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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended April 1, 2001
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
(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)
------------------
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 May 10, 2001, the registrant had 81,698,363 shares of common stock
outstanding.
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2
EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
April 1, 2001 and July 2, 2000 2
Condensed Consolidated Statements of Operations
Three and nine months ended April 1, 2001
and March 26, 2000 3
Condensed Consolidated Statements of Cash Flows
Nine months ended April 1, 2001 and March 26, 2000 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 28
Part II. OTHER INFORMATION
Item 1. Legal Proceedings. 28
Item 2. Changes in Securities and Use of Proceeds. 29
Item 5. Other Information. 29
Item 6. Exhibits and Reports on Form 8-K. 30
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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)
April 1, July 2,
2001 2000
--------- --------
Assets
Current assets:
Cash and cash equivalents $ 41,577 $ 23,471
Investments 156,711 128,234
Accounts and other receivables, net 33,782 24,332
Inventories, net 35,937 12,635
Prepaid expenses 3,070 1,021
Deferred income taxes 1,602 453
--------- --------
Total current assets 272,679 190,146
Property and equipment, net 16,637 6,927
Investments 27,418 29,293
Goodwill and other intangibles, net 631,765 --
Deferred income taxes and other assets 2,313 3,629
--------- --------
$ 950,812 $229,995
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 39,285 $ 17,869
Accrued liabilities 9,620 6,355
Income taxes payable and other current liabilities 311 320
--------- --------
Total current liabilities 49,216 24,544
Other liabilities 26 --
--------- --------
$ 49,242 $ 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; 81,435,700 and 72,466,848 issued
and outstanding at April 1, 2001 and July 2,
2000, respectively 8,144 7,247
Additional paid-in capital 856,221 155,190
Deferred compensation (13,523) --
Retained earnings 50,728 43,014
--------- --------
Total stockholders' equity 901,570 205,451
--------- --------
$ 950,812 $229,995
========= ========
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
---------------------- ---------------------
April 1, March 26, April 1, March 26,
2001 2000 2001 2000
-------- --------- -------- ---------
Net revenues $ 60,388 $36,518 $186,919 $99,017
Cost of sales 30,391 19,149 91,642 53,058
-------- ------- -------- -------
Gross profit 29,997 17,369 95,277 45,959
-------- ------- -------- -------
Operating expenses:
Engineering and development 7,725 3,586 17,700 10,735
Selling and marketing 4,662 2,492 11,319 7,270
General and administrative 3,414 1,884 8,147 5,121
Amortization of goodwill and other intangibles 13,150 -- 13,150 --
In-process research and development 22,280 -- 22,280 --
-------- ------- -------- -------
Total operating expenses 51,231 7,962 72,596 23,126
-------- ------- -------- -------
Operating income (loss) (21,234) 9,407 22,681 22,833
Nonoperating income 3,667 2,405 11,702 6,276
-------- ------- -------- -------
Income (loss) before income taxes (17,567) 11,812 34,383 29,109
Income tax provision 6,928 4,134 26,669 5,864
-------- ------- -------- -------
Net income (loss) $(24,495) $ 7,678 $ 7,714 $23,245
======== ======= ======== =======
Net income (loss) per share:
Basic $ (0.32) $ 0.11 $ 0.10 $ 0.33
======== ======= ======== =======
Diluted $ (0.32) $ 0.10 $ 0.10 $ 0.30
======== ======= ======== =======
Number of shares used in per share computations:
Basic 76,565 71,508 74,265 70,298
======== ======= ======== =======
Diluted 76,565 76,861 78,769 76,347
======== ======= ======== =======
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)
Nine Months Ended
----------------------
April 1, March 26,
2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 7,714 $ 23,245
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,914 1,154
Gain on sale of strategic investment (1,884) --
Stock-based compensation 369 --
Amortization of goodwill and other intangibles 13,150 --
In-process research and development 22,280 --
Loss on disposal of property and equipment 161 28
Deferred income taxes -- (5,643)
Tax benefit from exercise of stock options 26,669 11,232
Impairment of intangibles -- 175
Provision for doubtful accounts 318 398
Changes in assets and liabilities, net of
effects of business acquired:
Accounts receivable (9,140) (8,021)
Inventories (22,328) (1,044)
Prepaid expenses and other assets (647) (640)
Accounts payable 15,914 8,500
Accrued liabilities 1,877 2,975
Income taxes payable (37) 251
--------- ---------
Net cash provided by operating activities 57,330 32,610
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of property and equipment -- 30
Additions to property and equipment (7,789) (1,735)
Payments for purchase of Giganet, Inc.,
net of cash acquired (15,515) --
Purchases of held to maturity investments (387,352) (474,713)
Maturities of held to maturity investments 357,150 434,353
Proceeds from sale of strategic investment 5,484 --
--------- ---------
Net cash used in investing activities (48,022) (42,065)
--------- ---------
Cash flows from financing activities:
Principal payments under capital leases (1) (13)
Net proceeds from issuance of common stock
under stock option plans 8,799 3,453
--------- ---------
Net cash provided by financing activities 8,798 3,440
--------- ---------
Net increase (decrease) in cash and cash equivalents 18,106 (6,015)
Cash and cash equivalents at beginning of period 23,471 22,284
--------- ---------
Cash and cash equivalents at end of period $ 41,577 $ 16,269
========= =========
Supplemental disclosures:
Noncash investing and financing activities:
Fair value of assets acquired $ 7,832 $ --
Fair value of liabilities assumed 8,121 --
Common stock issued and options assumed for
acquired business 664,193 --
Cash paid during the period for:
Interest $ 1 $ 15
Income taxes 36 28
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 April 1 2001, and July 2, 2000, and the results of operations for the
three and nine months ended April 1, 2001, and March 26, 2000, and the
statements of cash flows for the nine months then ended. Certain
reclassifications have been made to the condensed consolidated statements
of cash flows for the nine months ended March 26, 2000, to conform to the
presentation for the nine months ended April 1, 2001. 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 nine months
ended April 1, 2001, 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:
April 1, July 2,
2001 2000
------- --------
Raw materials $10,816 $ 1,016
Finished goods 25,121 11,619
------- -------
$35,937 $12,635
======= =======
3. Accrued Liabilities
Components of accrued liabilities are as follows:
April 1, July 2,
2001 2000
------- -------
Payroll and related costs $4,565 $3,213
Warranty and related reserves 1,243 998
Deferred revenue 1,604 556
Other 2,208 1,588
------ ------
$9,620 $6,355
====== ======
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 (loss) per share:
Three Months Ended Nine Months Ended
--------------------- --------------------
April 1, March 26, April 1, March 26,
2001 2000 2001 2000
-------- ------- ------- ---------
Numerator:
Net income (loss) $(24,495) $ 7,678 $ 7,714 $23,245
======== ======= ======= =======
Denominator:
Denominator for basic net income per
share - weighted average shares outstanding 76,565 71,508 74,265 70,298
Effect of dilutive securities:
Dilutive options outstanding -- 5,353 4,504 6,049
-------- ------- ------- -------
Denominator for diluted net income per
share - adjusted weighted average shares 76,565 76,861 78,769 76,347
======== ======= ======= =======
Basic net income (loss) per share $ (0.32) $ 0.11 $ 0.10 $ 0.33
======== ======= ======= =======
Diluted net income (loss) per share $ (0.32) $ 0.10 $ 0.10 $ 0.30
======== ======= ======= =======
Antidilutive options 8,540 226 1,255 756
======== ======= ======= =======
Average market price $ 55.92 $ 70.89 $ 55.84 $ 41.07
======== ======= ======= =======
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The antidilutive options were excluded from the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the common shares for the nine months ended April 1, 2001, and
for the periods ended March 26, 2000. Furthermore, since the Company had a net
loss for the three months ended April 1, 2001, all outstanding options were
excluded from the calculation of diluted loss per share, because the effect
would have been anti-dilutive.
