<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
---------------------
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998
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 November 5, 1998, the registrant had 6,153,013 shares of common stock
outstanding.
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<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 27, 1998 and June 28, 1998 2
Condensed Consolidated Statements of Operations
Three months ended September 27, 1998
and September 28, 1997 3
Condensed Consolidated Statements of Cash Flows
Three months ended September 27, 1998
and September 28, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 27, June 28,
Assets 1998 1998
- ------ ------------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,885 $ 1,776
Accounts and notes receivable, net 14,263 12,141
Inventories, net 7,290 9,906
Prepaid expenses 652 476
Deferred income taxes 85 85
------- -------
Total current assets 26,175 24,384
Property, plant and equipment, net 4,504 5,112
Other assets 679 661
------- -------
$31,358 $30,157
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $10,334 $ 6,909
Accrued liabilities 4,102 4,105
Accrued consolidation charges 432 3,173
Income taxes payable and other current liabilities 270 212
------- -------
Total current liabilities 15,138 14,399
Deferred income taxes and other liabilities 2,167 2,152
------- -------
17,305 16,551
------- -------
Commitments and contingencies
Subsequent event
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, $0.20 par value; 20,000,000 shares
authorized; 6,137,040 and 6,133,322 issued
and outstanding at September 27, 1998 and
June 28, 1998, respectively 1,227 1,227
Additional paid-in capital 7,469 7,444
Retained earnings 5,357 4,935
------- -------
Total stockholders' equity 14,053 13,606
------- -------
$31,358 $30,157
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Net revenues $14,051 $15,007
------- -------
Cost of sales 8,343 8,880
Cost of sales - inventory charges related
to consolidation 626 --
------- -------
Total cost of sales 8,969 --
------- -------
Gross profit 5,082 6,127
Operating expenses:
Engineering and development 2,640 2,393
Selling and marketing 1,627 1,970
General and administrative 984 1,101
Consolidation charges, net (626) --
------- -------
Total operating expenses 4,625 5,464
------- -------
Operating income 457 663
Nonoperating income 12 14
------- -------
Income before income taxes 469 677
Income tax provision 47 68
------- -------
Net income $ 422 $ 609
======= =======
Net income per share:
Basic $ 0.07 $ 0.10
======= =======
Diluted $ 0.07 $ 0.10
======= =======
Number of shares used in per share computations:
Basic 6,133 6,103
======= =======
Diluted 6,414 6,312
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 422 $ 609
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 376 601
Loss on disposal of property, plant and equipment 1 4
Provision for doubtful accounts 1 28
Changes in assets and liabilities:
Accounts receivable (2,123) 2,244
Inventories 2,616 (157)
Accounts payable 3,425 (1,424)
Accrued liabilities (3) (64)
Accrued consolidation charges (2,741) --
Income taxes receivable -- 58
Income taxes payable 69 --
Deferred revenue -- (6)
Deferred income taxes -- 1
Prepaid expenses and other assets (172) (328)
------- -------
Net cash provided by operating activities 1,871 1,566
------- -------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment 547 --
Additions to property, plant and equipment (316) (390)
------- -------
Net cash provided by (used in) investing activities 231 (390)
------- -------
Cash flows from financing activities:
Principal payments under capital leases (18) (57)
Proceeds from issuance of common stock 25 35
------- -------
Net cash provided by (used in ) financing activities 7 (22)
------- -------
Net increase in cash and cash equivalents 2,109 1,154
Cash and cash equivalents at beginning of period 1,776 484
------- -------
Cash and cash equivalents at end of period $ 3,885 $ 1,638
======= =======
Supplemental disclosures:
Cash paid during the period for:
Interest $ 3 $ 9
Income taxes -- 10
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
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 September 27, 1998 and June 28, 1998, and the results of operations for
the three months ended September 27, 1998 and September 28, 1997, and the
statements of cash flows for the three months then ended. Interim results
for the three months ended September 27, 1998 are not necessarily
indicative of the results that may be expected for the year ending June 27,
1999. 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 28,
1998. Certain reclassifications have been made to the Condensed
Consolidated Statement of Operations for the three months ended September
28, 1997 to conform to the presentation for the three months ended
September 27, 1998. References to dollar amounts are in thousands, except
share data, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
<TABLE>
<CAPTION>
September 27, June 28,
1998 1998
------------- --------
<S> <C> <C>
Raw materials $1,802 $3,926
Work-in-process - 273
Finished goods 5,488 5,707
------ ------
$7,290 $9,906
====== ======
</TABLE>
3. Earnings per Share
Effective December 28, 1997, the Company adopted Statement of Financial
Accounting Standards No. ("Statement") 128, "Earnings Per Share". In
accordance with Statement 128, primary earnings per share have been
replaced with basic earnings per share and fully diluted earnings per share
have been replaced with diluted earnings per share which includes
potentially dilutive securities such as outstanding stock options. Prior
periods have been restated to conform to Statement 128.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding during the period increased to include 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 earnings per share by
application of the treasury stock method. The following table sets forth
the computation of basic and diluted earnings per share:
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------- -------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Numerator:
Net income $ 422 $ 609
====== ======
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding 6,133 6,103
Effect of dilutive securities:
Dilutive options outstanding 281 209
------ ------
Denominator for diluted earnings per
share - adjusted weighted average shares 6,414 6,312
===== =====
Basic earnings per share $ 0.07 $ 0.10
====== ======
Diluted earnings per share $ 0.07 $ 0.10
====== ======
</TABLE>
Options to purchase 274,895 shares of common stock at prices in excess of
$9.50 per share were outstanding at September 27, 1998, but were not
included in the computation of diluted earnings per share for the three
month period then ended. Options to purchase 298,450 shares of common stock
at prices in excess of $16.16 per share were outstanding at September 28,
1997, but were not included in the computation of diluted earnings per
share for the three month period then ended. These options were excluded
from the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common
shares during the respective periods, and therefore, the effect would be
antidilutive.
