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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NO. 0-11007
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 51-0300558
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(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
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(714) 662-5600
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(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 November 10, 2000, the registrant had 36,831,678 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
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PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
October 1, 2000 and July 2, 2000 2
Condensed Consolidated Statements of Income
Three months ended October 1, 2000
and September 26, 1999 3
Condensed Consolidated Statements of Cash Flows
Three months ended October 1, 2000
and September 26, 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Qualitative and Quantitative Disclosures about Market Risk 20
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
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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)
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October 1, July 2,
Assets 2000 2000
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Current assets:
Cash and cash equivalents $ 27,368 $ 23,471
Investments 135,426 128,234
Accounts and other receivables, net 35,160 24,332
Inventories, net 12,713 12,635
Prepaid expenses 1,065 1,021
Deferred income taxes 453 453
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Total current assets 212,185 190,146
Property and equipment, net 8,911 6,927
Long-term investments 29,327 29,293
Deferred income taxes and other assets 3,570 3,629
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$253,993 $229,995
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 19,657 $ 17,869
Accrued liabilities 6,878 6,355
Income taxes payable and other current liabilities 359 320
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Total current liabilities 26,894 24,544
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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; 120,000,000 shares
authorized; 36,493,484 and 36,233,424 issued
and outstanding at October 1, 2000, and
July 2, 2000, respectively 3,649 3,623
Additional paid-in capital 167,584 158,814
Retained earnings 55,866 43,014
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Total stockholders' equity 227,099 205,451
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$253,993 $229,995
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See accompanying notes to condensed consolidated financial statements.
2
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
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Three Months Ended
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October 1, September 26,
2000 1999
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Net revenues $55,456 $28,896
Cost of sales 27,802 15,999
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Gross profit 27,654 12,897
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Operating expenses:
Engineering and development 4,815 3,350
Selling and marketing 2,855 2,340
General and administrative 2,193 1,505
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Total operating expenses 9,863 7,195
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Operating income 17,791 5,702
Nonoperating income 2,938 1,854
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Income before income taxes 20,729 7,556
Income tax provision 7,877 756
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Net income $12,852 $ 6,800
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Net income per share:
Basic $ 0.35 $ 0.20
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Diluted $ 0.33 $ 0.18
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Number of shares used in per share computations:
Basic 36,371 34,415
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Diluted 38,567 37,766
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See accompanying notes to condensed consolidated financial statements.
3
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
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Three Months Ended
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October 1, September 26,
2000 1999
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Cash flows from operating activities:
Net income $ 12,852 $ 6,800
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 674 173
Loss on disposal of property and equipment 2 o
Provision for doubtful accounts 52 158
Deferred income taxes -- (2,320)
Changes in assets and liabilities:
Accounts receivable (10,880) (4,646)
Inventories (78) 2,328
Accounts payable 1,788 (110)
Accrued liabilities 523 3,622
Income taxes payable 7,877 3,076
Prepaid expenses and other assets 15 (140)
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Net cash provided by operating activities 12,825 8,941
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Cash flows from investing activities:
Net proceeds from sale of property and equipment -- 3
Additions to property and equipment (2,660) (290)
Purchases of investments (117,965) (250,258)
Maturities of investments 110,739 233,499
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Net cash used in investing activities (9,886) (17,046)
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Cash flows from financing activities:
Principal payments under capital leases (1) (7)
Proceeds from issuance of common stock under stock option plans 959 1,631
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Net cash provided by financing activities 958 1,624
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Net increase (decrease) in cash and cash equivalents 3,897 (6,481)
Cash and cash equivalents at beginning of period 23,471 22,284
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Cash and cash equivalents at end of period $ 27,368 $ 15,803
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1 $ --
Income taxes -- 1
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During the quarter ended October 1, 2000, the Company recognized a credit to
additional paid-in capital and a debit to income taxes payable of $7,837 related
to the tax benefit from exercises of stock options under the Company's stock
option plans. During the quarter ended September 26, 1999, the Company
recognized a credit to additional paid-in capital and a debit to income taxes
payable of $2,982 related to the tax benefit from exercises of stock options
under the company's stock option plans.
See accompanying notes to condensed consolidated financial statements.
4
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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 October 1, 2000, and July 2, 2000, and the statements of
income for the three months ended October 1, 2000, and September 26,
1999, and the statements of cash flows for the three months then ended.
