets are characterized by rapidly changing technology,
evolving industry standards and frequent introductions of new products and
enhancements, and the Company may not be able to respond to such changes on a
timely basis; the fact that the Fibre Channel market is at an early stage of
development; changes in economic conditions or changes in end-user demand for
technology solutions, including the possibility of slower than expected growth
in demand for Fibre Channel solutions; possible delays in OEM launching of
products enabled to the Company's solutions; the acquisition of Giganet is
subject to a number of customary closing conditions which could prevent or delay
the closing of the pending acquisition; the ability of Emulex to effectively
integrate Giganet's operations into its own upon completion of the pending
acquisition; the highly competitive nature of the markets for the Company's
products as well as pricing pressures that may result from such competitive
conditions; the Company's ability to attract and retain skilled personnel; the
Company's reliance on third-party suppliers for components used in the Company's
products and on manufacturing subcontractors that assemble and distribute the
Company's products; the Company's reliance on certain OEMs, distributors and key
customers; the fact that potential acquisitions or strategic investments may be
more costly or less profitable than anticipated; and potential fluctuations in
the company's future effective tax rate. The Company cautions the reader,
however, that these lists of risk factors may not be exhaustive. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or changes to these forward-looking statements that may be made to
reflect any future events or circumstances. References contained herein to
"Emulex," the "Company," "we," "our" and "us" refer to Emulex Corporation and it
subsidiaries.
COMPANY OVERVIEW
Emulex Corporation is a leading designer, developer and supplier of a broad line
of Fibre Channel host adapters, hubs, application-specific computer chips
("ASICs"), and software products that provide connectivity solutions for Fibre
Channel storage area networks ("SANs"), network attached storage (" NAS"), and
redundant array of independent disks ("RAID") storage. The Company's products
are based on internally developed ASIC technology, and are deployable across a
variety of SAN configurations, system buses and operating systems, enhancing
data flow between computers and peripherals. The Company's products offer
customers the unique combination of critical reliability, scalability, and high
performance, and can be customized for mission-critical server and storage
system applications. Over the course of its history, the Company has also
designed, developed and marketed traditional networking products such as printer
servers and network access products, including communications servers and wide
area network ("WAN") adapters. The Company markets to original equipment
manufacturers ("OEMs") and end users through its own worldwide selling
organization, as well as two-tier distribution partners. As of December 31,
2000, the Company had a total of 186 employees.
BUSINESS COMBINATION
On December 7, 2000, the Company entered into an agreement to acquire Giganet,
Inc. ("Giganet"), a privately-held developer of Virtual Interface Internet
Protocol networking solutions, for approximately 8 million shares of Emulex
common stock. Under the terms of the agreement, each issued and outstanding
share of Giganet's common stock, preferred stock, and warrant to purchase common
stock of Giganet will be converted into shares of Emulex common stock. In
addition, each outstanding option to acquire shares of Giganet common stock
shall become an option to acquire the number of shares of Emulex common stock
calculated based on the same conversion ratio applicable to the Giganet common
stock. A condition to the closing of the merger is that the average closing
price of the Company's common stock over the 15 trading days ending three
calendar days prior to the effective date of the merger be equal to or greater
than $50.00 per share (e.g., total transaction value of $400 million); provided,
however, that the Company shall have the right to pay cash or increase the
number of shares issuable in connection with the merger in order to satisfy this
condition. The merger is expected to be treated as a tax-free reorganization for
federal income tax purposes and to be accounted for using the purchase method of
accounting. The Company expects to incur a one-time writedown of approximately
$25 million for in-process research and development upon
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the close of the merger which will negatively impact its results of operations
for that period. In addition, the Company expects to incur recurring
merger-related expenses associated with the amortization of goodwill, other
intangibles and deal expenses, as well as noncash compensation charges arising
out of Giganet options that have subsequently been determined to have been
priced below fair market value at the time of issuance. The valuation of the
merger was approximately $665 million, based on the average closing stock price
of Emulex two days prior and subsequent to December 7, 2000, a valuation which
would result in approximately $603 million of goodwill and other intangibles
related to the merger. The Company expects to amortize these intangibles over a
relatively short period of two to seven years, and the resulting recurring
quarterly charges are expected to approximate or exceed the Company's current
level of pretax earnings, potentially generating a net loss for the Company in
upcoming quarters. The merger is subject to certain customary conditions to
closing, including approval by the stockholders of Giganet.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere herein.
References to dollar amounts are in thousands unless otherwise specified.
Percentage of Net Revenues Percentage of Net Revenues
For the Three Months Ended For the Six Months Ended
------------------------------ ----------------------------
December 31, December 26, December 31, December 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 47.1 53.3 48.4 54.3
------ ------ ------ ------
Gross profit 52.9 46.7 51.6 45.7
------ ------ ------ ------
Operating expenses:
Engineering and development 7.3 11.3 7.9 11.4
Selling and marketing 5.2 7.3 5.3 7.6
General and administrative 3.6 5.1 3.7 5.2
------- ------- ------- -------
Total operating expenses 16.1 23.7 16.9 24.2
------ ------ ------ ------
Operating income 36.8 23.0 34.7 21.5
Nonoperating income 7.1 6.0 6.4 6.2
------- ------- ------- ------
Income before income taxes 43.9 29.0 41.1 27.7
Income tax provision 16.7 2.9 15.6 2.8
------ ------- ------ -------
Net income 27.2% 26.1% 25.5% 24.9%
====== ====== ====== ======
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THREE MONTHS ENDED DECEMBER 31, 2000, COMPARED TO THREE MONTHS ENDED
DECEMBER 26, 1999
Net Revenues. Net revenues for the three months ended December 31, 2000, were
$71,075, an increase of $37,472, or 112 percent, from $33,603 for the three
months ended December 26, 1999. Net revenues for the three months ended December
31, 2000, consisted of $57,822 from sales to OEMs, $13,159 from sales sold
through distribution channels and $94 from sales directly to end users. This
represents an increase in OEM sales of $33,370, or 136 percent, and an increase
in distribution sales of $4,128, or 46 percent, compared to the same relative
quarter of the prior fiscal year. These increases in net revenues were partially
offset by a decrease in end-user sales of $26, or 22 percent.
From a product line perspective, net revenues generated from the Company's Fibre
Channel products for the second quarter of fiscal 2001 ended December 31, 2000,
were $68,864, or 97 percent of total net revenues. This represents an increase
of $40,560, or 143 percent, from the comparable quarter of fiscal 2000. This
increase in net revenues from the Company's Fibre Channel products is primarily
the result of the increased size of the market for Fibre Channel products and
increased market acceptance of the Company's Fibre Channel products. The
Company's net revenues in this emerging market have continued to be generated
from OEM's taking product directly and through distribution channels. Net
revenues from the Company's traditional networking products for the quarter
ended December 31, 2000 were $2,211, or three percent of total net revenues.
This represents a decrease of $3,088, or 58 percent, compared to the
corresponding quarter of fiscal 2000. This decrease in net revenues from the
Company's traditional networking products was principally due to the ongoing
maturation of these products and a decrease in the Company's focus on these
products. The Company issued last time buy notifications to customers for its
traditional networking products during the fourth quarter of fiscal 2000. The
Company expects that its traditional networking products will contribute
negligible revenues in succeeding quarters.
Net revenues for the second fiscal quarter ended December 31, 2000, increased
$15,619, or 28 percent, to $71,075 from $55,456 for the first fiscal quarter
ended October 1, 2000. This sequential growth from the previous quarter is due
to increased sales of the Company's Fibre Channel products, partially offset by
decreased sales of the Company's traditional networking products. There can be
no assurance that the Company will continue to achieve these high growth rates,
or favorable increases at all, when compared to the preceding quarter or the
comparable period of the prior year.