4. Commitments and Contingencies
As a result of Emulex Caribe, the Company's former Puerto Rico subsidiary,
entering into a tax-free plan of liquidation for U.S. income tax purposes
in May 1998, the Company submitted a Ruling Request to Puerto Rico's
Secretary of the Treasury ("Treasury"). The Company is requesting that the
Treasury rule in the Company's favor as to the tax-free treatment of the
liquidation for Puerto Rico income tax purposes. The Company believes it
will be able to obtain Treasury approval on the Ruling Request; however, if
the Company is unable to obtain this approval, the Company's results of
operations, financial condition and/or liquidity would be materially
adversely affected.
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. It is anticipated that this examination will be completed
during the current fiscal year. The Company is also undergoing examination
by the Internal Revenue Service of Emulex Caribe's 1995 U.S. tax return.
The Company does not anticipate that the examination by the Internal
Revenue Service will be resolved during the current fiscal year. 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.
5. Subsequent Event
On October 29, 1998, the Company completed the sale of its manufacturing
facility in Dorado, Puerto Rico. During the second quarter ending December
27, 1998, the Company will receive net proceeds of approximately $2,400 in
cash associated with the sale of the property, which will result in a gain
of approximately $750. In conjunction with the sale of this facility and
the completion of the final transition of manufacturing, the Company
expects to incur additional charges in the second quarter that could offset
some or all of the gain.
6. Consolidation Charges
On March 25, 1998, the Company announced plans to outsource the
manufacturing of its product lines to K*TEC Electronics, a division of Kent
Electronics Corporation. The Company made this strategic decision in an
attempt to reduce required future capital expenditures and production
costs, as well as to take advantage of K*TEC Electronics' consolidated
purchasing power and materials management capabilities. This announcement
resulted, among other things, in the decision to close the Company's Puerto
Rico manufacturing subsidiary and to close selected sales offices. As a
result of these actions, the Company anticipated a worldwide reduction of
approximately 130 full-time employees and 45 temporary workers in Puerto
Rico. During the quarter ended September 27, 1998, as the Company was
completing this consolidation plan, the Company recognized additional
inventory charges related to consolidation of $626 related to the
streamlining of the Company's products and a reduction of other accrued
consolidation charges of $626 as the Company reviewed the adequacy of its
remaining consolidation accrual. When the initial consolidation charge was
taken, management of the Company believed this inventory would be sold at
positive margins. However, as the Company continued the closure of the
manufacturing facility, it determined this inventory was no longer saleable
and these additional reductions in inventory were recorded. As of September
27, 1998, some actions to complete this consolidation plan were still in
process and the remaining consolidation accrual of $422 is primarily for
remaining severance and related payments to be made over the next twelve
months.
6
<PAGE>
Part I. Item 2.
- ----------------
EMULEX CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
SUBSEQUENT EVENT
On October 29, 1998, the Company completed the sale of its manufacturing
facility located in Puerto Rico as discussed in note 5 to the Condensed
Consolidated Financial Statements.
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," "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 "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 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.
COMPANY OVERVIEW
Emulex Corporation is a leading designer of high-performance network
connectivity products including fibre channel, printer server and network access
products. The Company's hardware and software-based networking solutions improve
communication in computer networks and enhance data flow between computers and
peripherals. The Company markets to original equipment manufacturers ("OEMs")
and end users through its own worldwide selling organizations, as well as
two-tier distribution partners.