Certain reclassifications have been made to the condensed consolidated
financial statements for the quarter ended September 26, 1999 to conform
to the presentation for the quarter ended October 1, 2000. Interim
results for the three months ended October 1, 2000, are not necessarily
indicative of the results that may be expected for the year ending July
1, 2001. The interim financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2000. References to dollar and share amounts are in thousands,
except per share data, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
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October 1, July 2,
2000 2000
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Raw materials $ 4,784 $ 1,016
Finished goods 7,929 11,619
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$12,713 $12,635
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3. Earnings per Share
Basic net income per share is computed by dividing income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing income by the
weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding stock options
is reflected in diluted net income per share by application of the
treasury stock method. The following table sets forth the computation of
basic and diluted net income per share:
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Three Months Ended
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October 1, September 26,
2000 1999
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Numerator:
Net income $12,852 $ 6,800
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Denominator:
Denominator for basic net income per
share - weighted average shares outstanding 36,371 34,415
Effect of dilutive securities:
Dilutive options outstanding 2,196 3,351
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Denominator for diluted net income per
share - adjusted weighted average shares 38,567 37,766
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Basic net income per share $ 0.35 $ 0.20
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Diluted net income per share $ 0.33 $ 0.18
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Options to purchase 667 shares of common stock at prices in excess of
$81.78 per share were outstanding at October 1, 2000, but were not
included in the computation of diluted net income per share for the
three month period then ended. These options were excluded from the
computation of diluted net income per share because the options'
exercise price was greater than the average market price of the common
shares during the respective periods, and therefore, the effect would be
antidilutive. All outstanding options to purchase shares of common stock
at September 26, 1999, were included in the computation of diluted net
income per share for the three month period then ended.
4. Accrued Liabilities
Components of accrued liabilities are as follows:
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October 1, July 2,
2000 2000
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Payroll and related costs $3,064 $3,213
Warranty and related reserves 1,013 998
Unearned revenue 950 556
Other 1,851 1,588
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$6,878 $6,355
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5. Common Stock Split
At the Company's Annual Stockholders meeting to be held on November 16,
2000, stockholders of record on October 2, 2000, will be entitled to
vote on an amendment to the Company's Certificate of Incorporation that
increases the number of authorized shares of Common Stock from 120,000
to 240,000 and authorizes a two-for-one stock split.
6. Commitments and Contingencies
The Company is currently undergoing an examination by the California
Franchise Tax Board of 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.
7. Subsequent Event
During the quarter ended October 1, 2000, the Company purchased
approximately 666 shares of CrosStor Software, Inc's Series B
Convertible Preferred Stock for $4,000 and held the stock at cost as of
October 1, 2000. On November 1, 2000, EMC Corporation announced the
acquisition of CrosStor Software, Inc. The Company currently expects to
receive approximately 90 shares of EMC Corporation stock as a result of
this transaction.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUBSEQUENT EVENT
During the quarter ended October 1, 2000, the Company purchased 665,577 shares
of CrosStor Software, Inc's Series B Convertible Preferred Stock for $4 million
and held the stock at cost as of October 1, 2000. On November 1, 2000, EMC
Corporation announced the acquisition of CrosStor Software, Inc. The Company
currently expects to receive approximately 90,000 shares of EMC Corporation
stock as a result of this transaction.
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's ability to respond to such changes; the fact
that the Fibre Channel market is at an early stage of development; the highly
competitive nature of the markets for the Company's products; the Company's
ability to attract and retain skilled personnel; the Company's reliance on
third-party suppliers for components used in the Company's products and on
manufacturing subcontractors that assemble and distribute the Company's
products; the Company's reliance on certain OEMs, distributors and key
customers; the fact that potential acquisitions or strategic investments may be
more costly or less profitable than anticipated; and potential fluctuations in
the company's future effective tax rate. The Company cautions the reader,
however, that these lists of risk factors may not be exhaustive. The Company
expressly disclaims any obligation or undertaking to release publicly any
updates or changes to these forward-looking statements that may be made to
reflect any future events or circumstances. References contained herein to
"Emulex," the "Company," "we," "our" and "us" refer to Emulex Corporation and it
subsidiaries.
COMPANY OVERVIEW
Emulex Corporation is a leading designer, developer and supplier of a broad line
of Fibre Channel host adapters, hubs, application-specific computer chips
("ASICs"), and software products that provide connectivity solutions for Fibre
Channel storage area networks ("SANs"), network attached storage (" NAS"), and
redundant array of independent disks ("RAID") storage. The Company's products
are based on internally developed ASIC technology, and are deployable across a
variety of SAN configurations, system buses and operating systems, enhancing
data flow between computers and peripherals. The Company's products offer
customers the unique combination of critical reliability, scalability, and high
performance, and can be customized for mission-critical server and storage
system applications. Over the course of its history, the Company has also
designed, developed and marketed traditional networking products such as printer
servers and network access products, including communications servers and wide
area network ("WAN") adapters. The Company markets to original equipment
manufacturers ("OEMs") and end users through its own worldwide selling
organization, as well as two-tier distribution partners.