In the three months ended December 31, 2000, direct sales to Compaq accounted
for 27 percent, sales to IBM accounted for 17 percent, and sales to EMC
accounted for 13 percent of the Company's total net revenues. No other customer
accounted for more than 10 percent of total net revenues. Additionally, some of
the Company's larger OEM customers purchased products through distributors,
resellers or other third parties. Total net revenues, including direct sales to
the Company's customers and their customer-specific models purchased indirectly
through other distribution channels, amounted to 27 percent of the Company's
total net revenues for Compaq, 25 percent for IBM, and 22 percent for EMC for
the three months ended December 31, 2000. For the three months ended December
26, 1999, direct sales to Compaq accounted for 23 percent, direct sales to EMC
accounted for 17 percent, direct sales to Avnet accounted for 15 percent, and
direct sales to IBM accounted for 11 percent of the Company's total net
revenues. No other customer accounted for more than 10 percent of total net
revenues during this period. Total net revenues, including direct sales to the
Company's customers and their customer-specific models purchased indirectly
through other distribution channels, amounted to 26 percent of the Company's
total net revenues for Compaq, 18 percent for IBM, and 17 percent for EMC for
the three months ended December 26, 1999. Direct sales to the Company's top five
customers accounted for 71 percent of net revenues for the quarter ended
December 31, 2000 and the comparable period of fiscal 2000.
Domestic net revenues were $43,865, or 62 percent of total net revenues, for the
three months ended December 31, 2000, and $23,943, or 71 percent of total net
revenues, for the three months ended December 26, 1999. This increase in
domestic net revenues of $19,922, or 83 percent, is principally due to the
increasing level of Fibre Channel product shipments during the current fiscal
year. The increase in Fibre Channel shipments is primarily the result of the
increased market acceptance of the Company's Fibre Channel products.
International net revenues were $27,210, or 38 percent of total net revenues,
for the three months ended December 31, 2000, and $9,660, or 29 percent of net
revenues, for the three months ended December 26, 1999. This increase in
international net revenues of $17,550, or 182 percent, is also principally due
to the increasing level of Fibre Channel product shipments during the current
fiscal year. Although both domestic and international net revenues have
increased, international net revenues have become a larger percent of total net
revenues due to the increased market acceptance of Fibre Channel products beyond
the domestic market in the current fiscal year.
Gross Profit. Cost of sales included the cost of production of finished
products, as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. For the three months
ended December 31, 2000, gross profit increased $21,933, or 140 percent, to
$37,626 from $15,693 for the
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comparable quarter of the prior fiscal year. Gross margin increased to 53
percent for the three months end December 31, 2000, compared to 47 percent in
the same relative quarter of fiscal 2000 primarily due to efficiencies of scale
and changes in product mix.
Engineering and development. Engineering and development expenses consisted
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of the Company's products. These expenses
included third-party fees paid to consultants, prototype development expenses
and computer services costs related to supporting computer tools used in the
design process. Engineering and development expenses were $5,160 and $3,799 for
the three months ended December 31, 2000, and December 26, 1999, representing
seven percent and 11 percent of net revenues, respectively. Engineering and
development expenses increased by $1,361, or 36 percent, from the second quarter
of fiscal 2000 to the second quarter of fiscal 2001 as the Company continued to
increase its investment in its Fibre Channel product development. Even though
the Company has continued to increase its investment in Fibre Channel product
development, it has not increased as quickly as net revenues have expanded.
Consequently, engineering and development has decreased as a percent of net
revenues. Due to the technical nature of the Company's products, engineering
support is a critical part of the Company's strategy during both the development
of its products and the support of its customers from product design through
deployment into the market. Management intends to continue to make significant
investments in the technical support and enhancement of the Company's current
products, as well as the continued development of new products in the Fibre
Channel market. Engineering and development expenses can fluctuate from quarter
to quarter depending on several factors, including new product introduction
schedules, hiring patterns and depreciation of capital equipment.
Selling and marketing. Selling and marketing expenses consisted primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of the Company's products, as well as trade shows, product
literature, promotional support costs and other advertising related costs.
Selling and marketing expenses were $3,802 and $2,438 for the three months ended
December 31, 2000, and December 26, 1999, representing five percent and seven
percent of net revenues, respectively. Selling and marketing expenses for the
second quarter of fiscal 2001 increased by $1,364, or 56 percent, from the
comparable quarter of fiscal 2000. This increase was primarily due to increased
salaries and commissions associated with additional employees and higher
revenues, and increased promotion and advertising costs. However, as a portion
of these selling and marketing expenses is fixed, these selling and marketing
costs have not expanded at the same rate as the Company's net revenues.
Consequently, as a percent of net revenues, selling and marketing expenses have
decreased.
General and administrative. General and administrative expenses consisted
primarily of salaries and related expenses for executives, financial accounting
support, human resources, administrative services, professional fees and other
associated corporate expenses. General and administrative expenses were $2,540
and $1,732 for the three months ended December 31, 2000, and December 26, 1999,
representing four percent and five percent of net revenues, respectively.
General and administrative expenses increased by $808, or 47 percent, for the
second quarter of fiscal 2001 compared to the equivalent quarter of fiscal 2000
primarily due to additional employees and higher compensation associated with
the higher revenues. Similar to selling and marketing expenses, these expenses
have not expanded at the same rate as the Company's net revenues. Consequently,
as a percentage of net revenues, general and administrative expenses have
decreased.
Nonoperating Income. Nonoperating income consisted primarily of interest income.
The Company's nonoperating income increased $3,080 to $5,097 for the second
quarter of fiscal 2001 compared to $2,017 for the second quarter of fiscal 2000.
This increase in nonoperating income is primarily due to a one-time gain of
$1,884 from the sale of a strategic investment. The remaining increase came from
an increase in interest income associated with the investments of the funds the
Company received from the secondary offering of common stock completed during
the fourth quarter of fiscal 1999, as well as cash generated from operations.
Income Taxes. For the quarter ended December 31, 2000, the Company recorded a 38
percent tax provision in the amount of $11,864. For the quarter ended December
26, 1999, the Company recorded a net tax provision of 10 percent in the amount
of $974. The lower effective tax rate in fiscal 2000 was due to utilization of
net operating loss carryforwards that were held net of a substantial valuation
allowance.
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's 1989, 1990 and 1991 California income tax returns.
The Company is also undergoing examination by the Internal Revenue Service of
Emulex Caribe's 1995 U.S. tax return. It is management's belief that the outcome
of these examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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SIX MONTHS ENDED DECEMBER 31, 2000, COMPARED TO SIX MONTHS ENDED
DECEMBER 26, 1999
Net Revenues. Net revenues for the six months ended December 31, 2000, were
$126,531, an increase of $64,032, or 102 percent, from $62,499 for the six
months ended December 26, 1999. Net revenues for the six months ended December
31, 2000, consisted of $104,929 from sales to OEMs, $21,236 from sales sold
through distribution channels and $366 from sales directly to end users. This
represents an increase in OEM sales of $58,175, or 124 percent, an increase in
distribution sales of $5,741, or 37 percent, and an increase in end-user sales
of $116, or 46 percent, compared to the same relative period of the prior fiscal
year.
From a product line perspective, net revenues generated from the Company's Fibre
Channel products for the first six months of fiscal 2001 ended December 31,
2000, were $119,108, or 94 percent of total net revenues. This represents an
increase of $69,185, or 139 percent, from the comparable period of fiscal 2000.