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 Condensed
Consolidated Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
Percentage of Net Revenues
For the Three Months Ended
------------------------------
September 27, September 28,
1998 1997
------------- -------------
<S> <C> <C>
Net revenues 100.0% 100.0%
----- -----
Cost of sales 59.4 59.2
Cost of sales - inventory charge
related to consolidation 4.4 --
----- -----
Total cost of sales 63.8 59.2
----- -----
Gross profit 36.2 40.8
Operating expenses:
Engineering and development 18.8 16.0
Selling and marketing 11.6 13.1
General and administrative 7.0 7.3
Consolidation charges, net (4.4) --
----- -----
Total operating expenses 33.0 36.4
----- -----
Operating income 3.2 4.4
Nonoperating income 0.1 0.1
----- -----
Income before income taxes 3.3 4.5
Income tax provision 0.3 0.4
----- -----
Net income 3.0% 4.1%
===== =====
</TABLE>
7
<PAGE>
NET REVENUES
Net revenues for the quarter ended September 27, 1998 were $14,051, a decrease
of $956, or 6 percent, from $15,007 in the comparable quarter of the prior
fiscal year. Net revenues for the quarter consisted of $10,299 from sales to
OEMs, $3,305 from sales sold through distribution channels and $447 from sales
directly to end users. This represents a reduction in distribution net revenues
of $924, or 22 percent, and a reduction in sales to end-users of $429, or 49
percent when compared to the quarter ended September 28, 1997. These decreases
in net revenues were partially offset by an increase in net revenues from sales
to OEMs of $397, or 4 percent.
From a product line perspective, net revenues from the Company's fibre channel
product line for the first quarter of fiscal 1999, were $5,432, or 39 percent of
net revenues, an increase of $257, or 5 percent, versus the first quarter of
fiscal 1998. Shipments in this emerging market have continued to be primarily to
domestic OEMs. The Company anticipates that future revenue from this product
line will be a function of continued demand from OEMs which are currently
shipping fibre channel products, launches of new fibre channel based systems by
the Company's OEMs, additional design wins and increased distribution sales as
this emerging market continues to develop. Net revenues from the Company's
printer server product line accounted for $5,031, or 36 percent of net revenues,
a decrease of $547, or 10 percent, for the quarter compared to the same period
of the prior fiscal year. This decrease in printer server net revenues was
principally due to decreased demand for standard printer servers sold through
distribution as demand for after-market solutions has decreased as more OEMs are
shipping network-ready printers. Net revenues from network access products of
$3,370 comprised 24 percent of the Company's net revenues for the quarter ended
September 27, 1998. This represents a decrease of $563, or 14 percent, from the
same period of the prior fiscal year in this mature product area. The Company
expects net revenues from network access products to show continued maturation
over this fiscal year. Additionally, the Company has streamlined this product
area because of the excessive start-up costs associated with initiating
production at its contract manufacturer for lower volume and aging products. Net
revenues from other miscellaneous product lines were $218 for the first quarter
of fiscal 1999 compared to $321 for the first quarter of fiscal 1998.
Although fibre channel represented 39 percent of net revenues for the quarter
ended September 27, 1998, 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 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. Furthermore, the Company's
fibre channel products are dependent upon components supplied by third parties
for this emerging technology and there can be no assurance that these components
will be available at a competitive price and in the quantities desired, or if
available, will function as needed.
GROSS PROFIT
For the quarter ended September 27, 1998, gross profit decreased $1,045, or 17
percent, to $5,082 compared to $6,127 in the same quarter of the previous fiscal
year. During the three months ended September 27, 1998, inventory charges
related to consolidation of $626 were recorded related to the streamlining of
products. When the initial consolidation charge was taken, which is discussed in
more detail below, we believed this inventory would be sold at positive margins;
however, as we continued the closure of the manufacturing facility, we
determined this inventory was no longer saleable and these additional reductions
in inventory were recorded. Gross profit as a percentage of net revenues
decreased to 36 percent for the quarter from 41 percent in the comparable
quarter of last fiscal year. This reduction in gross profit as a percentage of
net revenues is primarily due to the above mentioned charge and the result of
average selling price erosion and a greater percentage of lower margin products
within the Company's mature product lines: printer servers and network access.
OPERATING EXPENSES
Operating expenses for the three months ended September 27, 1998 were $4,625, a
decrease of $839, or 15 percent, compared to $5,464 for the same period of the
prior fiscal year. Included within operating expenses for the three month period
ended September 27, 1998 are $<626> of net charges related to the consolidation
discussed in the next paragraph. Excluding this net consolidation charge,
operating expenses were $5,251, a decrease of $213, or 4 percent, compared to
$5,464 for the first quarter of the prior fiscal year primarily as a result of
the streamlining actions that accompanied the Company's decision to outsource
manufacturing, as discussed below. Engineering and development expenses
increased $247, or 10 percent, to $2,640 for the first quarter of fiscal 1999
compared to $2,393 in the same quarter of fiscal 1998 as the Company continued
to heavily invest in its fibre channel product development. Selling and
marketing expenses decreased by $343, or 17 percent, to $1,627 for the quarter
ended September 27, 1998, in contrast to $1,970 for the corresponding period of
the prior year as a result of the streamlining of the Company's products and
related sales and marketing efforts. Additionally, general and administrative
expenses decreased by $117, or 11 percent, to $984 for the first quarter
compared to $1,101 in the equivalent quarter of the prior fiscal year primarily
due to reduced staffing levels.
