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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 DECEMBER 29, 1996
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 February 5, 1997, the registrant had 6,060,586 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 29, 1996 and June 30, 1996 2
Condensed Consolidated Statements of Operations
Three and six months ended December 29, 1996
and December 31, 1995 3
Condensed Consolidated Statements of Cash Flows
Six months ended December 29, 1996
and December 31, 1995 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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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)
<TABLE>
<CAPTION>
December 29, June 30,
Assets 1996 1996
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ - $ 1,635
Accounts and notes receivable, net 13,976 12,993
Inventories, net 11,380 14,671
Prepaid expenses 1,886 1,892
Income tax receivable 469 388
-------- --------
Total current assets 27,711 31,579
Property, plant and equipment, net 7,135 7,533
Other assets 556 188
-------- --------
$ 35,402 $ 39,300
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Note payable to bank $ 1,000 $ -
Current installments of capitalized
lease obligations 195 261
Accounts payable 4,998 8,699
Accrued liabilities 4,597 5,846
Deferred income taxes 112 688
-------- --------
Total current liabilities 10,902 15,494
Capitalized lease obligations,
excluding current installments 118 204
Deferred income taxes 2,518 1,572
-------- --------
13,538 17,270
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.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, $.20 par value; 20,000,000 shares authorized;
6,045,323 and 5,993,403 issued and outstanding at
December 29, 1996 and June 30, 1996, respectively 1,209 1,199
Additional paid-in capital 6,905 6,627
Retained earnings 13,750 14,204
-------- --------
Total stockholders' equity 21,864 22,030
-------- --------
$ 35,402 $ 39,300
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -----------------------------
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $16,058 $12,672 $32,010 $23,120
Cost of sales 10,112 8,648 20,594 15,802
------- ------- ------- -------
Gross profit 5,946 4,024 11,416 7,318
Operating expenses:
Engineering and development 2,201 2,897 4,701 5,940
Selling and marketing 1,935 2,842 4,014 5,815
General and administrative 1,189 1,240 2,432 2,476
Consolidation charges - - 1,280 -
------- ------- ------- -------
Total operating expenses 5,325 6,979 12,427 14,231
------- ------- ------- -------
Operating income (loss) 621 (2,955) (1,011) (6,913)
Nonoperating income (expense) (80) 39 126 129
------- ------- ------- -------
Income (loss) before income taxes 541 (2,916) (885) (6,784)
Provision for (benefit from) income taxes 54 - (431) (387)
------- ------- ------- -------
Net income (loss) $ 487 $(2,916) $ (454) $(6,397)
======= ======= ======= =======
Net income (loss) per common and common
equivalent share $ 0.08 $ (0.49) $ (0.08) $ (1.08)
======= ======= ======= =======
Weighted average number of common
and common equivalent shares 6,301 5,936 6,014 5,917
======= ======= ======= =======
</TABLE>
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)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
- -------------------------------------
Loss from continuing operations $ (454) $ (6,397)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization 1,396 1,144
Loss on disposal of property, plant and equipment 74 49
Provision for doubtful accounts 64 50
Changes in assets and liabilities:
Accounts receivable (1,047) 3,832
Inventories 3,291 (177)
Prepaid expenses and other assets 25 (231)
Income tax receivable (81) (19)
Long term deferred tax asset (387) (387)
Accounts payable (3,701) (3,179)
Accrued liabilities (1,249) (380)
Deferred income taxes 370 -
------- --------
Net cash used in operating activities (1,699) (5,695)
------- --------
Cash flows from investing activities:
- -------------------------------------
Net proceeds from sale of property, plant and equipment 1 254
Additions to property, plant and equipment (1,073) (1,104)
------- --------
Net cash used in investing activities (1,072) (850)
------- --------
Cash flows from financing activities:
- -------------------------------------
Principal payments under capital leases (152) (120)
Proceeds from note payable to bank, net 1,000 -
Proceeds from issuance of common stock 288 374
------- --------
Net cash provided by financing activities 1,136 254
------- --------
Net cash used in continuing operations (1,635) (6,291)
Net cash used in discontinued operations - (74)
------- --------
Net decrease in cash and cash equivalents (1,635) (6,365)
Cash and cash equivalents at beginning of period 1,635 10,308
------- --------
Cash and cash equivalents at end of period $ - $ 3,943
======= ========
Supplemental disclosures:
- -------------------------
Cash paid during the period (related to continuing
and discontinued operations) for:
Interest $ 110 $ 23
Income taxes 23 128