5. Common Stock Splits
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
Beginning on or about February 20, 2001, the Company and certain of its
officers and directors were named as defendants in securities class action
lawsuits filed in the United States District Court, Central District of
California. To the Company's knowledge, as of March 16, 2001, approximately
seven of these lawsuits have been filed. The Company expects that the cases
will be consolidated, and that a consolidated complaint will be filed after
the Court appoints a lead plaintiff. The plaintiffs in the actions purport
to represent purchasers of the Company's common stock during various
periods ranging from January 18, 2001 through February 9, 2001. The
complaints allege that the Company and certain of its officers and
directors made misrepresentations and omissions in violation of sections
10(b) and 20(a) of the Securities Exchange Act of 1934. As a result of
these lawsuits, a number of derivitive cases have been filed in California
and Delaware alleging that certain officers and directors breached their
fiduciary duties to the Company in connection with the events alleged in
the class action lawsuits. The complaints generally seek compensatory
damages, costs and attorney's fees in an unspecified amount. The Company
believes that the lawsuits are without legal merit and intends to defend
them vigorously. However, because the lawsuits are at an early stage, it is
not possible to predict whether the Company will incur any liability in
connection with such lawsuits. The Company has received inquiries about
events giving rise to the lawsuits from the Securities and Exchange
Commission and the Nasdaq Stock Market.
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 March 1, 2001, the Company completed the acquisition of Giganet, Inc., a
privately-held developer of Virtual Interface Internet Protocol networking
solutions and a Massachusetts corporation ("Giganet") pursuant to the terms
of an Agreement and Plan of Merger, dated December 7, 2000 (as amended by
Amendment No. 1 thereto dated February 7, 2001, the "Merger Agreement"), by
and among the Company, Giganet, GEMX Network Sub, Inc., a Massachusetts
corporation and wholly-owned subsidiary of the Company, and the Stockholder
Representatives identified therein. As a result of the merger (the
"Merger"), GEMX Network Sub, Inc. merged with and into Giganet and Giganet
became a wholly-owned subsidiary of Emulex.
In connection with the Merger, the Company issued an aggregate of 6,745
shares of Emulex common stock in exchange for all of the outstanding shares
of Giganet common stock and preferred stock. Of the total shares issued,
800 shares are held in escrow for a period of one year to secure
indemnification obligations of Giganet under the terms of the Merger
Agreement. In addition, the Company reserved for issuance an aggregate of
approximately 1,250 shares of its common stock for issuance upon exercise
of Giganet options and warrants assumed by the Company.
The Merger has been accounted for under the purchase method of accounting
in accordance with Generally Accepted Accounting Principles. The Company
recorded a one-time charge for purchased in-process research and
development ("IPR&D") expenses of $22,280 related to the acquisition during
the three months ended April 1, 2001.
The Company utilized an independent third-party appraiser to assess and
allocate values to the IPR&D. The values assigned to these projects were
determined by identifying projects that have economic value but that had
not yet reached technological feasibility and that have no alternative
future use. These products have not been released to the market as of the
date of the Merger, but the features and functionality of the products had
been defined.
The values of these projects were determined using the Income Forecast
Method. In applying the Income Forecast Method, the value of the acquired
technologies was estimated by discounting to present value, the free cash
flows generated by the products with which the technologies are associated,
over the remaining economic lives of the technologies. To distinguish
between the cash flows attributable to the underlying technology and cash
flows attributable to other assets available for generating product
revenues, adjustments were made to provide for a fair return to fixed
assets, working capital, and other assets that contribute to value. The
estimates were based on the following assumptions:
o The estimated revenues assume average compound annual revenue growth
rates of 102% to 316% during fiscal years 2002 through 2008, depending
on the product line. Estimated total revenues from the purchased
in-process products peak in the year 2007 and decline in 2008 as other
new products are expected to be introduced by the Company. These
projections are based on management's estimates over the expected
remaining economic lives of the technologies. IPR&D value is comprised
of three on-going projects. The estimated cost of revenues as a
percentage of revenues is expected to range from 50 % to 60%.
o The discount rates used in the valuation reflect the relative risk of
the product lines. For IPR&D projects, the discount rates ranged from
30% to 45%, which was based on the amount and risk of effort remaining
to complete the respective development projects.
The Company believes that the foregoing assumptions used in determining the
income forecast associated with the IPR&D products are reasonable. No
assurance can be given, however, that the underlying assumptions used to
estimate the income forecast, the ultimate revenues and costs on such
projects, or the events associated with such projects, will transpire as
estimated.