7
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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.
References to dollar amounts are in thousands unless otherwise specified.
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Percentage of Net Revenues
For the Three Months Ended
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October 1, September 26,
2000 1999
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Net revenues 100.0% 100.0%
Cost of sales 50.1 55.4
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Gross profit 49.9 44.6
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Operating expenses:
Engineering and development 8.7 11.6
Selling and marketing 5.1 8.1
General and administrative 4.0 5.2
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Total operating expenses 17.8 24.9
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Operating income 32.1 19.7
Nonoperating income 5.3 6.4
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Income before income taxes 37.4 26.1
Income tax provision 14.2 2.6
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Net income 23.2% 23.5%
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NET REVENUES
Net revenues for fiscal 2001's first quarter ended October 1, 2000, were
$55,456, an increase of $26,560, or 92 percent, from the same quarter of fiscal
2000. Net revenues for the quarter consisted of $47,107 from sales to OEMs,
$8,077 from sales sold through distribution channels and $272 from sales
directly to end users. This represented an increase in OEM sales of $24,805, or
111 percent, an increase in distribution sales of $1,613, or 25 percent, and an
increase in end user sales of $142, or 109 percent, compared to the same quarter
of fiscal 2000.
Net revenues for the quarter ended October 1, 2000, increased $14,701, or 36
percent, to $55,456 from $40,755 for the quarter ended July 2, 2000, the fourth
quarter of fiscal 2000. This sequential growth from the previous quarter is
primarily due to increased sales of the Company's Fibre Channel products and, to
a lesser extent, increased demand for last time buys of the Company's
traditional networking products. The Company issued last time buy notifications
to customers for its traditional networking products during the fourth quarter
of fiscal 2000. There can be no assurance that the Company will continue to
achieve these growth rates, or favorable increases at all, when compared to the
preceding quarter or the comparable period of the prior year.
From a product line perspective, net revenues generated from the Company's Fibre
Channel products for the quarter ended October 1, 2000 were $50,244, or 91
percent of total net revenues. This represents an increase of $28,625, or 132
percent, from the same quarter of fiscal 2000. The increase in net revenues from
the Company's Fibre Channel products was 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 quarter ended October 1, 2000, were
$5,212, or nine percent of total net revenues. Despite the sequential increase
in traditional networking product net revenues from the fourth quarter of fiscal
2000 to the quarter ended October 1, 2000 described in the paragraph above,
traditional networking product net revenues decreased $2,065, or 28 percent,
compared to the same quarter of fiscal 2000. The decrease in net revenues from
the Company's traditional networking products was principally due to the ongoing
maturation of these products and a decrease in the Company's focus on these
products. The Company expects that revenues from its traditional networking
products will diminish rapidly in upcoming quarters.
8
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For the quarter ended October 1, 2000, direct sales to Compaq accounted for 26
percent; direct sales to IBM, including Sequent, accounted for 19 percent;
direct sales to EMC, including Data General, accounted for 14 percent; and sales
to Celestica accounted for 11 percent of total net revenues during this period.
No other customer accounted for more than 10 percent of total net revenues
during this period. In the quarter ended October 1, 2000, some of the Company's
larger OEM customers have 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 30 percent of total net revenues for IBM, 26
percent for Compaq and 22 percent for EMC. Direct sales to the Company's top
five customers accounted for 75 percent of total net revenues for the quarter
ended October 1, 2000, compared to 73 percent for the same quarter of fiscal
2000.
Domestic net revenues were $37,299, or 67 percent of total net revenues, for the
quarter ended October 1, 2000, and $20,459, or 71 percent of total net revenues,
for the same quarter of fiscal 2000. The increase in domestic net revenues of
$16,840, or 82 percent, is principally due to the increased level of Fibre
Channel product shipments during the current fiscal year. The increase in Fibre
Channel shipments is primarily the result of the increased size of the market
for Fibre Channel products and the increased market acceptance of the Company's
Fibre Channel products. International net revenues were $18,157, or 33 percent
of total net revenues, for the quarter ended October 1, 2000, and $8,437, or 29
percent of total net revenues, for the same period of fiscal 2000. The increase
in international net revenues of $9,720, or 115 percent, is also principally due
to the increasing level of Fibre Channel product shipments during the current
year. Although both domestic and international net revenues have increased,
international net revenues have become a larger percent of net revenues due to
the increased market acceptance of Fibre Channel products beyond the domestic
market in the current fiscal year.