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are
normal recurring accruals) necessary to present fairly the financial
position as of December 29, 1996 and June 30, 1996, and the results of
operations for the three and six months ended December 29, 1996 and
December 31, 1995 and the statements of cash flows for the six months then
ended. Interim results for the three and six months ended December 29,
1996 are not necessarily indicative of the results that may be expected
for the year ending June 29, 1997. The interim financial statements
should be read in conjunction with the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996. References to dollar
amounts are in thousands, except share data, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
<TABLE>
<CAPTION>
December 29, June 30,
1996 1996
------------ --------
<S> <C> <C>
Raw materials $ 7,201 $ 8,074
Work-in-process 1,586 1,844
Finished goods 2,593 4,753
------- -------
$11,380 $14,671
======= =======
</TABLE>
3. Net Income (Loss) per Share
Net income (loss) per common and common equivalent share was computed
based on the weighted average number of common and common equivalent
shares outstanding during the periods presented. The Company has granted
certain stock options which have been treated as common share equivalents
in computing both primary and fully diluted income per share. Common
stock equivalents have been excluded from the calculation of both primary
and fully diluted loss per share for the six month period ended December
29, 1996 and the three and six month periods ended December 31, 1995, as
the effect would have been antidilutive. The primary and fully diluted
income (loss) per share computations are approximately the same.
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Part I. Item 2.
- ----------------
EMULEX CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
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 "projected", "believes",
"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 "Business
Environment and Risk Factors" set forth herein, and in the Company's most
recently filed Annual Report on Form 10-K. The Company cautions the reader,
however, that these lists of risk factors may not be exhaustive. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
COMPANY OVERVIEW
Emulex Corporation is a leading designer and manufacturer of network access
products, supplying high performance communications solutions for managing the
flow of time-critical data between computers and peripheral equipment.
Substantially all of the Company's revenues are derived from local and wide
area networking products such as printer servers, wide area network adapters,
and remote access products. In addition, Emulex is a leading developer of
Fibre Channel technology, an emerging high performance ANSI standard network
interface.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues represented by
selected items from the unaudited Condensed Consolidated Statements of
Operations. This table should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
Percentage of Net Revenues Percentage of Net Revenues
For the Three Months Ended For the Six Months Ended
----------------------------- ------------------------------
December 29, December 31, December 29, December 31,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.0 68.2 64.3 68.3
----- ----- ----- -----
Gross profit 37.0 31.8 35.7 31.7
Operating expenses:
Engineering and development 13.7 22.9 14.7 25.7
Selling and marketing 12.0 22.4 12.5 25.2
General and administrative 7.4 9.8 7.6 10.7
Consolidation charges - - 4.0 -
----- ----- ----- -----
Total operating expenses 33.1 55.1 38.8 61.6
----- ----- ----- -----
Operating income (loss) 3.9 (23.3) (3.1) (29.9)
Nonoperating income (expense) (0.5) 0.3 0.4 0.6
----- ----- ----- -----
Income (loss) before income taxes 3.4 (23.0) (2.7) (29.3)
Provision for (benefit from) income taxes 0.4 - (1.3) (1.6)
----- ----- ----- -----
Net income (loss) 3.0% (23.0)% (1.4)% (27.7)%
===== ===== ===== =====
</TABLE>
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NET REVENUES
Net revenues for the three and six month periods ended December 29, 1996 were
$16,058 and $32,010, respectively, compared to $12,672 and $23,120,
respectively, for the same periods of last fiscal year. These amounts
represent an increase in net revenues of $3,386, or 27 percent, for the quarter
and $8,890, or 38 percent, for the six month period compared to the prior
fiscal year. This increase in net revenues resulted primarily from higher
sales to original equipment manufacturers (OEMs), which increased from the
levels of the comparable periods of last fiscal year by $5,075, or 118 percent,
for the three month period and $12,411, or 192 percent, for the six month
period. These increases were partially offset by reductions in distribution
and end-user revenues of $640 and $1,049, respectively, for the quarter and
$1,710 and $1,811, respectively, for the six month period when compared to the
same periods of fiscal 1996.