7
9
The total purchase price and allocation among the fair value of tangible
and intangible assets and liabilities (including purchased in-process
research and development) are summarized as follows:
Tangible assets $ 19,205
Liabilities 8,121
-------
Net tangible assets 11,084
Identifiable intangible assets:
In-process research and development 22,280
Completed technology 20
Assembled workforce 2,680
Core technology and patents 40,600
Goodwill 601,616
Deferred compensation 11,624
Transaction costs 1,177
--------
$691,081
========
The goodwill and other intangibles will be amortized on a straight-line
basis over the following years:
Completed technology 2
Assembled workforce 4
Core technology and patents 7
Goodwill 4
The resulting recurring quarterly charges are expected to approximate or
exceed the Company's earnings, potentially generating a net loss for the
Company in upcoming quarters.
The operating results of Giganet have been included in the condensed
consolidated statements of operations since the acquisition date, March 1,
2001.
Following are the summarized unaudited pro forma combined results of
operations for the nine months ended April 1, 2001 and March 26, 2000,
assuming the acquisition had taken place at the beginning of each of those
fiscal years. The unaudited pro forma combined statement of operations for
the nine months ended March 26, 2000, were prepared based upon the
statement of operations of Emulex for the nine months ended March 26, 2000,
and the statement of operations for Giganet for the nine months ended June
30, 2000. The unaudited pro forma results exclude the effects of the IPR&D
charge but include the amortization of goodwill and other intangibles,
additional interest costs related to a pre-acquisition note receivable from
Giganet to Emulex and the amortization of deferred compensation. The
unaudited pro forma results are not necessarily indicative of the future
operations or operations that would have been reported had the acquisitions
been completed when assumed.
Nine Months Ended
-------------------------
April 1, March 26,
2001 2000
---------- ---------
Net revenues $ 189,192 $ 101,280
========== =========
Net loss $ (95,509) $(107,548)
========== =========
Net loss per share $ (1.19) $ (1.40)
========== =========
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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 storage networking 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 storage networking solutions; possible delays in Original
Equipment Manufacturer ("OEM") launching of products enabled to the Company's
solutions; the ability of Emulex to effectively integrate Giganet, Inc.'s
operations, now known as the Company's Internet Protocol ("IP") Storage
Networking Group, into its own; 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 supplier and developer of storage and server
networking host bus adapters based on both Fibre Channel and IP networking
technologies. Storage networks provide data centers with high-speed, scalable,
and highly available storage access. Server networks enable the creation of
high-performance server clusters for database and transaction processing. The
Emulex LightPulse and Giganet product families are based on internally developed
Application-Specific Integrated Circuit ("ASIC"), firmware and software
technologies, and offer customers high performance, scalability, flexibility and
reduced total cost of ownership. The Company's products have been selected by
the world's leading server and storage providers, including Compaq, Dell, EMC,
Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM, NEC,
Network Appliance and Unisys. In addition, Emulex includes industry leaders
Brocade, INRANGE, Intel, Legato, McDATA, Microsoft and Veritas among its
strategic partners. Emulex markets to OEMs and end users through its own
worldwide selling organization, as well as its two-tier distribution partners,
including ACAL, Avnet, Bell Microproducts, CTC, Info-X, Tech Data, and
TidalWire. 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. Corporate headquarters are located in Costa Mesa,
California. As of April 1, 2001, the Company had a total of 306 employees.
References to dollar amounts are in thousands unless otherwise specified.
BUSINESS COMBINATION
On March 1, 2001, the Company completed the acquisition of Giganet, Inc., a
privately-held developer of Virtual Interface Internet Protocol networking
solutions and a Massachusetts corporation ("Giganet") pursuant to the terms of
an Agreement and Plan of Merger, dated December 7, 2000 (as amended by Amendment
No. 1 thereto dated February 7, 2001, the "Merger Agreement"), by and among the
Company, Giganet, GEMX Network Sub, Inc., a Massachusetts corporation and
wholly-owned subsidiary of the Company, and the Stockholder Representatives
identified therein. As a result of the merger (the "Merger"), GEMX Network Sub,
Inc. merged with and into Giganet and Giganet became a wholly-owned subsidiary
of Emulex.
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11
In connection with the Merger, the Company issued an aggregate of 6,745 shares
of Emulex common stock in exchange for all of the outstanding shares of Giganet
common stock and preferred stock. Of the total shares issued, 800 shares are
held in escrow for a period of one year to secure indemnification obligations of
Giganet under the terms of the Merger Agreement. In addition, the Company
reserved for issuance an aggregate of approximately 1,250 shares of its common
stock for issuance upon exercise of Giganet options and warrants assumed by the
Company.
The Merger has been accounted for under the purchase method of accounting in
accordance with Generally Accepted Accounting Principles. The Company recorded a
one-time charge for purchased in-process research and development ("IPR&D")
expenses of $22,280 related to the acquisition during the three months ended
April 1, 2001.
The Company utilized an independent third-party appraiser to assess and allocate
values to the IPR&D. The values assigned to these projects were determined by
identifying projects that have economic value but that had not yet reached
technological feasibility and that have no alternative future use. These
products have not been released to the market as of the date of the Merger, but
the features and functionality of the products had been defined.
The values of these projects were determined using the Income Forecast Method.
In applying the Income Forecast Method, the value of the acquired technologies
was estimated by discounting to present value, the free cash flows generated by
the products with which the technologies are associated, over the remaining
economic lives of the technologies. To distinguish between the cash flows
attributable to the underlying technology and cash flows attributable to other
assets available for generating product revenues, adjustments were made to
provide for a fair return to fixed assets, working capital, and other assets
that contribute to value. The estimates were based on the following assumptions:
o The estimated revenues assume average compound annual revenue growth
rates of 102% to 316% during fiscal years 2002 through 2008, depending
on the product line. Estimated total revenues from the purchased
in-process products peak in the year 2007 and decline in 2008 as other
new products are expected to be introduced by the Company. These
projections are based on management's estimates over the expected
remaining economic lives of the technologies. IPR&D value is comprised
of three on-going projects. The estimated cost of revenues as a
percentage of revenues is expected to range from 50 % to 60%.
o The discount rates used in the valuation reflect the relative risk of
the product lines. For IPR&D projects, the discount rates ranged from
30% to 45%, which was based on the amount and risk of effort remaining
to complete the respective development projects.