GROSS PROFIT
Cost of sales included the cost of production of finished products, as well as
support costs and other expenses related to inventory management, manufacturing
quality and order fulfillment. For the quarter ended October 1, 2000, gross
profit increased $14,757, or 114 percent, to $27,654 from $12,897 for the same
quarter of fiscal 2000. Gross margin increased to 50 percent for the quarter
ended October 1, 2000, compared to 45 percent for the same quarter of fiscal
2000, due primarily to the continuing shift in product mix towards the Company's
higher margin Fibre Channel products.
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 $4,815 and $3,350 for the quarters ended October 1,
2000, and September 26, 1999, representing nine and 12 percent of net revenues,
respectively. Engineering and development expenses increased by $1,465, or 44
percent, from the first quarter of fiscal 2000 to the first quarter of fiscal
2001 as the Company continued to increase its investment in its Fibre Channel
product development. Even though the Company has continued to increase its
investment in Fibre Channel product development, it has not increased as quickly
as net revenues have expanded. Consequently, engineering and development has
decreased as a 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 in the Fibre Channel market. Engineering and
development expenses can fluctuate from quarter to quarter depending on several
factors, including new product introduction schedules, hiring patterns and
depreciation of capital equipment.
SELLING AND MARKETING
Selling and marketing expenses consisted primarily of salaries, commissions and
related expenses for personnel engaged in the marketing and sale of the
Company's products, as well as trade shows, product literature and promotional
support costs. Selling and marketing expenses were $2,855 and $2,340 for the
quarters ended October 1, 2000 and September 26, 1999, representing five and
eight percent of net revenues, respectively. Selling and marketing expenses
increased by $515, or 22 percent, from the first quarter of fiscal 2000 to the
first quarter of fiscal
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2001. This increase was primarily due to increased salaries and commissions
associated with additional employees and higher net revenues, as well as
increased promotion and advertising costs. 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 consisted primarily of salaries and related
expenses for executives, financial accounting support, human resources,
administrative services, professional fees and other associated corporate
expenses. General and administrative expenses were $2,193 and $1,505 for the
quarters ended October 1, 2000 and September 26, 1999, representing four and
five percent of net revenues, respectively. General and administrative expenses
increased by $688, or 46 percent, from the first quarter of fiscal 2000 to the
first quarter of fiscal 2001, primarily due to additional employees and higher
compensation associated with the higher net revenues. Similar to selling and
marketing expenses, these expenses have not expanded at the same rate as the
Company's net revenues. Consequently, as a percentage of net revenues, general
and administrative expenses have decreased slightly.
NONOPERATING INCOME
Nonoperating income consisted primarily of interest income. The Company's
nonoperating income increased $1,084 to $2,938 for the quarter ended October 1,
2000 compared to $1,854 for the quarter ended September 26, 2000. This increase
in nonoperating income was 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.
INCOME TAXES
For the quarter ended October 1, 2000, the Company recorded a 38 percent tax
provision in the amount of $7,877. For the quarter ended September 26, 1999, the
Company recorded a net tax provision of 10 percent in the amount of $756. The
lower net effective tax rate in fiscal 2000 was due to utilization of net
operating loss carryforwards that were held net of a substantial valuation
allowance.
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's 1989, 1990 and 1991 California income tax returns.
The Company is also undergoing examination by the Internal Revenue Service of
Emulex Caribe's 1995 U.S. tax return. It is management's belief that the outcome
of these examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. All companies are required to follow the
guidance in SAB 101 no later than the fourth quarter in fiscal year 2001, with
restatement of earlier quarters in fiscal 2001 required, if necessary. The SEC
has recently issued further guidance with respect to adoption of specific issues
addressed by SAB 101. The Company believes that the impact of SAB 101 will not
have a material effect on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). This Interpretation clarifies the definition of employee for
purposes of applying Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company believes that the impact of
FIN 44 will not have a material effect on its financial position or results of
operations.
10
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LIQUIDITY AND CAPITAL RESOURCES
At October 1, 2000, the Company had $185,291 in working capital, and $192,121 in
cash and cash equivalents, short-term 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, short-term investments and long-term investments. The
Company's cash and cash equivalents increased by $3,897 during the first quarter
of fiscal 2001 from $23,471 as of July 2, 2000, to $27,368 as of October 1,
2000. This increase in cash and cash equivalents was primarily due to the
operating activities and financing activities, which provided $12,825 and $959
of cash and cash equivalents, respectively, while investing activities used
$9,886 of cash and cash equivalents.