8
<PAGE>
On March 25, 1998, the Company announced plans to outsource the manufacturing of
its product lines to K*TEC Electronics, a contract manufacturing division of
Kent Electronics with advanced manufacturing capabilities which the Company
requires for its new generation fibre channel designs. The Company made this
strategic decision in an attempt to reduce required future capital expenditures
and production costs, as well as to take advantage of K*TEC Electronics'
consolidated purchasing power and materials management capabilities. This
announcement resulted, among other things, in the decision to close the
Company's Puerto Rico manufacturing subsidiary and to close selected sales
offices. During the quarter ended September 27, 1998, as the Company continued
this consolidation plan, the Company recorded a reduction of other accrued
consolidation charges of $626 in operating expenses based on a review of the
adequacy of its remaining consolidation accrual. During the quarter ended
September 27, 1998, the Company utilized $2,741 of its consolidation accrual
primarily on severance of 44 employees and other costs related to the closure of
the Company's Puerto Rican manufacturing facility. Some actions to complete this
consolidation plan are still in process. As of September 27, 1998, the remaining
consolidation accrual was $432 and the Company's workforce still included one
employee to be terminated as a part of this consolidation plan. The Company
expects that this plan will be substantially complete by the end of the second
quarter of fiscal 1999.
NONOPERATING INCOME
Nonoperating income for the quarter ended September 27, 1998 remained relatively
unchanged at $12 compared to $14 for the quarter ended September 28, 1997.
Nonoperating income consists primarily of interest income and expense and to a
lesser extent some foreign currency exchange gain or loss.
INCOME TAXES
For the quarter ended September 27, 1998, the Company recorded a 10 percent tax
provision on its pre-tax net income in the amount of $47.
As a result of Emulex Caribe, the Company's former Puerto Rico subsidiary,
entering into a tax-free plan of liquidation for U.S. income tax purposes in May
1998, the Company submitted a Ruling Request to Puerto Rico's Secretary of the
Treasury ("Treasury"). The Company is requesting that the Treasury rule in the
Company's favor as to the tax-free treatment of the liquidation for Puerto Rico
income tax purposes. The Company believes it will be able to obtain Treasury
approval on the Ruling Request; however, if the Company is unable to obtain this
approval, the Company's results of operations, financial condition and/or
liquidity would be materially adversely affected.
During the quarter ended September 27, 1998, the Company received approval on
its Closing Agreement submitted July 1998 to the Secretary of the Treasury of
Puerto Rico. The Closing Agreement was filed in connection with the liquidating
distribution received by the Company from Emulex Caribe and the offset of
Caribe's net operating losses, excess income tax payments and withholding
payments against the tax due on the distribution. Total tollgate tax calculated
to be due on the liquidating distribution, after reduction for net operating
losses allowed, was $301. This liability was further reduced by previous
payments allowed in the amount of $279 for a net liability paid during the
current quarter of $22.
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. It
is anticipated that this examination will be completed during the current fiscal
year. The Company is also undergoing examination by the Internal Revenue Service
of Emulex Caribe's 1995 U.S. tax return. The Company does not anticipate that
the examination by the Internal Revenue Service will be resolved during the
current fiscal year. 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.
YEAR 2000
The Company has considered the impact of Year 2000 issues on its products,
computer systems and applications. The Company believes that all of its current
products are Year 2000 compliant; however, some products previously sold by the
Company may not be Year 2000 compliant. The Company believes it is prepared to
update these older products as required under warranty for all Year 2000 issues
that the Company has been able to identify. Furthermore, the Company believes
that the related financial exposure for any required updates to these older
products is not material. Additionally, the Company has reviewed and tested its
internal computer systems and applications. The Company believes it has
identified all of the related Year 2000 compliance issues in this area. The
majority of these issues have already been corrected. The Company anticipates
that the remaining remediation
9
<PAGE>
related to its computer systems and applications will be completed by the end of
June 1999. These reviews, tests and corrections have not resulted in substantial
expenditures to date. Furthermore, the Company does not anticipate any material
expenditures in the future related to these issues. The Company is in the
process of completing a survey of its suppliers and financial institutions to
evaluate their Year 2000 compliance plans and state of readiness and to
determine whether any Year 2000 issues will impede the ability of such suppliers
to continue to provide goods and services to the Company. The Company has yet to
conduct a survey of its customers. As the Company has not yet completed its full
Year 2000 assessment, the Company has not developed a contingency plan. The
Company anticipates that its full Year 2000 review, necessary remediation
actions and contingency plan will be substantially complete by the end of June
1999. Management believes that the most likely worst case scenario related to
the Year 2000 that the Company may experience would be either an inability to
obtain inventory components from suppliers or delays in receiving orders or
payments from customers due to Year 2000 problems experienced by these third
parties. These events, if experienced, could have a material adverse effect on
the Company's business, results of operations, financial position and/or
liquidity. For an additional discussion of Year 2000 issues, please review the
"Risk Factors" set forth elsewhere herein.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
131, "Disclosure about Segments of an Enterprise and Related Information." The
new statement is effective for fiscal years beginning after December 15, 1997.