From a product line perspective, compared to the quarter a year earlier,
printer server revenues increased $1,679, or 28 percent, network access
revenues increased $274, or 5 percent, and other miscellaneous product lines
decreased $427, or 51 percent. Revenues generated by the Company's emerging
Fibre Channel products increased to $2,069, or 13 percent of revenue, compared
to $209 in the previous year's second quarter. For the six month period ended
December 29, 1996 compared to the same period of the prior fiscal year,
printer server revenues increased $6,493, or 68 percent, network access
revenues increased $1,165, or 12 percent, and other miscellaneous product lines
decreased $210, or 12 percent. Additionally in the six month period of fiscal
1996, the Company sold $1,472 of memory devices that had been engineered out of
certain products. Fibre Channel revenues for the six month period of the
current fiscal year increased to $3,255 compared to $341 for the comparable six
month period of fiscal 1996.
Although Fibre Channel represented 13 percent of revenues in the second quarter
and 10 percent for the first six months of fiscal 1997, the market is an
emerging technology and there can be no assurance that the Company's products
will adequately meet the requirements of the market, or achieve market
acceptance. Because the Company's Fibre Channel products are designed to
provide both an input/output (I/O) and a networking connection between
computers and storage devices, the future revenues of the Fibre Channel product
line depend on the availability of other Fibre Channel products not
manufactured or sold by the Company including, but not limited to, gigabit
transmission speed Fibre Channel disk drives.
GROSS PROFIT
The gross profit percentages for the three and six month periods ended December
29, 1996 were 37 percent and 36 percent, respectively, compared to 32 percent
for both the three and six month periods of the prior fiscal year. This
increase in gross profit is primarily attributable to a combination of higher
volumes and lower prices for components used in the Company's products.
OPERATING EXPENSES
Operating expenses for the quarter ended December 29, 1996 decreased by $1,654,
or 24 percent, from the comparable quarter a year earlier. For the first six
months of fiscal 1997, operating expenses decreased by $1,804, or 13 percent,
compared to the same period of fiscal 1996. Included in the current six month
period were consolidation charges of $1,280 recognized during the first quarter
of fiscal 1997. Excluding these charges, operating expenses in the current six
month period would have been $11,147. This represents a decrease of $3,084, or
22 percent, from the comparable six month period a year ago. Engineering and
development expenses decreased $696, or 24 percent, and $1,239, or 21 percent,
for the three and six month periods, respectively, compared to the
corresponding periods of the prior fiscal year. Selling and marketing expenses
decreased $907, or 32 percent, and $1,801, or 31 percent, for the three and six
month periods, respectively, of fiscal 1997 compared to fiscal 1996. These
reductions are primarily the result of the Company's reduction of investment in
product areas outside of the Company's core focus in Fibre Channel, printer
server and wide area networking markets. General and administrative expenses
declined slightly in comparison to a year earlier by $51, or 4 percent, for the
three month period and by $44, or 2 percent, for the six month period.
During the first quarter of fiscal 1997, the Company initiated a consolidation
of its operations to reduce its ongoing expense base and focus its activities
in the Fibre Channel, printer server and wide area networking markets.
Emulex's remote access and host software businesses, previously headquartered
out of a Bellevue, Washington facility, have been relocated to Emulex
headquarters in Costa Mesa, California. In addition, the Company has downsized
its Pacific Rim sales organization and also made selected reductions at its
manufacturing plant in Dorado, Puerto Rico and at its corporate headquarters.
The Company incurred charges of $1,280 in connection with this consolidation.
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NONOPERATING INCOME (EXPENSE)
Nonoperating income (expense) for the three months ended December 29, 1996
decreased by $119 compared to the same period a year earlier. This decrease
resulted primarily from reduced interest income and an increase in interest
expense due to the Company's current financing activities. For the six month
period ended December 29, 1996, nonoperating income decreased by $3 compared to
the same period of the prior fiscal year. The six month period for the current
year includes $238 of interest income associated with prior years' tax returns.