This increase in net revenues from the Company's Fibre Channel products is
primarily the result of the increased size of the market for Fibre Channel
products and increased market acceptance of the Company's Fibre Channel
products. The Company's net revenues in this emerging market have continued to
be generated from OEM's taking product directly and through distribution
channels. Net revenues from the Company's traditional networking products for
the first six months of fiscal 2001 ended December 31, 2000 were $7,423, or six
percent of total net revenues. This represents a decrease of $5,153, or 41
percent, compared to the corresponding period of fiscal 2000. This decrease in
net revenues from the Company's traditional networking products was principally
due to the ongoing maturation of these products and a decrease in the Company's
focus on these products. The Company expects that revenues from its traditional
networking products will contribute negligible revenues to succeeding quarters.
In the six months ended December 31, 2000, direct sales to Compaq accounted for
27 percent, direct sales to IBM accounted for 18 percent, and direct sales to
EMC accounted for 13 percent of the Company's total net revenues. No other
customer accounted for more than 10 percent of total net revenues during this
period. Additionally, some of the Company's larger OEM customers purchased
products through distributors, resellers or other third parties. Total net
revenues, including direct sales to the Company's customers and their
customer-specific models purchased indirectly through other distribution
channels, amounted to 27 percent of the Company's total net revenues for IBM, 27
percent for Compaq, and 22 percent for EMC for the six months ended December 31,
2000. For the six months ended December 26, 1999, direct sales to Compaq
accounted for 24 percent, direct sales to EMC accounted for 15 percent, direct
sales to IBM accounted for 14 percent, and direct sales to Avnet accounted for
12 percent of the Company's total net revenues. No other customer accounted for
more than 10 percent of total net revenues during this period. Total net
revenues, including direct sales to the Company's customers and their customer
specific models purchased indirectly through other distribution channels,
amounted to 26 percent of the Company's total net revenues for Compaq, 21
percent for EMC, and 15 percent for IBM for the six months ended December 26,
1999. Direct sales to the Company's top five customers accounted for 73 percent
of net revenues for the six months ended December 31, 2000 compared to 72
percent for the same period of fiscal 2000.
Domestic net revenues were $81,164, or 64 percent of total net revenues, for the
six months ended December 31, 2000, and $44,402, or 71 percent of total net
revenues, for the six months ended December 26, 1999. This increase in domestic
net revenues of $36,762, or 83 percent, is principally due to the increasing
level of Fibre Channel product shipments during the current fiscal year. The
increase in Fibre Channel shipments is primarily the result of the increased
size of the market for Fibre Channel products and increased market acceptance of
the Company's Fibre Channel products. International net revenues were $45,367,
or 36 percent of total net revenues, for the six months ended December 31, 2000,
and $18,097, or 29 percent of total net revenues, for the six months ended
December 26, 1999. This increase in international net revenues of $27,270, or
151 percent, is also principally due to the increasing level of Fibre Channel
product shipments during the current fiscal year. Although both domestic and
international net revenues have increased, international net revenues have
become a larger percent of net revenues due to the increased market acceptance
of Fibre Channel products beyond the domestic market in the current fiscal year.
Gross Profit. For the six months ended December 31, 2000, gross profit increased
$36,690, or 128 percent, to $65,280 from $28,590 for the comparable period of
the prior fiscal year. Gross margin increased to 52 percent for the six months
end December 31, 2000, compared to 46 percent in the same relative period of
fiscal 2000 primarily due to efficiencies of scale and changes in product mix.
Engineering and development. Engineering and development expenses were $9,975
and $7,149 for the six months ended December 31, 2000, and December 26, 1999,
representing eight percent and 11 percent of net revenues, respectively.
Engineering and development expenses increased by $2,826, or 40 percent, for the
first six months of
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fiscal 2001 compared to the first six months of fiscal 2000 as the Company
continued to increase its investment in its Fibre Channel product development.
Even though the Company has continued to increase its investment in Fibre
Channel product development, it has not increased as quickly as net revenues
have expanded. Consequently, engineering and development expenses have decreased
as a percent of net revenues. Due to the technical nature of the Company's
products, engineering support is a critical part of the Company's strategy
during both the development of its products and the support of its customers
from product design through deployment into the market. Management intends to
continue to make significant investments in the technical support and
enhancement of the Company's current products, as well as the continued
development of new products in the Fibre Channel market.
Selling and marketing. Selling and marketing expenses were $6,657 and $4,778 for
the six months ended December 31, 2000, and December 26, 1999, representing five
percent and eight percent of net revenues, respectively. Selling and marketing
expenses for the first six months of fiscal 2001 increased by $1,879, or 39
percent, from the comparable period of fiscal 2000. This increase was primarily
due to increased salaries and commissions associated with additional employees
and higher revenues, and increased promotion and advertising costs. However, as
a portion of these selling and marketing expenses is fixed, these selling and
marketing costs have not expanded at the same rate as the Company's net
revenues. Consequently, as a percent of net revenues, selling and marketing
expenses have decreased.
General and administrative. General and administrative expenses were $4,733 and
$3,237 for the six months ended December 31, 2000, and December 26, 1999,
representing four percent and five percent of net revenues, respectively.
General and administrative expenses increased by $1,496, or 46 percent, for the
first six months of fiscal 2001 compared to the equivalent period of fiscal 2000
primarily due to additional employees and higher compensation associated with
the higher revenues. Similar to selling and marketing expenses, these expenses
have not expanded at the same rate as the Company's net revenues. Consequently,
as a percentage of net revenues, general and administrative expenses have
decreased.
Nonoperating Income. Nonoperating income consisted primarily of interest income.
The Company's nonoperating income increased $4,164 to $8,035 for the first six
months of fiscal 2001 compared to $3,871 for the comparable period of fiscal
2000. This increase in nonoperating income is primarily due to an increase in
interest income associated with the investments of the funds the Company
received from the secondary offering of common stock completed during the fourth
quarter of fiscal 1999, as well as cash generated from operations. Additionally,
the Company recognized a one-time gain of $1,884 from the sale of a strategic
investment during the six months ended December 31, 2000.
Income Taxes. For the six months ended December 31, 2000, the Company recorded a
38 percent tax provision in the amount of $19,741. For the six months ended
December 26, 1999, the Company recorded a net tax provision of 10 percent in the
amount of $1,730. The lower effective tax rate in fiscal 2000 was due to
utilization of net operating loss carryforwards that were held net of a
substantial valuation allowance.
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's 1989, 1990 and 1991 California income tax returns.
The Company is also undergoing examination by the Internal Revenue Service of
Emulex Caribe's 1995 U.S. tax return. It is management's belief that the outcome
of these examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. All companies are required to follow the
guidance in SAB 101 no later than the fourth quarter in fiscal year 2001, with
restatement of earlier quarters in fiscal 2001 required, if necessary. The SEC
has recently issued further guidance with respect to adoption of specific issues
addressed by SAB 101. The Company believes that the impact of SAB 101 will not
have a material effect on its financial position or results of operations.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had $210,440 in working capital, and $221,848
in cash and cash equivalents, current investments and long-term investments. At
July 2, 2000, the Company had $165,602 in working capital, and $180,998 in cash
and cash equivalents, current investments and long-term investments. The
Company's cash and cash equivalents decreased by $8,575 during the first six
months of fiscal 2001 from $23,471 as of July 2, 2000, to $14,896 as of December
31, 2000. This decrease in cash and cash equivalents was primarily due to the
Company's investing activities, which used $ $53,070 of cash and cash
equivalents. The cash used in investing activities was offset by operating
activities and financing activities, which provided $40,352 and $4,143 of cash
and cash equivalents, respectively.