Operating activities provided $12,825 of cash and cash equivalents for the
quarter ended October 1, 2000 compared to providing $8,941 of cash and cash
equivalents for the same quarter of fiscal 2000. This increase in cash and cash
equivalents was primarily due to the Company's increased net income. Operating
activities in the quarter ended October 1, 2000 included net income of $12,852,
increases in income taxes payable of $7,877 and accounts payable of $1,788,
offset by an increase in accounts receivable of $10,880, and changes in other
working capital balances. Investing activities, which included purchases of
investments of $117,965, maturities of investments of $110,739, as well as the
acquisition of property and equipment of $2,660, used $9,886 of cash and cash
equivalents during the quarter ended October 1, 2000. For the same quarter of
fiscal 2000, investing activities, which included purchases of investments of
$250,258, maturities of investments of $233,499, as well as the acquisition of
property and equipment of $290, used $17,046 of cash and cash equivalents. Net
financing activities, which were limited to proceeds from the exercise of stock
options during the quarter ended October 1, 2000, provided $958 of cash and cash
equivalents during the quarter ended October 1, 2000 compared to providing
$1,624 of cash and cash equivalents in the same quarter of fiscal 2000.
Financing activities during the same quarter of fiscal 2000 also included
principal payments under capital leases.
As part of the Company's continued investment in Fibre Channel product
development, the Company expects to increase its capital expenditures, most
notably for engineering and development. The Company believes that its existing
cash balances, facilities and equipment leases, investments and anticipated cash
flows from operating activities will be sufficient to support its working
capital needs and capital expenditure requirements for at least the next 12
months.
RISK FACTORS
OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE FIBRE CHANNEL MARKET, AND OUR
REVENUES WILL BE LIMITED IF SUCH DEVELOPMENT DOES NOT OCCUR OR OCCURS MORE
SLOWLY THAN WE ANTICIPATE.
The size of our potential market is dependent upon the broad acceptance of Fibre
Channel technology as an alternative to other technologies traditionally
utilized for network and storage communications. The Fibre Channel market, while
rapidly evolving and attracting an increasing number of market participants, is
still at an early stage of development. We believe the Fibre Channel market will
continue to expand and that our investment in the Fibre Channel market
represents our greatest opportunity for revenue growth and profitability in the
future. However, we cannot be certain that Fibre Channel products will gain
broader market acceptance or that customers will choose our technology and
products. Fibre Channel products accounted for 91 percent of net revenues for
the quarter ended October 1, 2000. If the Fibre Channel market fails to develop,
develops more slowly than anticipated, attracts more competitors than we expect
(as discussed below), or if our products do not achieve market acceptance, our
business, results of operations and financial condition would be materially
adversely affected.
Alternative existing technologies such as SCSI compete with Fibre Channel
technology for customers. Some SCSI technology companies already have
well-established relationships with our current and potential customers, have
extensive knowledge of the markets we serve and have better name recognition and
more extensive development, sales and marketing resources than we have. Our
success also depends both on our own ability and on the ability of our OEM
customers to develop Fibre Channel solutions that are competitive with other
technologies. Additionally, proposed new technologies such as SCSI over IP,
Virtual Interface ("VI") and InfiniBand are still in the early development
stages and it is impossible to know what the end technology will provide. Given
the enormous support for Fibre Channel, we believe that there is a low
probability that a new standard will derail the Fibre Channel industry momentum
in the foreseeable future. However, ultimately, our business depends upon our
ability, along with the ability of our OEM customers, to convince end users to
adopt Fibre Channel technology.
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While we have secured numerous design wins for our Fibre Channel products from
OEM customers, nearly all of these customers are still at the early stages of
commercial shipments or at the developmental stage of incorporating Fibre
Channel throughout their product offerings. If our developmental and early stage
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:
- The size, timing and terms of customer orders;
- The relatively long sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
- Changes in our operating expenses;
- Our ability to develop and market new products;
- The ability of our contract manufacturers to produce and distribute
our products in a timely fashion;
- Integration of additional contract manufacturers or additional
sites of our current contract manufacturers;
- Component shortages, experienced by us or ones which result in
reduced demand from our customers if they are unable to acquire the
other components used in conjunction with our products in their
deployments;
- The market acceptance of our new Fibre Channel products;
- The timing of the introduction or enhancement of products by us,
our OEM customers and our competitors;
- The level of product and price competition;
- Our ability to expand our relationships with OEMs and distributors;
- Activities of, and acquisitions by, our competitors;
- Acquisitions or strategic investments made by us;
- Changes in technology, industry standards or consumer preferences;
- Increases in interest rates;
- Changes in the mix of sales channels;
- The level of international sales;
- Seasonality;
- Personnel changes;
- Changes in customer budgeting cycles;
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- Foreign currency exchange rates;
- Difficulties with the implementation of a new Enterprise Resource
Planning (ERP) System; and
- 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. Also, we have typically generated a large
percentage of our quarterly revenues in the last month of the quarter.