Excluding this nonrecurring interest income, nonoperating income (expense)
decreased $241, also primarily from reduced interest income and an increase in
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its recent working capital needs and capital
expenditure requirements from internally generated funds, its line of credit,
facilities leases and equipment leases. The Company has a line of credit of up
to $7,000 with Silicon Valley Bank. The facility is available through
September 1997, unless extended by the parties. At the end of the second
quarter of fiscal 1997, the Company had a $1,000 borrowing outstanding under
the line of credit. Under the terms of the line of credit, the Company is
required to grant Silicon Valley Bank a security interest in its accounts
receivable, inventories, equipment and other property upon any borrowing. The
line of credit with Silicon Valley Bank requires the Company to satisfy certain
financial and other covenants and conditions, including prescribed levels of
tangible net worth, profitability and liquidity. In the event the Company
fails to comply with any financial or other covenant in its loan agreement with
Silicon Valley Bank, the line of credit could become unavailable to the
Company. In addition, since borrowings have been made under the line of
credit, a failure to continue to satisfy such covenants in the future would
constitute an event of default, giving rise to the various remedies available
to a secured lender. At the end of the second quarter of fiscal 1997, the
Company was in compliance with all the terms of the line of credit; however,
there can be no assurance that the Company will continue to satisfy the
financial and other covenants and conditions of the line of credit or that the
line of credit will continue to be available to meet the Company's liquidity
requirements.
The Company believes that its existing cash balances, facilities and equipment
leases, anticipated cash flows from operating activities, borrowings under its
line of credit and the possible issuance of equity securities through public
offerings or private placements will be sufficient to support its working
capital needs and capital expenditure requirements for the next twelve months.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably or, in the absence thereof, to borrow on
its line of credit and to arrange additional debt and/or equity financing. If
the Company were to continue to experience losses at the rate experienced in
fiscal 1996 and the first quarter of fiscal 1997, additional debt or equity
financing would be required within three to nine months. There can be no
assurance that revenues will remain at current levels or return to the levels
experienced in previous years or that the Company would be profitable at such
revenue levels. Furthermore, there can be no assurance that future
requirements to fund operations will not require the Company to make additional
borrowing on its line of credit and seek additional financing, or that such
line of credit or additional financing will be available on terms favorable to
the Company and its stockholders, or at all.
BUSINESS ENVIRONMENT AND RISK FACTORS
Rapid Technological Change and New Product Development
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. The Company believes that its future success will
depend in large part on its ability to enhance its existing products and to
introduce new products on a timely basis to meet changes in customer
preferences, emerging technologies and evolving industry standards. There can
be no assurance that the Company will be successful in developing,
manufacturing and marketing new products or product enhancements that respond
to technological changes or evolving industry standards, that the Company will
not experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products or that its new
products will adequately meet the requirements of the marketplace and achieve
market acceptance. Nor can there be any assurance that the Company will be able
to develop or license from third parties the underlying core technologies
necessary for new products and enhancements. Additionally, there can be no
assurance that services, products or technologies developed by others will not
render the Company's products or technologies uncompetitive or obsolete. If
the Company is unable, for technological or other reasons, to develop new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer preferences, the Company's business,
results of operations, financial condition or liquidity would be materially and
adversely affected.
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Dependence on Proprietary Technology
Although the Company believes that its continued success will depend primarily
on continuing innovation, sales, marketing and technical expertise, the quality
of product support and customer relations, the Company must also protect the
proprietary technology contained in its products. The Company currently relies
on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect proprietary rights in its
products. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation or independent third
party development of its technology. Although the Company believes that its
products and technology do not infringe proprietary rights of others, there can
be no assurance that third parties will not assert infringement claims or that
the Company will not be required to obtain licenses of third party
technologies. No assurance can be given that any necessary licenses will be
available or that if available, such licenses can be obtained on commercially
reasonable terms. The failure to obtain such royalty or licensing agreements
on a timely basis would have a material adverse effect on the Company's
business, results of operations, financial condition or liquidity.