Investing activities, including purchases of investments of $294,259, maturities
of investments of $241,234, as well as the acquisition of property and equipment
of $5,529, used $53,070 of cash and cash equivalents during the six months ended
December 31, 2000. For the same relative period of fiscal 2000, investing
activities, which primarily included purchases of investments of $341,563,
maturities of investments of $313,806 and the acquisition of property and
equipment of $858, used $28,612 of cash and cash equivalents. The investing
activities in the first six months of fiscal 2001 include a $25 million
investment in Giganet, Inc.
Operating activities provided $40,352 of cash and cash equivalents for the six
months ended December 31, 2000. This increase in cash and cash equivalents was
primarily due to the Company's increased net income, accounts payable, and the
tax benefit from the exercise of stock options, offset by increases in accounts
receivable and inventories, as well as changes in other working capital
balances. Operating activities provided $21,480 of cash and cash equivalents for
the six months ended December 26, 1999. This increase in cash and cash
equivalents was primarily due to the Company's increased net income and the tax
benefit from the exercise of stock options as well as changes in other working
capital balances.
Net financing activities, which were primarily limited to proceeds from the
exercise of stock options during the six months ended December 31, 2000,
provided $4,143 of cash and cash equivalents during the six months ended
December 31, 2000 compared to providing $2,446 of cash and cash equivalents in
the same relative period of fiscal 2000. Financing activities also included
principal payments under capital leases.
As part of the Company's continued investment in Fibre Channel product
development, the Company expects to increase its capital expenditures, most
notably for additional engineering equipment, expansion of its Colorado
engineering facility and enhancement of the Company's global IT infrastructure.
Additionally, the Company has incurred and will continue to incur charges
related to the Company's pending acquisition of Giganet, Inc. The Company
believes that its existing cash balances, facilities and equipment leases,
investments and anticipated cash flows from operating activities will be
sufficient to support its working capital needs and capital expenditure
requirements for at least the next 12 months.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS DEPENDS UPON THE CONTINUED DEVELOPMENT OF THE FIBRE CHANNEL MARKET,
AND OUR REVENUES WILL BE LIMITED IF SUCH DEVELOPMENT DOES NOT OCCUR OR OCCURS
MORE SLOWLY THAN WE ANTICIPATE.
The size of our potential market is dependent upon the broad acceptance of Fibre
Channel technology as an alternative to other technologies traditionally
utilized for network and storage communications. The Fibre Channel market, while
rapidly evolving and attracting an increasing number of market participants, is
still at an early stage of deployment. We believe the Fibre Channel market will
continue to expand and that our investment in the Fibre Channel market
represents our greatest opportunity for revenue growth and profitability in the
future. However, we cannot be certain that Fibre Channel products will gain
broader market acceptance or that customers will choose our technology and
products. Fibre Channel products accounted for 94 percent of net revenues for
the six months ended December 31, 2000. If the Fibre Channel market fails to
develop, develops more slowly than anticipated, attracts more competitors than
we expect (as discussed below), or if our products do not achieve market
acceptance, our business, results of operations and financial condition would be
materially adversely affected.
Alternative existing technologies such as SCSI compete with Fibre Channel
technology for customers. Some SCSI technology companies already have
well-established relationships with our current and potential customers, have
extensive knowledge of the markets we serve and have better name recognition and
more extensive development, sales and marketing resources than we have. Our
success also depends both on our own ability and on the ability of our OEM
customers to develop Fibre Channel solutions that are competitive with legacy
technologies. However, ultimately, our business depends upon our ability, along
with the ability of our OEM customers, to convince end users to adopt Fibre
Channel technology.
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While we have secured numerous design wins for our Fibre Channel products from
OEM customers, nearly all of these customers are still at the early stages
incorporating Fibre Channel throughout their product offerings. If our customers
are unable to or otherwise do not ship systems that incorporate our products, or
if their shipped systems are not commercially successful, our business, results
of operations and financial condition would be materially adversely affected.
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MAY BE ADVERSELY AFFECTED BY
MANY FACTORS.
Our revenues and results of operations have varied on a quarterly basis in the
past and potentially may vary significantly in the future. Accordingly, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful, and you should not rely on such comparisons as
indications of our future performance. Our revenues and results of operations
are difficult to forecast and could be adversely affected by many factors,
including, among others:
o The size, timing and terms of customer orders;
o The relatively long sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
o Changes in our operating expenses;
o Our ability to develop and market new products;
o The ability of our contract manufacturers to produce and distribute our
products in a timely fashion;
o Integration of additional contract manufacturers or additional sites of
our current contract manufacturers;
o Component shortages experienced by us, or shortages resulting in reduced
demand from our customers if our customers are unable to acquire the
other components used in conjunction with our products in their
deployments;
o The market acceptance of our new Fibre Channel products;
o The timing of the introduction or enhancement of products by us, our OEM
customers and our competitors;
o The level of product and price competition;
o Our ability to expand our relationships with OEMs and distributors;
o Activities of, and acquisitions by, our competitors;
o Acquisitions or strategic investments made by us;
o Changes in technology, industry standards or consumer preferences;
o Increases in interest rates;
o Changes in the mix of sales channels;
o The level of international sales;
o Seasonality;
o Personnel changes;
o Changes in customer budgeting cycles;
o Foreign currency exchange rates;
o Difficulties with the implementation of a new Enterprise Resource
Planning (ERP) System; and
o General economic conditions.
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As a result of these and other factors, our business, results of operations and
financial condition could be materially adversely affected.
There are other factors that contribute to the variability of our sales as well.
Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially on
orders booked in that quarter. As of December 31, 2000, we had $80,640 of total
backlog, of which $79,513 was for Fibre Channel products. These amounts are not
necessarily indicative of the results that may be expected for any future
quarter or the fiscal year ending July 1, 2001. Also, we have typically
generated a large percentage of our quarterly revenues in the last month of the
quarter. Additionally, individual OEM customer purchases can vary significantly
from quarter to quarter.
A decrease in the number of orders we receive is likely to adversely and
disproportionately affect our quarterly results of operations. This is because
our expense levels are partially based on our expectations of future sales and
our expenses may be disproportionately large as compared to sales in a quarter
with reduced orders. Hence, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any shortfall in
sales in relation to our quarterly expectations or any delay of customer orders
would likely have an immediate and adverse impact on our business, quarterly
results of operations and financial condition.
WE HAVE EXPERIENCED LOSSES IN OUR HISTORY.
We have experienced losses in our history, most recently a net loss of $10,838
for the fiscal year ended June 28, 1998, which included $12,545 of consolidation
charges related to the closure of our Puerto Rico manufacturing operations and
selected sales offices. While we have generated net income for 16 of the last 17
quarters through the quarter ended December 31, 2000, we cannot be certain that
revenues will remain at current levels or improve or that we will be profitable
at such revenue levels.
THE LOSS OF ONE OR MORE CUSTOMERS COULD HARM OUR REVENUES.
For the six months ended December 31, 2000, direct sales to our top customer,
Compaq, represented 27 percent of our net revenues. Additionally, direct sales
to IBM were 18 percent, and direct sales to EMC were 13 percent of our total net
revenues. Also, some of our larger OEM customers purchased our products
indirectly through distributors or resellers. Total net revenues, including
direct sales to our customers and their customer-specific models purchased
indirectly through other distribution channels, amounted to 27 percent of our
total net revenues for IBM, 27 percent for Compaq, and 22 percent for EMC for
the six months ended December 21, 2000. For the comparable period in fiscal
2000, direct sales to Compaq were 24 percent, direct sales to EMC accounted for
15 percent, direct sales to IBM represented 14 percent, and direct sales to
Avnet accounted for 12 percent of our total net revenues. Total net revenues,
including direct sales to our customers and their customer specific models
purchased indirectly through other distribution channels, amounted to 26 percent
of our total net revenues for Compaq, 21 percent for EMC, and 15 percent for IBM
for the six months ended December 26, 1999. Direct sales to our top five
customers accounted for 73 percent of total net revenues for the six months
ended December 31, 2000, and 72 percent of total net revenues for the comparable
period in fiscal 2000. Although we have attempted to expand our base of
customers, we believe our revenues in the future will continue to be similarly
derived from a limited number of customers, especially given the consolidation
the industry has recently experienced.