Additionally, individual OEM customer purchases can vary significantly from
quarter to quarter.
A decrease in the number of orders we receive is likely to adversely and
disproportionately affect our quarterly results of operations. This is because
our expense levels are partially based on our expectations of future sales and
our expenses may be disproportionately large as compared to sales in a quarter
with reduced orders. Hence, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any shortfall in
sales in relation to our quarterly expectations or any delay of customer orders
would likely have an immediate and adverse impact on our business, quarterly
results of operations and financial condition.
WE HAVE EXPERIENCED LOSSES IN OUR HISTORY.
We have experienced losses in our history, most recently a net loss of $10,838
for the fiscal year ended June 28, 1998, which included $12,545 of consolidation
charges related to the closure of our Puerto Rico manufacturing operations and
selected sales offices. While we have generated net income for 15 of the last 16
quarters through the quarter ended October 1, 2000, we cannot be certain that
revenues will remain at current levels or improve or that we will be profitable
at such revenue levels.
THE LOSS OF ONE OR MORE CUSTOMERS COULD HARM OUR REVENUES.
For the quarter ended October 1, 2000, direct sales to our top customer, Compaq,
represented 26 percent of our net revenues. Additionally, direct sales to IBM,
including Sequent, were 19 percent, direct sales to EMC, including Data General,
were 14 percent and sales to Celestica were 11 percent of our net revenues. For
the same quarter in fiscal 2000, direct sales to Compaq were 26 percent, direct
sales to IBM, including Sequent, represented 18 percent, and direct sales to
EMC, including Data General, accounted for 13 percent of our net revenues.
Direct sales to our top five customers accounted for 75 percent of net revenues
for the quarter ended October 1, 2000, and 73 percent of net revenues for the
same quarter in fiscal 2000. During the current quarter, some of our larger OEM
customers have purchased our products indirectly through distributors or
resellers. Total sales, including direct sales to our customers and their
customer-specific models purchased indirectly through other distribution
channels, amounted to 30 percent of our net revenues for IBM, 26 percent for
Compaq and 22 percent for EMC. 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. 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 quarter ended October 1, 2000, we derived approximately 85
percent of our net revenues from OEMs and 15 percent from sales through
distribution. For the same quarter in fiscal 2000, we derived approximately 77
percent of our net revenues from OEMs and 22 percent from distribution sales. We
cannot be certain that we will retain our current OEM and
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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.
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. We cannot
be certain that we will be successful in developing, manufacturing and marketing
new products or product enhancements that respond to such changes in a timely
manner and achieve market acceptance. We also cannot be certain that we will be
able to develop the underlying core technologies necessary to create new
products and enhancements, or that we will be able to license the core
technologies from third parties.
A key element of our business strategy is to develop multiple ASICs in order to
increase system performance and reduce manufacturing costs, thereby enhancing
the price/performance of our Fibre Channel products. We cannot be certain that
we will be successful at developing and incorporating ASICs effectively and in a
timely manner. Additionally, changes in technology and consumer preference could
potentially render our current products uncompetitive or obsolete. If we are
unable, for technological or other reasons, to develop new products or enhance
existing products in a timely manner in response to technological and market
changes, our business, results of operations and financial condition would be
materially adversely affected.
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:
- The timely development by us and our OEM customers of new products
with new functionality, increased speed and enhanced performance at
acceptable prices;
- The development costs facing our OEM customers;
- The compatibility of new products with both existing and emerging
industry standards;
- Technological advances;
- The ability to acquire all required components;
- Intellectual property issues; and
- 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
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products that use our technology would have a material adverse effect on our
business, results of operations and financial condition.
SOME OF OUR REVENUES ARE FROM PRODUCT LINES THAT ARE BEING PHASED OUT.
We have shifted the focus of our business to Fibre Channel technology. However,
some of our revenues still depend on sales of our traditional networking
products. These traditional networking products accounted for nine percent of
our net revenues for the quarter ended October 1, 2000. We believe any revenue
contribution from these products will be nominal after the end of calendar year
2000. If the maturation of these products were to occur faster than we
anticipate, our business, results of operations and financial condition could be
materially adversely affected.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. Our current and potential competition consists
of major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than we have.
We also expect that an increasing number of companies will enter the markets for
our Fibre Channel products. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their significant
resources, such as distribution channels and brand recognition, to acquire
significant market share. Emerging companies attempting to obtain a share of the
existing markets act as potential competition as well. Additionally, our
competitors continue to introduce products with improved price/performance
characteristics, and we will have to do the same to remain competitive.
Increased competition could result in significant price competition, reduced
revenues, lower profit margins or loss of market share, any of which would have
a material adverse effect on our business, results of operations and financial
condition. We cannot be certain that we will be able to compete successfully
against either current or potential competitors in the future.