Early Stage of the Fibre Channel Market
The Company has invested and continues to invest substantially in the
engineering of products to address the Fibre Channel market, which is at an
early stage of development and is rapidly evolving. The Company's investment
in Fibre Channel designs was over 50 percent of the Company's engineering and
development expenditures for the current quarter and over 45 percent
year-to-date. The Company's future success in the Fibre Channel market will
depend to a significant degree upon broad market acceptance of the technology
under development. This success will be dependent in part on the ability of
the Company's OEMs to develop new products that provide the functionality,
performance, speed and network connectivity demanded by the market at
acceptable prices, and to convince end users to adopt Fibre Channel. The
Company believes the projected Fibre Channel market represents a significant
portion of the opportunities for revenue growth in the future; however, there
can be no assurance that the Fibre Channel market will continue to expand, that
the Company's investment in Fibre Channel will achieve a profitable return,
that customers will choose the Company's technology for use, or that Fibre
Channel will gain market acceptance. The failure of any of these events to
occur would have a material adverse effect on the Company's operating results.
Competition
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, price erosion, frequent new
product introductions and evolving industry standards. The industry consists
of major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than the
Company, as well as emerging companies attempting to obtain a share of the
existing market. The Company's competitors continue to introduce products with
improved price/performance characteristics, and the Company will have to do the
same to remain competitive. The Company operates in a volatile and dynamic
market, and more aggressive market and product positioning by certain
competitors would have a material adverse effect on the Company's business,
results of operations and financial position.
Reliance on OEMs, Distributors and Key Customers
In the second quarter and for the first six months of fiscal 1997, the Company
derived approximately 36 percent of its revenue from distributors and 59
percent from OEMs. The Company's agreements with distributors and OEMs are
typically non-exclusive and in many cases may be terminated by either party
without cause, and many of the Company's distributors and OEMs carry competing
product lines. Therefore, there can be no assurance that any distributors or
OEMs will continue to purchase the Company's products. The loss of important
distributors or OEMs could adversely affect the Company's business, results of
operations, financial condition or liquidity. Among the Company's key
customers, Reuters accounted for 15 percent of the Company's revenue in the
second quarter of fiscal 1997. The Company's revenues are significantly
dependent upon, among other things, the ability and willingness of these OEMs
to timely develop and promote products that incorporate the Company's
technology. The ability and willingness of these OEMs to do so is based upon a
number of factors such as: the timely development by the Company and the OEMs
of new products with new functionality,
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increased speed and enhanced performance at acceptable prices to end users;
development costs of the OEMs; compatibility with both existing and emerging
industry standards; technological advances; patent and other intellectual
property issues and competition generally. No assurance can be given as to the
ability or willingness of the Company's OEMs to continue developing, marketing
and selling products incorporating the Company's technology. Since the
Company's business is dependent on its relationships with its OEMs and
distributors, the inability or unwillingness of any of the Company's
significant customers to continue their relationships with the Company and to
develop and promote products incorporating the Company's technology would have
a material adverse effect on the Company's operating results, financial
condition or liquidity.
Concentration of OEM Customers
Over the past 18 months, the Company secured over 20 new printer server design
wins, many of which will enter volume production over the balance of this
fiscal year. The Company has also been an early entrant and leading developer
of gigabit Fibre Channel products. Based on its initial positioning in this
market, the Company has secured 27 initial design wins with storage and
computing OEM customers. In the most recent quarter, revenues from Fibre
Channel products have increased to 13 percent of total company revenues.
Historically, revenues from the Company's top OEM customers have accounted for
a significant portion of the Company's total revenues. Although the Company
has attempted to expand its base of OEMs, there can be no assurance that its
revenues in the future will not be similarly derived from a limited number of
OEM customers. The Company's largest OEM customers vary to some extent from
year to year as product cycles end, contractual relationships expire and new
products and customers emerge. Many of the arrangements with the Company's
OEMs are provided on a project-by-project basis, are terminable with limited or
no notice, and, in certain instances, are not governed by long-term
agreements. The Company also is subject to a credit risk associated with the
concentration of its accounts receivable from these OEMs. No assurance can be
given as to the ability or willingness of any of the Company's OEMs to continue
utilizing the Company's products and technology or as to the ability of the
Company in the future to sell its products and technology to its existing or
new OEMs. Any significant decrease in sales of products by the Company's
larger OEMs, any failure of the Company to replace its existing OEMs or to
enter into relationships with new OEM customers in accordance with the
Company's expectations, or any delay in or failure to make the payments due to
the Company from such OEMs would have a material adverse effect on the
Company's operating results, financial condition or liquidity.