THE FAILURE OF ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS TO MAKE PAYMENTS COULD
ADVERSELY AFFECT OUR BUSINESS.
We are also subject to credit risk associated with the concentration of our
accounts receivable from our customers. Although our days sales outstanding, or
DSOs, were 40 days at December 31, 2000, there can be no assurance they will
remain at this level. If we were to lose one of our current significant
customers or did not receive their payments due to us, we could experience a
material adverse effect on our business, results of operations and financial
condition.
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THE LOSS OF ONE OR MORE OF OUR OEM OR DISTRIBUTOR CUSTOMERS COULD ADVERSELY
AFFECT OUR BUSINESS.
We rely almost exclusively on OEMs and sales through distribution channels for
our revenue. For the six months ended December 31, 2000, we derived
approximately 83 percent of our net revenues from OEMs and 17 percent from sales
through distribution. For the comparable period in fiscal 2000, we derived
approximately 75 percent of our net revenues from OEMs and 25 percent from
distribution sales. We cannot be certain that we will retain our current OEM and
distributor customers or that we will be able to recruit additional or
replacement customers. As is common in an emerging technology industry, our
agreements with OEMs and distributors are typically non-exclusive, have no
volume commitments, and often may be terminated by either party without cause.
Indeed, many of our OEM and distributor customers carry or utilize competing
product lines. If we were to suddenly lose one or more important OEM or
distributor customers to a competitor, our business, results of operations and
financial condition could be materially adversely affected.
A SIGNIFICANT DECREASE OR DELAY IN ORDERS FROM ONE OR MORE OF OUR CUSTOMERS
COULD ADVERSELY AFFECT OUR BUSINESS.
In February 2001, we noted that certain of our OEM customers had deferred a
portion of their existing orders from our third fiscal quarter ending April 1,
2001 until our fourth fiscal quarter ending July 1, 2001. As of the date of
this quarterly report, we are unable to ascertain whether such deferrals are
isolated events or represent a broader market trend. In the event that such
deferrals continue or accelerate, our business, results of operations and
financial condition could be materially adversely affected.
SOME OF OUR SUPPLIERS OR OUR OEM CUSTOMERS COULD BECOME COMPETITORS.
Some of our suppliers or our OEM customers currently have, and others could
develop, products internally that would replace our products. The resulting
production delays or reductions in sales of our products could have a material
adverse effect on our business, results of operations and financial condition.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND WE MUST KEEP PACE
WITH THE CHANGES TO SUCCESSFULLY COMPETE.
The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in a large part on our ability to
enhance our existing products and to introduce new products on a timely basis to
meet changes in customer preferences and evolving industry standards. Currently,
proposed new technologies such as SCSI over IP ("SOIP"), Virtual Interface
("VI"), and InfiniBand are still in the early development stages and it is
impossible to know what the end technology will provide. We cannot be certain
that we will be successful in developing, manufacturing and marketing new
products or product enhancements that respond to such changes in a timely manner
and achieve market acceptance. We also cannot be certain that we will be able to
develop the underlying core technologies necessary to create new products and
enhancements, or that we will be able to license the core technologies from
third parties.
A key element of our business strategy is to develop multiple ASICs in order to
increase system performance and reduce manufacturing costs, thereby enhancing
the price/performance of our Fibre Channel products. We cannot be certain that
we will be successful at developing and incorporating ASICs effectively and in a
timely manner. Furthermore, as our customers migrate from one platform to the
enhanced price/performance of the next platform, we may experience reduced
revenue, gross profit and gross margin levels associated with lower average
selling prices and higher relative product costs associated with improved
performance. Additionally, changes in technology and consumer preference could
potentially render our current products uncompetitive or obsolete. If we are
unable, for technological or other reasons, to develop new products or enhance
existing products in a timely manner in response to technological and market
changes, our business, results of operations and financial condition would be
materially adversely affected.
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THE FAILURE OF OUR OEM CUSTOMERS TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE
COULD ADVERSELY AFFECT OUR BUSINESS.
Our revenues depend significantly upon the ability and willingness of our OEM
customers to develop, promote and deliver, on a timely basis, products that
incorporate our technology. The ability and willingness of OEM customers to
develop, promote and deliver such products is based upon a number of factors,
such as:
o The timely development by us and our OEM customers of new products with
new functionality, increased speed and enhanced performance at
acceptable prices;
o The development costs facing our OEM customers;
o The compatibility of new products with both existing and emerging
industry standards;
o Technological advances;
o The ability to acquire all required components;
o Intellectual property issues; and
o Competition in general.
We cannot be certain of the ability or willingness of our OEM customers to
continue developing, marketing and selling products that incorporate our
technology. Our business is dependent on our relationships with our OEM and
distributor customers, so the inability or unwillingness of any of our
significant customers to develop or promote products that use our technology
would have a material adverse effect on our business, results of operations and
financial condition.
SOME OF OUR REVENUES ARE FROM PRODUCT LINES THAT ARE BEING PHASED OUT.
We have shifted the focus of our business to Fibre Channel technology. However,
some of our revenues still depend on sales of our traditional networking
products. These traditional networking products accounted for three and six
percent of our net revenues for the three and six months ended December 31,
2000, respectively. If the maturation of these products were to occur faster
than we anticipate, our business, results of operations and financial condition
could be materially adversely affected.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. Our current and potential competition consists
of major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than we have.
We also expect that an increasing number of companies will enter the markets for
our Fibre Channel products. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their significant
resources, such as distribution channels and brand recognition, to acquire
significant market share. Emerging companies attempting to obtain a share of the
existing markets act as potential competition as well. Additionally, our
competitors continue to introduce products with improved price/performance
characteristics, and we will have to do the same to remain competitive.
Increased competition could result in significant price competition, reduced
revenues, lower profit margins or loss of market share, any of which would have
a material adverse effect on our business, results of operations and financial
condition. We cannot be certain that we will be able to compete successfully
against either current or potential competitors in the future.
In the Fibre Channel market, we compete primarily against Adaptec, Agilent, JNI,
LSI Logic, QLogic and, to a lesser extent, several smaller companies. During the
fourth quarter of fiscal 2000, we issued last time buy notifications to
customers for our traditional networking products, which include printer servers
and network access products. We expect these traditional networking products to
contribute only negligible amounts of revenue in succeeding quarters.
As is common in an emerging technology industry with non-exclusive development
arrangements, many of our OEM customers arrange second source agreements to meet
their requirements. Furthermore, in the future, our OEM customers may develop
products that compete with ours or purchase such products from our competitors
and may terminate their relationships with us as a result.
A DECREASE IN THE AVERAGE UNIT SELLING PRICES OF OUR FIBRE CHANNEL PRODUCTS
COULD ADVERSELY AFFECT OUR BUSINESS.
As the market for Fibre Channel products matures, it is likely that we will
experience downward pressure on the average unit selling prices of our Fibre
Channel products. To the extent that average unit selling prices of our Fibre
Channel products decrease without a corresponding decrease in the costs of such
products, our gross margins and financial performance could be materially
adversely affected.
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DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR BUSINESS.