The Company believes that the foregoing assumptions used in determining the
income forecast associated with the IPR&D products are reasonable. No assurance
can be given, however, that the underlying assumptions used to estimate the
income forecast, the ultimate revenues and costs on such projects, or the events
associated with such projects, will transpire as estimated.
The total purchase price and allocation among the fair value of tangible and
intangible assets and liabilities (including purchased in-process research and
development) are summarized as follows:
Tangible assets $ 19,205
Liabilities 8,121
-------
Net tangible assets 11,084
Identifiable intangible assets:
In-process research and development 22,280
Completed technology 20
Assembled workforce 2,680
Core technology and patents 40,600
Goodwill 601,616
Deferred compensation 11,624
Transaction costs 1,177
--------
$691,081
========
10
12
The goodwill and other intangibles will be amortized on a straight-line basis
over the following years:
Completed technology 2
Assembled workforce 4
Core technology and patents 7
Goodwill 4
The resulting recurring quarterly charges are expected to approximate or exceed
the Company's earnings, potentially generating a net loss for the Company in
upcoming quarters.
The operating results of Giganet have been included in the condensed
consolidated statements of operations since the acquisition date, March 1, 2001.
Following are the summarized unaudited pro forma combined results of operations
for the nine months ended April 1, 2001 and March 26, 2000, assuming the
acquisition had taken place at the beginning of each of those fiscal years. The
unaudited pro forma combined statement of operations for the nine months ended
March 26, 2000, were prepared based upon the statement of operations of Emulex
for the nine months ended March 26, 2000, and the statement of operations for
Giganet for the nine months ended June 30, 2000. The unaudited pro forma results
exclude the effects of the IPR&D charge but include the amortization of goodwill
and other intangibles, additional interest costs related to a pre-acquisition
note receivable from Giganet to Emulex and the amortization of deferred
compensation. The unaudited pro forma results are not necessarily indicative of
the future operations or operations that would have been reported had the
acquisitions been completed when assumed.
Nine Months Ended
-------------------------
April 1, March 26,
2001 2000
---------- ---------
Net revenues $ 189,192 $ 101,280
========== =========
Net loss $ (95,509) $(107,548)
========== =========
Net loss per share $ (1.19) $ (1.40)
========== =========
11
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RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere herein.
Percentage of Percentage of
Net Revenues For Net Revenues For
the Three Months Ended the Nine Months Ended
----------------------- -----------------------
April 1, March 26, April 1, March 26,
2001 2000 2001 2000
-------- --------- -------- ---------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 50.3 52.4 49.0 53.6
----- ----- ----- -----
Gross profit 49.7 47.6 51.0 46.4
----- ----- ----- -----
Operating expenses:
Engineering and development 12.8 9.8 9.5 10.8
Selling and marketing 7.7 6.8 6.1 7.3
General and administrative 5.7 5.2 4.4 5.2
Amortization of goodwill and other intangibles 21.8 -- 7.0 --
In-process research and development 36.9 -- 11.9 --
----- ----- ----- -----
Total operating expenses 84.9 21.8 38.9 23.3
----- ----- ----- -----
Operating income (loss) (35.2) 25.8 12.1 23.1
Nonoperating income 6.1 6.5 6.3 6.3
----- ----- ----- -----
Income (loss) before income taxes (29.1) 32.3 18.4 29.4
Income tax provision 11.5 11.3 14.3 5.9
----- ----- ----- -----
Net income (loss) (40.6)% 21.0% 4.1% 23.5%
===== ===== ===== =====
THREE MONTHS ENDED APRIL 1, 2001, COMPARED TO THREE MONTHS ENDED MARCH 26, 2000
Net Revenues. Net revenues for the three months ended April 1, 2001, were
$60,388, an increase of $23,870, or 65 percent, from $36,518 for the three
months ended March 26, 2000. Net revenues for the quarter ended April 1, 2001,
consisted of $51,005 from sales to OEMs, $9,311 from sales sold through
distribution channels and $72 from sales directly to end users. This represents
an increase in OEM sales of $26,045, or 104 percent, and an increase in end user
sales of $12, or 20 percent, compared to the same relative quarter of the prior
fiscal year. These increases in net revenues were partially offset by a decrease
in distribution sales of $2,187, or 19 percent, primarily due to some of the
Company's larger OEM customers taking less product indirectly through
distribution channels for the three months ended April 1, 2001, compared to the
same relative quarter of the prior fiscal year.
From a product line perspective, net revenues generated from the Company's Fibre
Channel products for the third quarter of fiscal 2001 ended April 1, 2001, were
$58,022, or 96 percent of total net revenues. This represents an increase of
$27,046, or 87 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
the increased market acceptance of the Company's Fibre Channel products. The
Company's net revenues in this emerging market have continued to be generated
primarily from OEMs taking product directly and through distribution channels.
Net revenues from the Company's traditional networking products for the quarter
ended April 1, 2001 were $1,946, or three percent of total net revenues. This
represents a decrease of $3,596, or 65 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 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 its traditional networking products will contribute negligible revenues
to succeeding quarters. Net revenues from the Company's IP Storage Networking
products were $420, or one percent of total net revenues. The IP Storage
Networking revenues were earned from March 1, 2001, the date the Company
acquired its IP Storage Networking Group, through April 1, 2001.
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Net revenues for the third fiscal quarter ended April 1, 2001, decreased
$10,687, or 15 percent, to $60,388 from $71,075 for the second fiscal quarter
ended December 30, 2000. This sequential reduction from the previous quarter is
primarily due to customer order deferrals into succeeding quarters. The Company
believes industry-wide decreases in end-user demand for technology solutions
caused these deferrals.