Risks Associated with Product Development; Product Delays
The Company in the past has experienced delays in product development, and the
Company may experience similar delays in the future. 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 resources limitations,
difficulties with independent contractors, changing market or competitive
product requirements and unanticipated engineering complexity. In addition,
the Company's software and hardware have in the past and may in the future
contain undetected errors or failures that become evident upon product
introduction or as product production volume increases. There can be no
assurance, despite testing by the Company and its OEMs, that errors will not be
found, that the Company will not experience development challenges resulting in
unanticipated problems or delays in the acceptance of products by the Company's
OEMs or shipment of the OEMs' products, or that the Company's new products and
technology will meet performance specifications under all conditions or for all
anticipated applications. Given the short product life cycles in the company's
products markets, any delay or unanticipated difficulty associated with new
product introductions or product enhancements would have a material adverse
effect on the Company's operating results.
Reliance on Third Party Suppliers
The Company relies on third party suppliers who supply the components used in
the Company's products. Most components are readily available from alternate
sources. However, the unavailability of certain components from current
suppliers, especially components custom designed for the Company, could result
in delays in the shipment of the Company's products as well as additional
expense associated with obtaining and qualifying a new supplier or redesigning
the Company's product to accept more readily available components. In
addition, certain key components used in the Company's products are available
only from single sources and the Company does not have long-term contracts
ensuring the supply of such components. As the Company typically attempts to
maintain less than 90 days supply of such components, there can be no assurance
that components will be available to meet the Company's future requirements at
favorable prices, if at all. The Company also relies on third party suppliers
for software that is bundled with some of the Company's products. The Company
currently has agreements with these suppliers; however, these software items
are not generally readily available from alternate sources. The Company's
future inability to obtain components or software or to redesign its products
to accept alternatives, in a timely manner, could materially and adversely
affect the Company's business and financial condition. In addition, any
significant increase in prices or inability to ship products due to a lack of
components or software could adversely affect the Company's results of
operations.
10
<PAGE> 12
Risks Associated with International Operations and Regulatory Standards
For the second quarter of fiscal 1997, sales in the United States, Europe, and
in the Pacific Rim countries accounted for 46 percent, 48 percent and 6 percent
of the Company's net revenues respectively. For the first six months of the
current fiscal year, sales in the United States, Europe and the Pacific Rim
countries accounted for 53 percent, 42 percent and 5 percent of the Company's
net revenues, respectively. The Company expects that sales in the United
States and Europe will continue to account for a substantial majority of the
Company's revenues for the foreseeable future. There can be no assurance that
the Company will achieve significant penetration in other markets.
The Company's worldwide price list uses U.S. dollars in all markets. An
increase in the value of the U.S. dollar relative to foreign currencies would
make the Company's products more expensive and therefore potentially less
competitive in those markets. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, costs and risks of
localizing products for foreign countries, longer accounts receivable payment
cycles, potentially adverse tax consequences, repatriation of earnings and the
burdens of complying with a wide variety of foreign laws. In addition,
revenues of the Company earned in various countries where the Company does
business may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that
such factors will not have an adverse effect on the revenues from the Company's
future international sales and, consequently, the Company's results of
operations.
The Company's primary manufacturing operation is located in Dorado, Puerto
Rico, an area which is subject to hurricanes at certain times of the year.
Damage to this facility or an interruption in the ability to receive components
or ship products to its customers could have a material adverse impact on the
Company's business, financial condition, operating results or liquidity.
Dependence of Key Personnel
The Company's success depends to a significant degree on the performance and
continued service of its senior management and certain key employees.