We have experienced delays in product development in the past and may experience
similar delays in the future. Given the short product life cycles in the markets
for our products, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could have a material adverse
effect on our business, results of operations and financial condition. Prior
delays have resulted from numerous factors, such as:
o Changing OEM product specifications;
o Difficulties in hiring and retaining necessary personnel;
o Difficulties in reallocating engineering resources and other resource
limitations;
o Difficulties with independent contractors;
o Changing market or competitive product requirements;
o Unanticipated engineering complexity;
o Undetected errors or failures in software and hardware; and
o Delays in the acceptance or shipment of products by OEM customers.
OUR JOINT DEVELOPMENT ACTIVITIES MAY RESULT IN PRODUCTS THAT ARE NOT
COMMERCIALLY SUCCESSFUL OR THAT ARE NOT AVAILABLE IN A TIMELY FASHION.
We have engaged in joint development projects with third parties in the past and
we expect to continue doing so in the future. Joint development creates several
risks for us, including the loss of control over development of aspects of the
jointly-developed products and over the timing of product availability.
Accordingly, we face the risk that joint development activities will result in
products that are not commercially successful or that are not available in a
timely fashion.
THE LOSS OF THIRD-PARTY SUPPLIERS OR OUR CONTRACT MANUFACTURERS COULD ADVERSELY
AFFECT OUR BUSINESS.
We rely on third-party suppliers for components that are used in our products,
and we have experienced delays or difficulty in securing components in the past.
Delays or difficulty in securing components may be caused by numerous factors
including, but not limited to:
o Discontinued production by a vendor;
o Undetected errors or failures;
o Natural disasters;
o Disruption in shipping channels;
o Difficulties associated with foreign operations; and
o Market shortages.
Additionally, key components that we use in our products may only be available
from single sources with which we do not have long-term contracts. For example,
Intel is currently our sole supplier for microprocessors used in our Fibre
Channel products, and IBM is currently our sole supplier for components that
enable some of our older-generation Fibre Channel products to connect to
networks. In addition, we design our own semiconductors that are embedded in our
traditional networking and Fibre Channel products, and these are manufactured by
third-party semiconductor foundries such as Chip Express, LSI Logic and
QuickLogic. In addition to hardware, we design software to provide functionality
to our hardware products. We also license software from third party providers
for use with our traditional networking products. Most of these providers are
the sole source for this software.
Because we outsource the production of our products to contract manufacturers,
K*TEC Electronics and Manufacturers Services LTD, (our recently added second
contract manufacturer), we only manage the supply of a small number of our
product components. Currently, we rely upon K*TEC Electronics and Manufacturers
Services LTD ("MSL") to complete the majority of the component purchases for our
products. Consequently, we cannot be certain that the necessary components will
be available to meet our future requirements at favorable prices, if at all.
Moreover, because we rely upon K*TEC Electronics and MSL to manufacture, store
and ship our products, if
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K*TEC Electronics or MSL is unable or unwilling to complete production runs for
us in the future, or experiences any significant delays in completing production
runs or shipping product, the manufacturing and sale of our products would be
temporarily suspended. An interruption in supply of our products and the cost of
qualifying and shifting production to an alternative manufacturing facility
would have a material adverse effect on our business, results of operations and
financial condition.
A DECREASE IN THE DEMAND FOR HIGH PERFORMANCE COMPUTER AND STORAGE SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS.
A significant portion of our products are currently used in high-performance
computer and storage systems. Our Fibre Channel growth has been supported by
increasing demand for sophisticated networking and data storage solutions that
support enterprise computing requirements, including on-line transaction
processing, data mining, data warehousing, multimedia and Internet applications.
Should there be a slowing in the growth of demand for such systems, our
business, results of operations and financial condition could be materially
adversely affected.
THE INADEQUACY OF OUR INTELLECTUAL PROPERTY PROTECTIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of product
support and customer relations. At the same time, our success is partially
dependent on the proprietary technology contained in our products. We currently
rely on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect our intellectual property rights
in our products. For a more complete description of our intellectual property,
you should read "Business--Intellectual Property" contained in our most recently
filed Form 10-K.
We cannot be certain that the steps we take to protect our intellectual property
will adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or superior technology, or
that we can maintain such technology as trade secrets. In addition, the laws of
some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all. Our
failure to protect our intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. However, we have in the past, and may be required in the future, to
obtain licenses of technology owned by other parties. We cannot be certain that
the necessary licenses will be available or that they can be obtained on
commercially reasonable terms. If we were to fail to obtain such royalty or
licensing agreements in a timely manner and on reasonable terms, our business,
results of operations and financial condition would be materially adversely
affected.
THE LOSS OF KEY TECHNICAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant degree upon the performance and continued
service of engineers involved in the development of our Fibre Channel technology
and technical support of Fibre Channel products and customers. Our future
success depends upon our ability to attract, train and retain such personnel. We
will need to increase the number of technical staff members with experience in
high-speed networking applications as we further develop the Fibre Channel
product line. Competition for such highly skilled employees in our local
community as well as our industry is intense, and we cannot be certain that we
will be successful in recruiting and retaining such personnel. In addition,
employees may leave our company and subsequently compete against us. The loss of
these key technical employees could have a material adverse effect on our
business, results of operations and financial condition.
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
For the six months ended December 31, 2000, sales in the United States accounted
for 64 percent of our total net revenues, sales in Europe accounted for 32
percent of our total net revenues, and sales in the Pacific Rim countries
accounted for four percent of our total net revenues. During the comparable six
months in fiscal 2000, sales in the
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United States accounted for 71 percent of net revenues, sales in Europe
accounted for 26 percent of our net revenues, and sales in the Pacific Rim
countries accounted for three percent of our net revenues. We expect that sales
in the United States and Europe will continue to account for the substantial
majority of our net revenues for the foreseeable future.
We encounter risks inherent in international operations. All of our sales are
currently denominated in U.S. dollars. As a result, if the value of the U.S.
dollar increases relative to foreign currencies, our products could become less
competitive in international markets. Additionally, we are in the process of
beginning production of our products at Global Manufacturing Services, a MSL
production facility, in Valencia, Spain. Our international business activities
could be limited or disrupted by any of the following factors:
o The imposition of governmental controls and regulatory requirements;
o The costs and risks of localizing products for foreign countries;
o Restrictions on the export of technology;
o Financial and stock market dislocations;
o Increases in interest rates;
o Longer accounts receivable payment cycles;
o Potentially adverse tax consequences;
o The burden of complying with a wide variety of foreign laws;
o Trade restrictions; and
o Changes in tariffs.
In addition, the revenues we earn in various countries in which we do business
may be subject to taxation by more than one jurisdiction, thereby adversely
affecting our earnings. These factors could harm future sales of our products to
international customers and have a material adverse effect on our business,
results of operations and financial condition.
EXPORT RESTRICTIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our Fibre Channel products are subject to U.S. Department of Commerce export
control restrictions. Neither we nor our customers may export such products
without obtaining an export license. These U.S. export laws also prohibit the
export of our Fibre Channel products to a number of countries deemed by the
United States to be hostile. These restrictions may make foreign competitors
facing less stringent controls on their products more competitive in the global
market than we or our Fibre Channel customers are. The U.S. government may not
approve any pending or future export license requests. In addition, the list of
products and countries for which export approval is required, and the regulatory
policies with respect thereto, could be revised. The sale of our Fibre Channel
products could be harmed by our failure or the failure of our customers to
obtain the required licenses or by the costs of compliance.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND SUCH ADDITIONAL FINANCING MAY
NOT BE AVAILABLE.
We currently anticipate that our available cash resources will be sufficient to
meet our expected working capital and capital expenditure requirements for at
least the next 12 months. However, we cannot assure you that such resources will
be sufficient for anticipated or unanticipated working capital and capital
expenditure requirements. We may need to raise additional funds through public
or private debt or equity financings in order to:
o Take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
o Develop new products or services; or
o Respond to unanticipated competitive pressures.