The Company believes the impact of adopting this new standard on the
consolidated financial statements will not be material.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities." The new statement established accounting
and reporting standards for derivative instruments and for hedging activities
and is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. The Company does not expect the adoption of Statement 133 to have a
material impact on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $2,109 during the first
quarter of fiscal 1999 from $1,776 to $3,885 as of September 27, 1998. Operating
activities, which include changes in working capital balances, provided $1,871
of cash and cash equivalents for the quarter compared to providing $1,566 of
cash and cash equivalents during the first quarter of the prior fiscal year.
Investing activities, which were limited to the acquisition and disposition of
property, plant and equipment, provided $231 of cash and cash equivalents in the
quarter compared to using $390 in the comparable period of fiscal 1998, as the
Company completed the sale of its production equipment from its former
manufacturing facility in Puerto Rico. Net financing activities, which were
limited to payments under capital lease obligations and proceeds from the
exercise of employee stock options, provided $7 of cash and cash equivalents
during the first quarter of fiscal 1999 compared to using $22 of cash and cash
equivalents in the same period of the prior year. As of September 27, 1998, the
Company had a remaining consolidation accrual of $432 for severance and related
costs which the Company anticipates will be paid over the next twelve months.
Additionally, on October 29, 1998, the Company completed the sale of its
manufacturing facility in Puerto Rico as discussed in note 5 to the Condensed
Consolidated Financial Statements set forth elsewhere herein.
In addition to its cash balances, the Company has a line of credit of up to
$10,000 with Silicon Valley Bank which is available through September 1999,
unless extended by the parties. The agreement allows the Company to borrow at
the bank's prime rate (8.5% at September 27, 1998) plus one-half percent. The
Company last utilized the line of credit in the quarter ended September 28,
1997. There were no borrowings outstanding under this line at September 27, 1998
or June 28, 1998. Under the terms of the line of credit, the Company has granted
Silicon Valley Bank a security interest in its accounts receivable, inventories,
equipment and other property. The line of credit 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, the line of credit could become unavailable to the Company. In
addition, after borrowings have been made under the line of credit, a failure to
continue to satisfy such covenants would constitute an event of default, giving
rise to the various remedies available to a secured lender. As of September 27,
1998, the Company was in compliance with all covenants 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 borrowings under the line of credit may
be required periodically during the next twelve months.
10
<PAGE>
The Company believes that its existing cash balances, facilities and equipment
leases, anticipated cash flows from operating activities and available
borrowings under its line of credit will be sufficient to support its working
capital needs and capital expenditure requirements for the next twelve months.
However, the Company has experienced reductions in revenue levels, significant
losses from operations and large fluctuations in the timing of significant
customer orders on a quarterly basis. 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/or to arrange
additional financing. If the Company were to experience losses at the rate
experienced in fiscal 1998, additional debt or equity financing may be required
within the next twelve months. There can be no assurances that revenues will
remain at current levels or improve or that the Company would be profitable at
such revenue levels. In addition, there can be no assurances that the Company
may not be required to utilize its line of credit even during profitable periods
for various reasons including, but not limited to, the timing of inventory
purchases, customer orders and shipments, and/or expenditures in connection with
the Company's closure of its Puerto Rican manufacturing facility. Furthermore,
there can be no assurances that future requirements to fund operations will not
require the Company to draw on its line of credit again or 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
RISK FACTORS
HISTORY OF LOSSES; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company incurred a net loss of $10,838 for the year ended June 28, 1998.
Fiscal 1998 included $5,314 of inventory charges related to consolidation and
$7,231 of consolidation charges in conjunction with the planned closure of the
Company's Puerto Rico manufacturing operations. While the Company has generated
net income for seven of the last eight quarters, there can be no assurances that
revenues will remain at current levels or improve or that the Company would be
profitable at such revenue levels.