In the three months ended April 1, 2001, direct sales to Compaq accounted for 26
percent, direct sales to IBM accounted for 18 percent, direct sales to Celestica
accounted for 11 percent, and direct sales to EMC accounted for 11 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 29 percent of the Company's total net
revenues for IBM, 26 percent for Compaq and 21 percent for EMC for the three
months ended April 1, 2001. For the three months ended March 26, 2000, direct
sales to IBM accounted for 16 percent, direct sales to EMC accounted for 15
percent, direct sales to Avnet accounted for 14 percent, direct sales to Compaq
accounted for 12 percent and direct sales to Bell Microproducts 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 22 percent of the Company's total net revenues for Compaq,
21 percent for IBM, and 21 percent for EMC for the three months ended March 26,
2000. Direct sales to the Company's top five customers accounted for 72 percent
of total net revenues for the three months ended April 1, 2001, compared to 68
percent for the comparable period of fiscal 2000.
Domestic net revenues were $34,012, or 56 percent of total net revenues, for the
three months ended April 1, 2001, and $24,793, or 68 percent of total net
revenues, for the three months ended March 26, 2000. This increase in domestic
net revenues of $9,219, or 37 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 $26,376, or 44 percent of total net revenues, for the three months
ended April 1, 2001, and $11,725, or 32 percent of total net revenues for the
three months ended March 26, 2000. This increase in international net revenues
of $14,651, or 125%, 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 products sold 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. Also, related to its
purchase of Giganet, the Company absorbed approximately one month of its IP
Storage Networking Group's cost of products sold, which included $6 of amortized
deferred compensation expenses. For the three months ended April 1, 2001, gross
profit increased $12,628, or 73 percent, to $29,997 from $17,369 for the
comparable quarter of the prior fiscal year. Gross margin increased to 50
percent for the three months ended April 1, 2001, compared to 48 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 $7,725 and $3,586 for
the three months ended April 1, 2001, and March 26, 2000, representing 13
percent and 10 percent of net revenues, respectively. Engineering and
development expenses increased by $4,139, or 115 percent, from the third quarter
of fiscal 2000 to the third quarter of fiscal 2001 primarily due to the
Company's increased Fibre Channel product development. In addition, the Company
absorbed approximately one month of its IP Storage Networking Group's
engineering and development expenses, which included $215 of amortized deferred
compensation expenses. 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. 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 $4,662 and $2,492 for the three months ended
April 1, 2001, and March 26, 2000, representing eight and seven percent of net
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revenues, respectively. Selling and marketing expenses for the third quarter of
fiscal 2001 increased by $2,170, or 87 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. In addition, the Company absorbed
approximately one month of its IP Storage Networking Group's selling and
marketing expenses, which included $123 of amortized deferred compensation
expenses.
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 $3,414
and $1,884 for the three months ended April 1, 2001, and March 26, 2000,
representing six and five percent of net revenues, respectively. General and
administrative expenses increased by $1,530 or 81 percent, for the third quarter
of fiscal 2001 compared to the equivalent quarter of fiscal 2000 primarily due
to additional employees and higher compensation associated with higher revenues.
Additionally, the Company absorbed approximately one month of its IP Storage
Networking Group's general and administrative expenses, which included $25 of
amortized deferred compensation expenses.
Amortization of goodwill and other intangibles. Amortization of goodwill and
other intangibles included the amortization of goodwill and other purchased
intangible assets that related to the purchase of Giganet, completed during the
three months ended April 1, 2001. The amortization of goodwill and other
intangibles was $13,150 for the three months ended April 1, 2001, representing
22 percent of net revenues. No amortization of goodwill and other intangibles
was incurred for the three months ended March 26, 2000. Currently, the Company
expects to incur approximately $40 million per quarter of additional
amortization of goodwill and other intangibles in future periods as a result of
this purchase transaction. Under current Generally Accepted Accounting
Principles, the goodwill and other intangibles are being amortized over periods
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.
In-process research and development. In-process research and development expense
relates to the purchase of Giganet, completed during the three months ended
April 1, 2001. The in-process research and development expense was $22,280 for
the three months ended April 1, 2001, representing 37 percent of net revenues.
No in-process research and development expenses were incurred for the three
months ended March 26, 2000.
Nonoperating Income. Nonoperating income consisted primarily of interest income.
The Company's nonoperating income increased $1,262 to $3,667 for the three
months ended April 1, 2001 compared to $2,405 for the comparable quarter 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, interest income for the three months ended April 1, 2001, included
$690 of interest income related to a pre-acquisition note receivable from
Giganet.
Income Taxes. For the quarter ended April 1, 2001, the Company recorded a tax
provision in the amount of $6,928. The tax provision is calculated using the
loss before income taxes and adding back the permanent differences, including
but not limited to, amortization of goodwill and other intangibles and the
in-process research and development charge multiplied by the effective tax rate
of 38 percent. For the quarter ended March 26, 2000, the Company recorded a tax
provision in the amount of $4,134.
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.
NINE MONTHS ENDED APRIL 1, 2001, COMPARED TO NINE MONTHS ENDED MARCH 26, 2000
Net Revenues. Net revenues for the nine months ended April 1, 2001, were
$186,919, an increase of $87,902, or 89 percent, from $99,017 for the nine
months ended March 26, 2000. Net revenues for the nine months ended April 1,
2001, consisted of $155,934 from sales to OEMs, $30,547 from sales sold through
distribution channels and $438 from sales directly to end users. This represents
an increase in OEM sales of $84,220, or 117 percent, and an increase in
distribution sales of $3,554, or 13 percent, and an increase in end-user sales
of $128, or 41 percent, compared to the same relative period of the prior fiscal
year.
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From a product line perspective, net revenues generated from the Company's Fibre
Channel products for the first nine months of fiscal 2001 ended April 1, 2001,
were $177,130, or 95 percent of total net revenues. This represents an increase
of $96,231, or 119 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
the 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 OEMs taking product directly and through distribution channels. Net
revenues from the Company's traditional networking products for the first nine
months of fiscal 2001 ended April 1, 2001, were $9,369, or five percent of net
revenues. This represents a decrease of $8,749, or 48 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 its traditional networking products will
contribute negligible revenues to succeeding quarters. Net revenues from the
Company's IP Storage Networking products were $420, or less than one percent of
total net revenues for the nine months ended April 1, 2001.