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We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms. We cannot
assure you that any additional financing we may need will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to take advantage of
unanticipated opportunities, develop new products or services or otherwise
respond to unanticipated competitive pressures. In any such case, our business,
results of operations and financial condition could be materially adversely
affected.
POTENTIAL ACQUISITIONS OR STRATEGIC INVESTMENTS MAY BE MORE COSTLY OR LESS
PROFITABLE THAN ANTICIPATED AND MAY ADVERSELY AFFECT THE PRICE OF OUR COMPANY
STOCK.
In addition to the risks described earlier related to our pending merger with
Giganet, Inc., we may pursue additional acquisitions or strategic investments
that could provide new technologies, products or service offerings. Future
acquisitions or strategic investments may involve the use of significant amounts
of cash, potentially dilutive issuances of equity or equity-linked securities,
incurrence of debt and amortization of expenses related to goodwill and other
intangible assets. Moreover, to the extent that any proposed acquisition or
strategic investment is not favorably received by stockholders, analysts and
others in the investment community, the price of our common stock could be
adversely affected. In addition, acquisitions or strategic investments involve
numerous risks, including:
o Difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
o The diversion of management's attention from other business concerns;
o Risks of entering markets in which we have no or limited prior
experience; and
o The potential loss of key employees of the acquired company.
In the event that an acquisition or strategic investment does occur and we are
unable to successfully integrate operations, technologies, products or personnel
that we acquire, our business, results of operations and financial condition
could be materially adversely affected.
OUR STOCK PRICE IS VOLATILE.
The stock market in general, and the stock prices in technology-based companies
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price of
our common stock has fluctuated in the past and is likely to fluctuate in the
future as well. Factors which could have a significant impact on the market
price of our common stock include, but are not limited to, the following:
o Quarterly variations in operating results;
o Announcements of new products by us or our competitors;
o The gain or loss of significant customers;
o Changes in analysts' earnings estimates;
o Rumors or dissemination of false information;
o Pricing pressures;
o Short selling of our common stock;
o General conditions in the computer, storage or communications markets;
or
o Events affecting other companies that investors deem to be comparable to
us.
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In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
OUR CORPORATE OFFICES AND PRINCIPAL PRODUCT DEVELOPMENT FACILITIES ARE LOCATED
IN A REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities, including our corporate offices and principal product
development facilities, are located near major earthquake faults. The Company is
not specifically insured for earthquakes, or other such natural disasters. Any
personal injury or damage to the facilities as a result of such occurrences
could have a material adverse effect on the Company's business, results of
operations and financial condition.
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain future
earnings, if any, to finance the growth and expansion of our business and for
general corporate purposes.
OUR STOCKHOLDER RIGHTS PLAN, CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD
ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK.
Our stockholder rights plan and provisions of our certificate of incorporation
and of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. The stockholder rights plan and these provisions of our
certificate of incorporation and Delaware law are intended to encourage
potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. You should read Note 8 to the Consolidated Financial Statements contained
in our most recently filed Form 10-K, our certificate of incorporation and
Delaware law for more information on the anti-takeover effects of provisions of
our stockholder rights plan.
RISKS RELATED TO PENDING MERGER WITH GIGANET, INC.
ALTHOUGH WE EXPECT THAT OUR PENDING MERGER WITH GIGANET WILL RESULT IN BENEFITS,
THOSE BENEFITS MAY NOT BE REALIZED AND OUR STOCK PRICE MAY DECLINE AS A RESULT.
On December 7, 2000, we entered into an agreement to merge with Giganet, Inc.
Achieving the benefits of the merger will depend in part on our ability to
integrate the technology, operations and personnel of the two companies in a
timely and efficient manner so as to minimize the risk that the merger will
result in the loss of customers or key employees. Integrating Emulex and Giganet
will be a complex, time consuming and expensive process and may disrupt Emulex's
and Giganet's business if not completed in a timely and efficient manner.
Integrating two companies like Emulex and Giganet involves a number of risks,
including:
o diverting management's attention from ongoing operations;
o difficulties and expenses in combining the operations, technology and
systems of the two companies;
o difficulties and expenses in assimilating and retaining employees,
including integrating teams that have not previously worked together;
o difficulties in creating and maintaining uniform standards, controls,
procedures and policies;
o different geographic locations of the principal operations of Emulex and
Giganet;
o challenges in attracting new customers;
o difficulties in demonstrating to existing customers that the merger will
not result in adverse changes to product quality, lead time for product
deliveries or customer service standards; and
o potential adverse short-term effects on operating results, primarily as
a result of increased costs resulting from the integration of the
operations of the two companies.
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We may not be able to successfully integrate the operations of Giganet or
realize any of the anticipated benefits of a merger. A failure to do so could
have a material adverse effect on Emulex's business, financial condition and
operating results.
THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.
The market price of our common stock may decline as a result of the merger if:
o the integration of Emulex and Giganet is unsuccessful;
o We do not achieve the perceived benefits of the merger as rapidly or to
the extent anticipated by financial analysts or investors; or
o the effect of the merger on our financial results is not consistent with
the expectations of financial analysts or investors.
THE PURCHASE ACCOUNTING TREATMENT OF THE MERGER OF GIGANET WILL RESULT IN A
SIZABLE ONE-TIME IN-PROCESS R & D CHARGE UPON THE CLOSE OF THE MERGER, AND IN
SIZABLE RECURRING AMORTIZATION CHARGES FOR ACQUISITION-RELATED INTANGIBLES AND
OTHER ITEMS, WHICH WILL LIKELY GENERATE NET LOSSES FOR US AFTER THE COMPLETION
OF THE MERGER.
We expect to incur a one-time writedown of approximately $25 million for
in-process R&D upon the close of the merger which will negatively impact our
results of operations for that period. In addition, we expect to incur recurring
merger-related expenses associated with the amortization of goodwill, other
intangibles and deal expenses, as well as noncash compensation charges arising
out of Giganet options that have subsequently been determined to have been
priced below fair market value at the time of issuance. The valuation of the
merger was approximately $665 million, based on the average closing stock price
of Emulex two days prior and subsequent to December 7, 2000, a valuation which
would result in approximately $603 million of goodwill and other intangibles
related to the merger. We expect to amortize these intangibles over a relatively
short period of two to seven years, and the resulting recurring quarterly
charges are expected to approximate or exceed our current level of pretax
earnings, potentially generating a net loss for us in upcoming quarters.
COMPETITORS OF EMULEX AND GIGANET MAY INCREASE THEIR COMPETITIVE PRESSURES ON
THE INTEGRATED BUSINESSES, OR MAKE ANNOUNCEMENTS CHALLENGING THE EXPECTED
BENEFITS OF THE MERGER, CAUSING OUR STOCK PRICE TO DECLINE.
As integrated businesses, Emulex and Giganet will face the combined competitive
pressure from existing competitors of both companies. Some of these competitors
may see the integrated businesses as a new threat and exert greater competitive
pressures than either company currently faces. Some competitors may join
together, through agreements or acquisitions, to face the challenge or perceived
challenge that the merger presents. If we are not able to adequately respond to
this increased competition, the companies' integrated businesses, financial
conditions and operating results would be adversely affected.
In addition, competitors may make public announcements that challenge or
question our expectation that the merger will result in benefits. Such
announcements could cause our stock price to decline. In addition, if such
announcements require a response from us, such announcements could disrupt and
delay our attempts to integrate the two companies, which could have a material
adverse effect on our business, financial condition and operating results.