Competition for such highly skilled employees with technical, management,
marketing, sales, product development and other specialized skills is intense,
and there can be no assurance that the Company will be successful in recruiting
and retaining such personnel. In addition, there can be no assurance that
employees will not leave the Company and, after leaving, compete against the
Company. The loss of key management, technical and sales personnel would have
a material adverse effect on the Company's business, financial condition,
operating results or liquidity.
Fluctuations in Quarterly Operating Results
Because the Company generally ships products within a short period after
receipt of an order, the Company typically does not have a material backlog of
unfilled orders, and revenues in any quarter are substantially dependent on
orders booked in that quarter. Typically, the Company generates a large
percentage of its quarterly revenues in the last month of the quarter. Adding
further to the variability of sales are certain large OEM customers that tend
to order sporadically and volumes can vary significantly from quarter to
quarter. A small variation in the timing of orders is likely to adversely and
disproportionately affect the Company's quarterly results of operations as the
Company's expense levels are based, in part, on its expectations of future
sales and only a small portion of the Company's expenses vary directly with its
sales. Therefore, the Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall of demand in relation to the Company's quarterly
expectations or any material delay of customer orders would have an immediate
and adverse impact on the Company's quarterly results of operations, financial
condition or liquidity.
Recent History of Losses from Continuing Operations
The Company incurred losses from continuing operations of $9,288 in fiscal
1996, and $941 in the first quarter of fiscal 1997. Results for the first
quarter included consolidation charges of $1,280. While the Company returned
to profitability in the current quarter, there can be no assurances that
revenues will remain at current levels or return to the levels experienced in
previous years or that the Company would be profitable at such revenue levels.
11
<PAGE> 13
Possible Volatility of Stock Price
As is the case with many technology based companies, the market price of the
Company's common stock has been, and is likely to continue to be, extremely
volatile. Factors such as new product introductions by the Company or its
competitors, fluctuations in the Company's quarterly operating results, the
gain or loss of significant contracts, pricing pressures and general conditions
in the computer market, and general events and circumstances beyond the
Company's control may have a significant impact on the market price of the
Company's common stock. In addition, the stock market recently has experienced
significant price and volume fluctuations which have particularly affected the
market price for many high technology companies like the Company.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of the Company was held on November 21,
1996. The following members were elected to the Company's Board of Directors
to hold office for the ensuing year:
<TABLE>
<CAPTION>
Nominee In Favor Withheld
- ------- -------- --------
<S> <C> <C>
Fred B. Cox 5,192,014 347,397
Paul F. Folino 5,191,474 347,937
Michael P. Downey 5,188,524 350,887
Robert H. Goon 5,186,974 352,437
Don M. Lyle 5,189,874 349,537
</TABLE>
In addition, the stockholders of the Company ratified the selection of KPMG
Peat Marwick LLP as the Company's independent public accountants for fiscal
year 1997. The number of shares voted for ratification was 5,491,962. The
number of shares voted against ratification was 12,368. The number of shares
abstaining was 35,081.
The stockholders of the Company also approved an amendment of the Company's
Employee Stock Option Plan which increased the number of shares covered by that
plan by 200,000 shares. The amendment was approved with 4,939,101 shares
voting for approval, 528,733 shares voting against approval, 32,636 shares
abstaining, and 38,971 non-voted shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) The registrant has not filed any reports on Form 8-K during the period
for which this report is filed.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 11, 1997
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 Finance and
Acting Chief Financial Officer
(Principal Financial & Chief
Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMULEX
CORPORATION AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF
OPERATIONS AND STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED DECEMBER
29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-29-1997
<PERIOD-END> DEC-29-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,976
<ALLOWANCES> 0
<INVENTORY> 11,380
<CURRENT-ASSETS> 27,711
<PP&E> 7,135
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,402
<CURRENT-LIABILITIES> 10,902
<BONDS> 118
0
0
<COMMON> 1,209
<OTHER-SE> 20,655
<TOTAL-LIABILITY-AND-EQUITY> 35,402
<SALES> 32,010
<TOTAL-REVENUES> 32,010
<CGS> 20,594
<TOTAL-COSTS> 20,594
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (885)
<INCOME-TAX> (431)
<INCOME-CONTINUING> (454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (454)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