In the nine months ended April 1, 2001, direct sales to Compaq accounted for 27
percent, direct sales to IBM accounted for 18 percent, direct sales to EMC
accounted for 13 percent, and direct sales to Celestica accounted for 10 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 indirectly 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 28 percent of the Company's total net
revenues for IBM, 27 percent for Compaq and 21 percent for EMC for the nine
months ended April 1, 2001. For the nine months ended March 26, 2000, direct
sales to Compaq accounted for 20 percent, direct sales to EMC accounted for 17
percent, direct sales to IBM accounted for 15 percent, and direct sales to Avnet
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.
Total net revenues, including direct sales to the Company's customers and their
customer-specific models purchased indirectly through other distribution
channels, amounted to 24 percent of the Company's total net revenues for Compaq,
21 percent for EMC, and 17 percent for IBM for the nine months ended March 26,
2000. Direct sales to the Company's top five customers accounted for 72 percent
of total net revenues for the nine months ended April 1, 2001, compared to 73
percent for the comparable period of fiscal 2000.
Domestic net revenues were $115,176, or 62 percent of total net revenues, for
the nine months ended April 1, 2001, and $69,195, or 70 percent of total net
revenues, for the nine months ended March 26, 2000. This increase in domestic
net revenues of $45,981, or 66 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 $71,743, or 38 percent of total net revenues, for the nine months
ended April 1, 2001, and $29,822, or 30 percent of total net revenues, for the
nine months ended March 26, 2000. This increase in international net revenues of
$41,921, or 141%, 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. For the nine months ended April 1, 2001, gross profit increased
$49,318, or 107 percent, to $95,277 from $45,959 for the comparable nine months
of fiscal 2000. Gross margin increased to 51 percent for the nine months ended
April 1, 2001 compared to 46 percent for the same relative period of fiscal 2000
primarily due to efficiencies of scale and changes in product mix. Also, related
to its purchase of Giganet, the Company absorbed approximately one month of its
IP Storage Networking Group's cost of products sold, which included $6 of
amortized deferred compensation expense.
Engineering and development. Engineering and development expenses were $17,700
and $10,735 for the nine months ended April 1, 2001, and March 26, 2000,
representing 10 percent and 11 percent of net revenues, respectively.
Engineering and development expenses increased by $6,965, or 65 percent, for the
first nine months of fiscal 2001 compared to the first nine months of fiscal
2000 primarily due to the Company's increased investment in its Fibre Channel
product development. In addition, the Company absorbed approximately one month
of its IP Storage Networking Group's engineering and development expenses, which
included $215 of amortized deferred compensation expenses. Even though the
Company has continued to increase its investment in Fibre Channel product
development, it has not increased as quickly as revenue has expanded.
Consequently, engineering and development has decreased as a
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percentage 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.
Selling and marketing. Selling and marketing expenses were $11,319 and $7,270
for the nine months ended April 1, 2001, and March 26, 2000, representing six
percent and seven percent of net revenues, respectively. Selling and marketing
expenses for the first nine months of fiscal 2001 increased by $4,049, or 56
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. In addition,
the Company absorbed approximately one month of its IP Storage Networking
Group's selling and marketing expenses, which included $123 of amortized
deferred compensation expenses. However, as a portion of the selling and
marketing expenses is fixed, these expenses have not expanded at the same rate
as the Company's net revenues. Consequently, as a percentage of net revenues,
selling and marketing expenses have decreased.
General and administrative. General and administrative expenses were $8,147 and
$5,121 for the nine months ended April 1, 2001, and March 26, 2000, representing
four percent and five percent of net revenues, respectively. General and
administrative expenses increased by $3,026, or 59 percent, for the first nine
months of fiscal 2001 compared to the equivalent period of fiscal 2000,
primarily due to higher compensation associated with additional employees and
higher revenues. In addition, the Company absorbed approximately one month of
its IP Storage Networking Group's general and administrative expenses, which
included $25 of amortized deferred compensation expenses. 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 slightly.
Amortization of goodwill and other intangibles. The amortization of goodwill and
other intangibles that related to the Company's purchase of Giganet was $13,150
for the nine months ended April 1, 2001, representing seven percent of net
revenues. No amortization of goodwill and other intangibles was incurred for the
nine months ended March 26, 2000. Currently, the Company expects to incur
approximately $40 million per quarter of additional amortization of goodwill and
other intangibles in future periods as a result of this purchase transaction.
Under current Generally Accepted Accounting Principles, the goodwill and other
intangibles are being amortized over periods 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.
In-process research and development. The in-process research and development
expense that related to the purchase of Giganet was $22,280 for the nine months
ended April 1, 2001, representing 12 percent of net revenues. No in-process
research and development expenses were incurred for the nine months ended March
26, 2000.
Nonoperating Income. The Company's nonoperating income increased $5,426 to
$11,702 for the first nine months of fiscal 2001 compared to $6,276 for the
first nine months 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, for the nine months ended April 1, 2001, interest
income included $690 related to a pre-acquisition note receivable from Giganet
and the Company recognized a one-time gain of $1,884 from the sale of a
strategic investment.
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Income Taxes. For the nine months ended April 1, 2001, the Company recorded a
tax provision in the amount of $26,669. The tax provision is calculated using
the loss before income taxes and adding back the permanent differences,
including but not limited to, amortization of goodwill and other intangibles and
the in-process research and development charge multiplied by the effective tax
rate of 38 percent. For the nine months ended March 26, 2000, the Company
recorded a tax provision in the amount of $5,864.
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.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2001, the Company had $223,463 in working capital, and $225,706 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 increased by $18,106 during the first nine
months of fiscal 2001 from $23,471 as of July 2, 2000, to $41,577 as of April 1,
2001. This increase in cash and cash equivalents was due to the Company's
operating activities and financing activities, which provided $57,330 and $8,798
of cash and cash equivalents, respectively. The cash provided by operating and
financing activities was partially offset by investing activities, which used
$48,022 of cash and cash equivalents.
Operating activities provided $57,330 of cash and cash equivalents for the nine
months ended April 1, 2001. This increase in cash and cash equivalents was
primarily due to the Company's net income adjusted for the amortization of
goodwill and other intangibles and in-process research and development expense,
an increase in 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 $32,610
of cash and cash equivalents for the nine months ended March 26, 2000. This
increase in cash and cash equivalents was primarily due to the Company's net
income and the tax benefit from the exercise of stock options as well as changes
in other working capital balances.