THE NUMBER OF SHARES OF OUR COMMON STOCK THE GIGANET STOCKHOLDERS WILL RECEIVE
FOR EACH SHARE OF GIGANET COMMON STOCK WILL DEPEND, IN PART, ON THE MARKET VALUE
OF THE OUR COMMON STOCK, WHICH COULD CHANGE BASED ON A NUMBER OF FACTORS.
Upon completion of the merger, each share of Giganet common stock will be
exchanged for a number of shares of our common stock based, in part, on the
average market price of the our common stock at the effective time of the
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merger. It shall be a condition to the closing of the merger that the average
closing price of our common stock over the 15 trading days ending three calendar
days prior to the effective date of the merger be equal to or greater than
$50.00 per share (e.g., total transaction value of $400 million); provided,
however, that we shall have the right to pay cash or increase the number of
shares issuable in connection with the merger in order to satisfy this
condition. Except for this limitation, there will be no adjustment for changes
in the market price of our common stock, and Giganet and Emulex are not
permitted to "walk away" from the merger or resolicit the vote of Giganet's
stockholders solely because of changes in the market price of our common stock.
Accordingly, the specific dollar value of our common stock to be received by
Giganet stockholders upon completion of the merger will depend on the market
value of our common stock at the time of the completion of the merger. No
prediction can be made as to the market price of our common stock at the
completion of the merger or as to the market price of our common stock after the
completion of the merger.
The market price of our common stock could fluctuate widely and affect the
amount of profit, if any, which our investors may realize from any sale of our
common stock. From January 1, 2000 through December 31, 2000, the market price
has ranged from a low of $17.75 per share to a high of $112.75 per share.
Fluctuations may occur, among other reasons, in response to:
o operating results;
o announcements by us or our competitors;
o economic changes;
o general market conditions; and
o other risk factors described in this Form 10-Q.
The trading price of our common stock could continue to be subject to wide
fluctuations in response to the factors set forth above and other factors, many
of which are beyond our control. The stock market in recent years has
experienced extreme price and trading volume fluctuations that often have been
unrelated or disproportionate to the operating performance of individual
companies.
FAILURE TO COMPLETE THE MERGER COULD NEGATIVELY IMPACT OUR FUTURE BUSINESS AND
OPERATIONS.
If the merger is not completed, we may be subject to a number of material risks,
including the following:
o costs related to the merger, such as legal, accounting and financial
advisory fees, must be paid even if the merger is not completed; and
o our ability to complete future transactions may be impaired because
potential partners may view us as having an unfavorable reputation in
our ability to complete transactions as a result of the failure to
complete the merger.
In addition, our customers may, in response to the announcement of the merger,
delay or defer purchasing decisions. Any delay or deferral in purchasing
decisions by our customers could have a material adverse effect on our business,
regardless of whether or not the merger is ultimately completed. Similarly,
current and prospective employees may experience uncertainty about their future
role with us until our strategies with regard to Giganet are executed. This may
adversely affect our ability to attract and retain key management, sales,
marketing and technical personnel.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
At December 31, 2000, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents and strategic
investments, of $181,552. The Company has the positive intent and ability to
hold these securities to maturity. Currently, the carrying amount of these
securities approximates fair market value. However, the fair market value of
these securities is subject to interest rate risk and would decline in value if
market interest rates increased. If market interest rates were to increase
immediately and uniformly by 10 percent from the levels existing as of December
31, 2000, the decline in the fair value of the portfolio would not be material
to the Company's financial position, results of operations and cash flows.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on November 16, 2000.
All share amounts related to the stockholder's meeting are the actual shares as
of that date. They have not been adjusted for the two-for-one stock split on
December 15, 2000. There were 36,493,484 shares of the Company's common stock
issued, outstanding and entitled to vote at the meeting as of October 2, 2000,
the record date. Proxies representing 33,092,044 common shares were received and
tabulated. Five proposals were voted on at this meeting. First, the following
members were elected to the Company's Board of Directors to hold office for the
ensuing year:
Nominee In Favor Withheld
- ------- ---------- ---------
Fred B. Cox 32,894,365 197,679
Michael P. Downey 32,988,621 103,423
Bruce C. Edwards 32,990,974 101,070
Paul F. Folino 32,895,370 196,674
Robert H. Goon 31,600,789 1,491,255
Don M. Lyle 32,988,648 103,396
The second proposal was to amend the Company's certificate of incorporation to
increase the authorized common shares from 120,000,000 to 240,000,000 shares.
This proposal also included a two-for-one stock split of outstanding shares of
common stock of the Company. This proposal was approved with 30,051,542 shares
voted for approval, 3,015,533 against and 24,969 abstaining from the vote.
The third proposal was for an amendment of the Company's Employee Stock Option
Plan to increase the number of pre-split shares authorized by 1,775,000 and
extend the plan's expiration date to September 30, 2005. This proposal was
approved with 18,284,196 shares voted for approval, 4,629,762 against, 56,550
abstaining and broker non-votes of 10,121,536 shares.
The fourth proposal was for an amendment to the Company's 1997 Stock Option Plan
for Non-Employee Directors to increase the number of pre-split shares authorized
by 140,000 shares. This amendment was also approved with 20,917,082 shares voted
for approval, 1,976,249 voted against, 77,177 abstaining and 10,121,536 broker
non-votes.
The fifth proposal was to approve the adoption of an Employee Stock Purchase
Plan. This proposal was also approved with 22,767,566 shares voted for approval,
152,490 voted against, 50,452 abstaining and 10,121,536 broker non-votes.
The final proposal submitted to the stockholders of the Company was to ratify
the selection of KPMG LLP as the Company's independent public accountants for
fiscal year 2001. This proposal was approved with 33,033,535 shares voted for
ratification, 14,983 voted against and 43,526 abstaining from the vote.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.1 Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for fiscal
1997).
Exhibit 3.2 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for fiscal 1997).
Exhibit 3.3 Certificate of Designations of Series A Junior
Participating Preferred Stock (incorporated byreference
to Exhibit 4 to the Registrant's Current Report on
Form 8-K filed February 2, 1989).
Exhibit 3.4 Certificate of Amendment of Certificate of
Incorporation of the Registrant.
Exhibit 4.1 Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K filed
February 2, 1989).
Exhibit 4.2 Certificate regarding extension of Final Expiration
Date of Rights Agreement, dated January 18, 1999
(incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form S-3 filed
April 26, 1999).
Exhibit 99.1 Press Release of November 16, 2000 related to
December 15, 2000, stock split.
(b) Reports on Form 8-K
(1) The registrant filed Form 8-K on December 21, 2000, with respect
to the acquisition of Giganet, Inc. reported under Item 5.
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SIGNATURES
Pursuant to the requirements 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.
Date: February 14, 2001
EMULEX CORPORATION
By: /s/ PAUL F. FOLINO
---------------------------------
Paul F. Folino
President and Chief
Executive Officer
By: /s/ MICHAEL J. ROCKENBACH
--------------------------------
Michael J. Rockenbach
Executive Vice President and
Chief Financial Officer
(Principal Financial &
Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Exhibit 3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for fiscal 1997).
Exhibit 3.2 Bylaws of the Registrant, as amended (incorporated by reference
to Exhibit 3.2 to the Registrant's Annual Report on Form 10-K
for fiscal 1997).
Exhibit 3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated byreference to Exhibit 4 to the
Registrant's Current Report on Form 8-K filed February 2,
1989).
Exhibit 3.4 Certificate of Amendment of Certificate of Incorporation of the
Registrant.
Exhibit 4.1 Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K filed February 2, 1989).
Exhibit 4.2 Certificate regarding extension of Final Expiration Date of
Rights Agreement, dated January 18, 1999 (incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form S-3 filed April 26, 1999).
Exhibit 99.1 Press Release of November 16, 2000 related to December 15,
2000, stock split.