In the Fibre Channel market, we compete primarily against Adaptec, Agilent, JNI,
LSI Logic, QLogic and, to a lesser extent, several smaller companies. During the
fourth quarter of fiscal 2000, we issued last time buy notifications to
customers for our traditional networking products, which include printer servers
and network access products. In the printer server market, we compete against
Hewlett-Packard, Intel, Lexmark and a number of smaller companies. In the
network access market, we compete against a number of networking companies who
offer network access solutions, including Compaq and IBM.
As is common in an emerging technology industry with non-exclusive development
arrangements, many of our OEM customers arrange second source agreements to meet
their requirements. Furthermore, in the future, our OEM customers may develop
products that compete with ours or purchase such products from our competitors
and may terminate their relationships with us as a result.
A DECREASE IN THE AVERAGE UNIT SELLING PRICES OF OUR FIBRE CHANNEL PRODUCTS
COULD ADVERSELY AFFECT OUR BUSINESS.
As the market for Fibre Channel products matures, it is likely that we will
experience downward pressure on the average unit selling prices of our Fibre
Channel products. To the extent that average unit selling prices of our Fibre
Channel products decrease without a corresponding decrease in the costs of such
products, our gross margins and financial performance could be materially
adversely affected.
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:
- Changing OEM product specifications;
- Difficulties in hiring and retaining necessary personnel;
- Difficulties in reallocating engineering resources and other
resource limitations;
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- Difficulties with independent contractors;
- Changing market or competitive product requirements;
- Unanticipated engineering complexity;
- Undetected errors or failures in software and hardware; and
- 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 MANUFACTURER 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:
- Discontinued production by a vendor;
- Undetected errors or failures;
- Natural disasters;
- Disruption in shipping channels;
- Difficulties associated with foreign operations; and
- 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. Hewlett-Packard and IBM are currently our sole suppliers for
components that enable some of our older-generation Fibre Channel products to
connect to networks. Motorola is currently our sole supplier of memory devices
incorporated into our Fibre Channel products. 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 transitioned the production of our products to a contract
manufacturer, K*TEC Electronics, currently a division of Kent Electronics
Corporation and recently sold to Thayer Capital Partners, we only maintain a
minimal supply of product components. Currently, we rely on K*TEC Electronics 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 on
K*TEC Electronics to manufacture, store and ship our products, if K*TEC
Electronics 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.
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A DECREASE IN THE DEMAND FOR HIGH PERFORMANCE COMPUTER AND STORAGE SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS.
A significant portion of our products are currently used in high-performance
computer and storage systems. Our Fibre Channel growth has been supported by
increasing demand for sophisticated networking and data storage solutions that
support enterprise computing requirements, including on-line transaction
processing, data mining, data warehousing, multimedia and Internet applications.
Should there be a slowing in the growth of demand for such systems, our
business, results of operations and financial condition could be materially
adversely affected.
THE INADEQUACY OF OUR INTELLECTUAL PROPERTY PROTECTIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of product
support and customer relations. At the same time, our success is partially
dependent on the proprietary technology contained in our products. We currently
rely on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect our intellectual property rights
in our products. For a more complete description of our intellectual property,
you should read "Business--Intellectual Property" contained in our most recently
filed Form 10-K.
We cannot be certain that the steps we take to protect our intellectual property
will adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or superior technology, or
that we can maintain such technology as trade secrets. In addition, the laws of
some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all. Our
failure to protect our intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. However, we have in the past, and may be required in the future, to
obtain licenses of technology owned by other parties. We cannot be certain that
the necessary licenses will be available or that they can be obtained on
commercially reasonable terms. If we were to fail to obtain such royalty or
licensing agreements in a timely manner and on reasonable terms, our business,
results of operations and financial condition would be materially adversely
affected.
THE LOSS OF KEY TECHNICAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant degree upon the performance and continued
service of engineers involved in the development of our Fibre Channel technology
and technical support of Fibre Channel products and customers. Our future
success depends upon our ability to attract, train and retain such personnel. We
will need to increase the number of technical staff members with experience in
high-speed networking applications as we further develop the Fibre Channel
product line. Competition for such highly skilled employees in our local
community as well as our industry is intense, and we cannot be certain that we
will be successful in recruiting and retaining such personnel. In addition,
employees may leave our company and subsequently compete against us. The loss of
these key technical employees could have a material adverse effect on our
business, results of operations and financial condition.