The Company's revenues and results of operations have varied on a quarterly
basis in the past and there can be no assurances that the Company's revenues and
results of operations will not vary significantly in the future. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. The Company's revenue 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 individual
transactions; the relatively long sales and deployment cycles for the Company's
products, particularly through its OEM channel; changes in the Company's
operating expenses; the ability of the Company to develop and market new
products; the ability of the Company's contract manufacturer to produce and
distribute the Company's products in a timely fashion; market acceptance of new
products, particularly in the fibre channel market; timing of the introduction
or enhancement of products by the Company, its OEMs or its competitors; the
level of product and price competition; the ability of the Company to expand its
OEM and distributor relationships; activities of and acquisitions by
competitors; changes in printer server, network access and fibre channel
technology and industry standards; changes in the mix of products sold, since
the Company's network access and fibre channel host adapter products typically
have higher margins than the Company's printer server and fibre channel hub
products; changes in the mix of channels through which products are sold; levels
of international sales; seasonality; personnel changes; changes in customer
budgeting cycles; foreign currency exchange rates; and general economic
conditions. As a result of the foregoing or other factors in some future period,
the Company's results of operations, financial condition and/or liquidity could
fail to meet the expectations of public market analysts or investors, and the
price of the Company's common stock could be materially adversely affected.
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 whose purchases 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 shortfall of
demand in relation
11
<PAGE>
to the Company's quarterly expectations or any delay of customer orders would
have an immediate and adverse impact on the Company's quarterly results of
operations, financial condition and/or liquidity.
Reliance on OEMs, Distributors and Key Customers
In the quarter ended September 27, 1998, the Company derived approximately 73
percent of its net revenues from OEMs and 24 percent from distributors. In the
comparable quarter of the prior fiscal year, the Company derived approximately
66 percent and 28 percent of its net revenues from OEMs and distributors,
respectively. The Company's agreements with distributors and OEMs are typically
non-exclusive and in many cases may be terminated by either party without cause.
Furthermore, many of the Company's distributors and OEMs carry or utilize
competing product lines. There can be no assurance that the Company will retain
its current OEMs or distributors or that it will be able to recruit additional
or replacement OEMs or distributors. The loss of important distributors or OEMs
would adversely affect the Company's business, results of operations, financial
condition and/or liquidity. The Company negotiates individual agreements with
the majority of its OEMs and distributors. Although these agreements are
substantially standardized, due to the individual negotiations, variances do
occur. Furthermore, some of these agreements may provide for discounts based on
expected or actual volumes of products purchased or resold in a given period and
do not require minimum purchases. Certain of these agreements provide
manufacturing rights and access to source code upon the occurrence of specified
conditions or defaults. The Company expects that certain of its OEMs could in
the future develop competitive products and, if they were to do so, they could
decide to terminate their relationship with the Company. Any reduction or delay
in sales of the Company's products by its OEMs or distributors could have a
material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
For the quarter ended September 27, 1998, IBM Corporation represented 18 percent
of net revenues. In the comparable quarter of the prior fiscal year, Sequent
Computer Systems represented 20 percent of net revenues. Furthermore, the
Company's top five customers accounted for 46 percent and 43 percent of net
revenues for the quarters ended September 27, 1998 and September 28, 1997,
respectively.
The Company's revenues are significantly dependent upon the ability and
willingness of its 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, 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/or promote products
incorporating the Company's technology would have a material adverse effect on
the Company's business, results of operations, financial condition and/or
liquidity.
Concentration of OEM Customers
Historically, revenues from the Company's top OEM customers have accounted for a
significant portion of net revenues. For the quarters ended September 27, 1998
and September 28, 1997, the Company's top five OEM customers accounted for 45
percent and 41 percent of the Company's net revenues, respectively. 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
period to period 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. 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. The Company
also is subject to credit risk associated with the concentration of its accounts
receivable from these OEMs. Any loss or significant decrease in the Company's
current OEMs or any failure of the Company to replace its existing OEMs, or any
delay in or failure to receive the payments due to the Company from such OEMs
would have a material adverse effect on the Company's business, results of
operations, financial condition and/or liquidity.
12
<PAGE>
Dependence on Emerging Fibre Channel Market and
Acceptance of Fibre Channel Standard
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, is rapidly evolving and is attracting an increasing
number of market entrants. The Company's investment in fibre channel designs
represented over 70% of the Company's engineering and development expenditures
for the quarter ended September 27, 1998. The Company's future success in the
fibre channel market will depend to a significant degree upon broad market
acceptance of fibre channel technology. Competing or alternative technologies,
including Gigabit Ethernet and SCSI, are being, or are likely in the future to
be, promoted by current and potential competitors of the Company, some of which
have well-established relationships with current and potential customers of the
Company, extensive knowledge of the markets served by the Company, better name
recognition and more extensive development, sales and marketing resources than
the Company. The Company's success will be dependent in part on the ability of
the Company's OEM customers, as well as the Company, 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 technology. While the Company has secured numerous design wins for
its fibre channel products from its OEM customers, nearly all of these customers
are currently developing systems that incorporate the Company's products, and
only a limited number of OEM customers have shipped products that incorporate
the Company's fibre channel products. To the extent these customers are unable
to or otherwise do not deploy or ship systems that incorporate the Company's
products, or if these systems are not commercially successful, this would have a
material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity. The Company believes the fibre channel
market will continue to expand, and that the Company's investment in the fibre
channel market represents a significant portion of the Company's opportunities
for revenue growth and profitability in the future. However, there can be no
assurance that customers will choose the Company's technology for use, or that
fibre channel products will gain market acceptance. If the fibre channel market
fails to develop, develops more slowly than anticipated or attracts competitors
(as discussed below), or if the Company's products do not achieve market
acceptance, the Company's business, results of operations, financial condition
and/or liquidity would be materially adversely affected.