Investing activities, including purchases of investments of $387,352, maturities
of investments of $357,150, acquisitions of property and equipment of $7,789 and
payments for the purchase of Giganet, Inc., net of cash acquired, of $15,515,
used $48,022 of cash and cash equivalents during the nine months ended April 1,
2001. For the same relative period of fiscal 2000, investing activities, which
primarily included purchases of investments of $474,713, maturities of
investments of $434,353 and the acquisition of property and equipment of $1,735,
used $42,065 of cash and cash equivalents.
Net financing activities, which were primarily limited to proceeds from the
exercise of stock options, provided $8,798 of cash and cash equivalents during
the nine months ended April 1, 2001 compared to providing $3,440 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 storage networking product
development, including Fibre Channel and its recently acquired IP Storage
Networking Group, 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.
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.
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RISK FACTORS
OUR BUSINESS DEPENDS UPON THE CONTINUED DEVELOPMENT OF THE STORAGE NETWORKING
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 our
storage networking technologies as alternatives to other technologies
traditionally utilized for network and storage communications. The storage
networking market, while rapidly evolving and attracting an increasing number of
market participants, is still at an early stage of deployment. We believe the
storage networking market will continue to expand and that our investment in the
storage networking market represents our greatest opportunity for revenue growth
and profitability in the future. However, we cannot be certain that storage
networking products will gain broader market acceptance or that customers will
choose our technology and products. Among our storage networking products, Fibre
Channel products accounted for 95 percent and IP Storage Networking products
accounted for less than one percent of total net revenues for the nine months
ended April 1, 2001. If the storage networking 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 Small Computer Systems Interface
("SCSI") compete with our Fibre Channel and IP Storage Networking technologies
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 storage networking 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 storage
networking technology.
While we have secured numerous design wins for our storage networking products
from OEM customers, several of these customers are still at the early stages of
incorporating our storage networking products 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 reduced demand from our
customers if our customers are unable to acquire the components used in
conjunction with our products in their deployments;
o The market acceptance of our new 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;
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o Changes in the mix of sales channels;
o The level of international sales;
o Seasonality;
o Personnel changes;
o Changes in customer budgeting and spending;
o Foreign currency exchange rates;
o Difficulties with the implementation of a new Enterprise Resource
Planning (ERP) System; and
o General economic conditions.
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. Alternatively, orders already in backlog may be
deferred or cancelled. As of April 1, 2001, we had $55,743 of total backlog
(orders scheduled to ship within 180 days), of which $55,567 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 $24,495
for the three months ended April 1, 2001 and a net loss of $10,838 for the
fiscal year ended June 28, 1998. The net loss for the three months ended April
1, 2001, included $22,280 of in-process research and development expenses and
$13,150 of amortization of intangible assets that were related to the
acquisition of Giganet, Inc. The net loss for the fiscal year ended June 28,
1998 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 18 quarters through the quarter ended
April 1, 2001, 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 nine months ended April 1, 2001, direct sales to 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,
resellers or other third parties. Total net revenues, including direct sales to
our customers and their customer-specific models purchased indirectly through
other distribution channels, amounted to 28 percent of our total net revenues
for IBM, 27 percent for Compaq, and 21 percent for EMC for the nine months ended
April 1, 2001. For the comparable period in fiscal 2000, direct sales to Compaq
were 20 percent, direct sales to EMC accounted for 17 percent, direct sales to
IBM represented 15 percent, and direct sales to Avnet accounted for 13 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 24 percent of our total net revenues for
Compaq, 21 percent for EMC, and 17 percent for IBM for the nine months ended
April 1, 2001. Direct sales to our top five customers accounted for 72 percent
of total net
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revenues for the nine months ended April 1, 2001, and 73 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 41 days at April 1, 2001, 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.
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 nine months ended April 1, 2001, we derived approximately
84 percent of our net revenues from OEMs and 16 percent from sales through
distribution. For the comparable period in fiscal 2000, we derived approximately
72 percent of our net revenues from OEMs and 27 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.
During the three months ended April 1, 2001, we experienced a downturn in Fibre
Channel host bus adapter demand first evidenced by order deferrals disclosed by
us in early February 2001. As of April 1, 2001, we had $55,743 total backlog
compared to $80,640 of total backlog as of December 31, 2000. In the event 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 Infiniband, iSCSI, PCI-X, SCSI over IP
("SOIP") and Virtual Interface ("VI") 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 storage networking 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 and cost-effective 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.
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 storage networking 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. In the storage networking market, we compete primarily against
Adaptec, Alacritech, Agilent, Intel, JNI, LSI Logic, QLogic and, to a lesser
extent, several smaller companies. We cannot be certain that we will be able to
compete successfully against either current or potential competitors in the
future.
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.
Since we first introduced our first Fibre Channel products, we have experienced
downward pressure on their average unit selling prices. 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 ("MSL"), we only manage the
supply of a small number of our product components. K*TEC Electronics
manufactures for us within the United States, while MSL manufactures for us in
both the United States and in Europe at their Global Manufacturing Services
production facility in Valencia, Spain. Currently, we rely upon
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K*TEC Electronics and 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 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 storage networking
technologies and technical support of our storage networking 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 our storage networking product lines. 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. If we are unable to attract new technical employees, or are unable
to retain our current key technical employees, our business, results of
operations and financial condition could be materially adversely affected.
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OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
For the nine months ended April 1, 2001, sales in the United States accounted
for 62 percent of our total net revenues, sales in Europe accounted for 34
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 nine
months in fiscal 2000, sales in the United States accounted for 70 percent of
total net revenues, sales in Europe accounted for 26 percent of our total net
revenues, and sales in the Pacific Rim countries accounted for four percent of
our total 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. 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, some of our products are produced at Global Manufacturing
Services, a MSL production facility in Valencia, Spain.
We encounter risks inherent in international operations. 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 Changes in the value of local currencies relative to our functional
currency;
o Trade restrictions;
o Changes in tariffs; and
o General economic and social conditions within foreign countries.
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.
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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.
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 related to our 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, WHICH HAS AND MAY RESULT IN LAWSUITS AGAINST US AND
OUR OFFICERS AND DIRECTORS.