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
For the quarter ended October 1, 2000, sales in the United States accounted for
67 percent of our net revenues, sales in Europe accounted for 30 percent of our
net revenues, and sales in the Pacific Rim countries accounted for three percent
of our net revenues. During the same quarter in fiscal 2000, sales in the United
States accounted for 71 percent of net revenues, sales in Europe accounted for
27 percent of our net revenues, and sales in the Pacific Rim countries accounted
for two percent of our net revenues. We expect that sales in the United States
and Europe will continue to account for the substantial majority of our revenues
for the foreseeable future.
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We encounter risks inherent in international operations. All of our sales are
currently denominated in U.S. dollars. As a result, if the value of the U.S.
dollar increases relative to foreign currencies, our products could become less
competitive in international markets. Our international business activities
could be limited or disrupted by any of the following factors:
- The imposition of governmental controls and regulatory
requirements;
- The costs and risks of localizing products for foreign countries;
- Restrictions on the export of technology;
- Financial and stock market dislocations;
- Increases in interest rates;
- Longer accounts receivable payment cycles;
- Potentially adverse tax consequences;
- The burden of complying with a wide variety of foreign laws;
- Trade restrictions; and
- Changes in tariffs.
In addition, the revenues we earn in various countries in which we do business
may be subject to taxation by more than one jurisdiction, thereby adversely
affecting our earnings. These factors could harm future sales of our products to
international customers and have a material adverse effect on our business,
results of operations and financial condition.
EXPORT RESTRICTIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our Fibre Channel products are subject to U.S. Department of Commerce export
control restrictions. Neither we nor our customers may export such products
without obtaining an export license. These U.S. export laws also prohibit the
export of our Fibre Channel products to a number of countries deemed by the
United States to be hostile. These restrictions may make foreign competitors
facing less stringent controls on their products more competitive in the global
market than we or our Fibre Channel customers are. The U.S. government may not
approve any pending or future export license requests. In addition, the list of
products and countries for which export approval is required, and the regulatory
policies with respect thereto, could be revised. The sale of our Fibre Channel
products could be harmed by our failure or the failure of our customers to
obtain the required licenses or by the costs of compliance.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND SUCH ADDITIONAL FINANCING MAY
NOT BE AVAILABLE.
We currently anticipate that our available cash resources will be sufficient to
meet our expected working capital and capital expenditure requirements for at
least the next 12 months. However, we cannot assure you that such resources will
be sufficient for anticipated or unanticipated working capital and capital
expenditure requirements. We may need to raise additional funds through public
or private debt or equity financings in order to:
- Take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses
or technologies;
- Develop new products or services; or
- 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
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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.
We may pursue 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:
- Difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- The diversion of management's attention from other business
concerns;
- Risks of entering markets in which we have no or limited prior
experience; and
- The potential loss of key employees of the acquired company.
In the event that an acquisition or strategic investment does occur and we are
unable to successfully integrate operations, technologies, products or personnel
that we acquire, our business, results of operations and financial condition
could be materially adversely affected.
OUR STOCK PRICE IS VOLATILE.
The stock market in general, and the stock prices in technology-based companies
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public company. The market price of
our common stock has fluctuated in the past and is likely to fluctuate in the
future as well. Factors which could have a significant impact on the market
price of our common stock include, but are not limited to, the following:
- Quarterly variations in operating results;
- Announcements of new products by us or our competitors;
- The gain or loss of significant customers;
- Changes in analysts' earnings estimates;
- Rumors or dissemination of false information;
- Pricing pressures;
- Short selling of our common stock;
- General conditions in the computer, storage or communications
markets; or
- Events affecting other companies that investors deem to be
comparable to us.
In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
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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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
At October 1, 2000, the Company's investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents and the $4,000
strategic investment in CrosStor Software, Inc., of $160,753. 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
at October 1, 2000, the decline in the fair value of the portfolio would not be
material to the Company's financial position, results of operations and cash
flows.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 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 27.1 Financial Data Schedule.
Exhibit 99.1 Press Release of October 6, 2000, regarding proposed stock
split to be voted on at annual stockholders meeting on
November 16, 2000.
(b) The registrant has not filed any reports on Form 8-K during the period for
which this report is filed.
21
<PAGE> 23
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: November 13, 2000
EMULEX CORPORATION
By: /s/ Paul F. Folino
-----------------------------------
Paul F. Folino
President and Chief Executive Officer
By: /s/ Michael J. Rockenbach
-----------------------------------
Michael J. Rockenbach
Vice President and
Chief Financial Officer
(Principal Financial & Chief
Accounting Officer)
22
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
(a) 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 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 27.1 Financial Data Schedule.
Exhibit 99.1 Press Release of October 6, 2000, regarding proposed stock
split to be voted on at annual stockholders meeting on
November 16, 2000.
</TABLE>