Competition
The Company's products are targeted at the fibre channel, printer server and
network access markets. 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. In
the fibre channel market, the Company primarily competes against
Hewlett-Packard, QLogic Corporation, LSI Logic's Symbios product line, Vixel,
Gadzoox Microsystems and to a lesser extent against several smaller companies.
In the printer server market, the Company competes directly against a number of
smaller companies and indirectly against Hewlett-Packard and Lexmark, the two
largest printer vendors, who primarily use their own internally developed
printer servers. In the network access market, the Company competes against
numerous networking companies who offer network access solutions. The Company
expects that other companies will enter its markets, particularly the new and
evolving fibre channel market. Additionally, although the Company has
development agreements with many of its customers, these agreements are not
exclusive, and it is not uncommon, especially with an emerging technology, for
OEMs to arrange second source agreements to meet their requirements.
Furthermore, the Company's OEM customers may in the future develop competitive
products or purchase from the Company's competitors, and may then decide to
terminate their relationships with the Company.
The Company's current and potential competition 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. Increased competition could result in significant price
competition, reduced profit margins or loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity. There can be no assurance that the Company
will be able to compete successfully against either current or potential
competitors in the future.
13
<PAGE>
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. There can be no assurance that the Company will be able to develop
or license from third parties the underlying core technologies necessary for new
products and enhancements. A key element of the Company's strategy is the
development of multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing the price/performance of the Company's
printer server and fibre channel products. There can be no assurance that the
Company will be successful at developing and incorporating ASICs effectively and
in a timely manner. 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 and/or liquidity would be materially adversely affected.
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 resource 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 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 product markets, any delay or
unanticipated difficulty associated with new product introductions or product
enhancements could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
The Company has in the past engaged, and expects that it will continue in the
future to engage, in joint development projects with third parties. Joint
development creates several risks for the Company, including loss of control
over the development of aspects of the jointly developed product and over the
timing of product availability. There can be no assurance that joint development
activities will result in products, or that any products developed will be
commercially successful or available in a timely fashion.
Reliance on Third Party Suppliers
The Company relies on third party suppliers who supply the components to the
Company and its subcontracted manufacturer which are used in the Company's
products. Most components are readily available from alternate sources. However,
the unavailability of certain components from current suppliers, especially
custom components fabricated for the Company, such as ASICs, 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. Furthermore, the components used for the Company's
fibre channel products are based on an emerging technology and may not be
available with the performance characteristics and in the quantities required by
the Company. Additionally, as the Company transitions the production of its
product lines to a subcontracted manufacturer, the Company plans to maintain
only a minimal supply of certain key components. Furthermore, the Company will
now rely on its contract manufacturer to complete the majority of the component
purchases. Consequently, there can be no assurance that the necessary components
will be available to meet the Company's
14
<PAGE>
future requirements at favorable prices, if at all. The Company also relies on
third party suppliers for some of the software incorporated in some of the
Company's products. These software items are not generally readily available
from alternate sources. The Company's future inability to supply product due to
a lack of components or software or to redesign its products to accept
alternatives, in a timely manner, or any resulting significant increase in
prices would materially adversely affect the Company's business, results of
operations, financial condition and/or liquidity.
Risks Associated With Transition From Puerto Rico Manufacturing Facility
To Subcontracted Manufacturer
The Company is completing the transition of the manufacture of its product lines
from its former Puerto Rico manufacturing facility to a contract manufacturer
located in Texas. The Company expects this transition to be completed during the
second quarter of fiscal 1999. Any unanticipated delays or issues related to
events such as the transfer of test equipment, supply of components, loss of key
personnel and/or production start up at the Company's contract manufacturer, as
well as any unanticipated events, could have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
Furthermore, if for any reason, the Company's selected contract manufacturer is
unable or unwilling to complete, or experiences any significant delays in
completing, the production runs for the Company during the transition period or
in the future, the Company's resulting inability to supply product and/or costs
to qualify and shift production to an alternative manufacturing facility would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Dependence on Proprietary Technology
Although the Company believes that its continued success will depend primarily
on continuing innovation, sales, marketing and technical expertise and the
quality of product support and customer relations, the Company's success is
dependent in part on 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 technology. Any such claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. 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 and on commercially
reasonable terms would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
Dependence on 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. This is
especially critical as the Company transitions the manufacturing of its products
from its Puerto Rican subsidiary to a contract manufacturer. The Company's
future success also depends upon its ability to attract, train and retain highly
qualified technical, sales, marketing and managerial personnel. An increase in
technical staff with experience in highspeed networking applications will be
required as the Company further develops its fibre channel product line.