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. In this
regard, we and certain of our officers and directors have been named as
defendants in securities class action lawsuits filed in the United States
District Court, Central District of California. Such lawsuits allege that we and
certain of our officers and directors made misrepresentations and omissions in
violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. As
a result of these lawsuits, a number of derivitive cases have been filed in
California and Delaware alleging that certain of officers and directors breached
their fiduciary duties to the Company in connection with the events alleged in
the class action lawsuits. The complaints generally seek compensatory damages,
costs and attorney's fees in an unspecified amount. Such litigation could result
in substantial costs to us and a diversion of our management's attention and
resources. While we believe that the lawsuits are without legal merit and intend
to defend them vigorously, because the lawsuits are at an early stage, it is not
possible to predict whether we will incur any material liability in connection
with such lawsuits.
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.
ALTHOUGH WE EXPECT THAT OUR MERGER WITH GIGANET WILL RESULT IN BENEFITS, THOSE
BENEFITS MAY NOT BE REALIZED AND OUR STOCK PRICE MAY DECLINE AS A RESULT.
On March 1, 2001, we completed our merger 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;
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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.
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.
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THE PURCHASE ACCOUNTING TREATMENT OF THE MERGER OF GIGANET RESULTED IN A SIZABLE
ONE-TIME IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE, 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 incurred a one-time writedown of $22,280 for in-process research and
development upon the close of the merger, which negatively impacted our results
of operations for the three months ended April 1, 2001. In addition, we expect
to incur recurring merger-related expenses associated with the amortization of
goodwill and other intangibles, as well as noncash compensation charges arising
out of Giganet options assumed by the Company. The valuation of the merger was
$691 million, a valuation that resulted in $645 million of goodwill and other
intangibles related to the merger. We are amortizing these intangibles over
periods 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 faced previously. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
At April 1, 2001, the Company's investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents, of $184,129. 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 April 1, 2001, the decline in the
fair market value of the portfolio would not be material to the Company's
financial position, results of operations and cash flows.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Beginning on or about February 20, 2001, the Company and certain of its officers
and directors were named as defendants in securities class action lawsuits filed
in the United States District Court, Central District of California. To the
Company's knowledge, as of March 16, 2001, approximately seven of these lawsuits
have been filed. The Company expects that the cases will be consolidated, and
that a consolidated complaint will be filed after the Court appoints a lead
plaintiff. The plaintiffs in the actions purport to represent purchasers of our
common stock during various periods ranging from January 18, 2001 through
February 9, 2001. The complaints allege that the Company and certain of its
officers and directors made misrepresentations and omissions in violation of
sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaints
generally seek compensatory damages, costs and attorney's fees in an unspecified
amount. As a result of these lawsuits, a number of derivitive cases have been
filed in California and Delaware alleging that certain officers and directors
breached their fiduciary duties to the Company in connection with the events
alleged in the class action lawsuits. We believe that the lawsuits are without
legal merit and intend to defend them vigorously. However, because the lawsuits
are at an early stage, it is not possible to predict whether the Company will
incur any liability in connection with such lawsuits. The Company has received
inquiries about the events giving rise to the lawsuits from the Securities and
Exchange Commission and the Nasdaq Stock Market.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 1, 2001, in connection with its acquisition of Giganet, Inc., the
Company issued 6,744,638 shares of Emulex common stock in exchange for all of
the outstanding shares of Giganet common stock and preferred stock. Of the total
shared issued, 800,000 shares are held in escrow for a period of one year to
secure indemnification obligations of Giganet under the terms of the Merger
Agreement. In addition, the Company reserved for issuance an aggregate of
approximately 1,250,000 shares of its common stock for issuance upon exercise of
Giganet options assumed by the Company.
ITEM 5. OTHER INFORMATION.
On March 2, 2001, Cornelius A. Ferris was appointed to the Registrant's Board of
Directors.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 2.1 Agreement and Plan of Merger, as amended, relating to the
acquisition of Giganet, Inc. by the Registrant (incorporated
by reference to Exhibit 2.1 and 2.2 to the Registrant's
Current Reports on Form 8-K filed on December 21, 2000 and
March 14, 2001, respectively).
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 by reference 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 (incorporated by reference to Exhibit 3.4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2000).
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 10.1 Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8, filed March 2, 2001).
Exhibit 10.2 Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8, filed
December 28, 2000).
Exhibit 10.3 Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Exhibit
99.2 to the Registrant's Registration Statement on Form S-8,
filed December 28, 2000).
Exhibit 10.4 Emulex Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-8, filed December 28, 2000).
Exhibit 10.5 Consulting agreement dated December 7, 2000 between Cornelius
A. Ferris and the Registrant.
(b) Reports on Form 8-K
(1) The registrant filed Form 8-K on March 14, 2001, as amended on Form
8-K/A on May 10, 2001, with respect to the acquisition of Giganet, Inc.
reported under Item 2 - Acquisition or Disposition of Assets.
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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: May 16, 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 and
Chief Accounting Officer)
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EXHIBIT INDEX
EXHIBITS DESCRIPTION
-------- -----------
Exhibit 2.1 Agreement and Plan of Merger, as amended, relating to the
acquisition of Giganet, Inc. by the Registrant (incorporated
by reference to Exhibit 2.1 and 2.2 to the Registrant's
Current Reports on Form 8-K filed on December 21, 2000 and
March 14, 2001, respectively).
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 by reference 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 (incorporated by reference to Exhibit 3.4 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2000).
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 10.1 Giganet, Inc. 1995 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Registrant's Registration
Statement on Form S-8, filed March 2, 2001).
Exhibit 10.2 Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Exhibit 99.1 to the
Registrant's Registration Statement on Form S-8, filed
December 28, 2000).
Exhibit 10.3 Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Exhibit
99.2 to the Registrant's Registration Statement on Form S-8,
filed December 28, 2000).
Exhibit 10.4 Emulex Corporation Employee Stock Purchase Plan (incorporated
by reference to Exhibit 99.3 to the Registrant's Registration
Statement on Form S-8, filed December 28, 2000).
Exhibit 10.5 Consulting agreement dated December 7, 2000 between Cornelius
A. Ferris and the Registrant.