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, results of operations,
financial condition and/or liquidity.
Risks Associated with International Operations and Regulatory Standards
During the quarter ended September 27, 1998, sales in the United States, Europe
and the Pacific Rim countries accounted for 69 percent, 25 percent and 6 percent
of the Company's net revenues, respectively. During the comparable quarter of
the prior fiscal year, sales in the United States, Europe and the Pacific Rim
countries accounted for 75 percent, 20 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 the substantial majority of the
15
<PAGE>
Company's revenues for the foreseeable future. There can be no assurance that
the Company will achieve significant penetration in other markets.
All of the Company's sales are currently denominated in U.S. dollars. 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 a material adverse effect on the Company's future international
sales and consequently, the Company's business, results of operations, financial
condition and/or liquidity.
Year 2000 Issue
The Year 2000 issue is the result of computer programs, microprocessors and
embedded date reliant systems using two digits rather than four to define the
applicable year. If such programs are not corrected, date data concerning the
Year 2000 could cause many systems to fail or generate erroneous information.
The Company considers a product to be "Year 2000 compliant" if the product's
performance and functionality are unaffected by processing of dates prior to,
during and after the Year 2000. The Company believes its current products are
Year 2000 compliant, although older products previously sold by the Company
which may still be covered under warranty may not be Year 2000 compliant. The
Company believes it is prepared to update these older products as required under
warranty for all issues that the Company has been able to identify. However,
there can be no assurance that all potential Year 2000 issues have been
identified and will be successfully resolved to the customers' satisfaction.
Consequently, litigation may be brought against vendors, including the Company.
Any such claims, with or without merit, could result in a material adverse
effect on the Company's business, results of operations, financial condition
and/or liquidity.
The Company has committed resources in an attempt to identify and correct
potential Year 2000 issues, both in its products and in its internal computer
systems and applications, as well as to identify those of third parties which
could impact the Company. The Company believes it has identified and either
corrected or has a plan in place to correct any Year 2000 issues related to its
products and internal computer systems. However, the Company relies in various
ways, both domestically and internationally, upon government agencies, utility
companies, telecommunication companies and other service providers. The Company
is in the process of completing a survey of its suppliers and financial
institutions to evaluate their Year 2000 compliance plans and state of readiness
and to determine whether any Year 2000 issues will impede the ability of such
suppliers to continue to provide goods and services to the Company. The Company
has yet to conduct a survey of its customers. There can be no assurance that all
such suppliers, government agencies, customers, financial institutions and other
third parties will not suffer business disruption caused by a Year 2000 issue.
Management believes that the most likely worst case scenario related to the Year
2000 that the Company may experience would be either an inability to obtain
inventory components from suppliers or delays in receiving orders or payments
from customers due to Year 2000 problems experienced by these third parties.
Such failures could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
As the Company has not yet completed its full Year 2000 assessment (as
previously discussed), the Company has not developed a contingency plan. The
Company anticipates that its full Year 2000 review, necessary remediation
actions and contingency plan will be substantially complete by the end of June
1999. Although this process has not generated any material expenditures to date
and the Company does not foresee any needed material expenditures, the costs
related to this issue will continue to evolve as the remaining issues are
identified and addressed by the Company. Although the Company currently does not
believe that the Year 2000 issue will pose any significant operational problems,
delays in the Company's efforts to address the Year 2000 issue or a failure to
fully identify all Year 2000 issues in the Company's systems, equipment or
processes or those of its vendors, customers, financial institutions or other
third parties could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
16
<PAGE>
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, changes in earnings
estimates by analysts, and general conditions in the computer and communications
markets, among other factors, 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.
PART II. OTHER INFORMATION
- --------------------------
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.
17
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999
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)
18
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMULEX
CORPORATION AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF
OPERATIONS AND STATMENT OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER
27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1999
<PERIOD-END> SEP-27-1998
<CASH> 3,885
<SECURITIES> 0
<RECEIVABLES> 14,263
<ALLOWANCES> 0
<INVENTORY> 7,290
<CURRENT-ASSETS> 26,175
<PP&E> 4,504
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,358
<CURRENT-LIABILITIES> 15,138
<BONDS> 0
0
0
<COMMON> 1,227
<OTHER-SE> 12,826
<TOTAL-LIABILITY-AND-EQUITY> 31,358
<SALES> 14,051
<TOTAL-REVENUES> 14,051
<CGS> 8,969
<TOTAL-COSTS> 8,969
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 469
<INCOME-TAX> 47
<INCOME-CONTINUING> 422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 422
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
