<PAGE> 1
================================================================================
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 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 February 4, 1999, the registrant had 6,158,891 shares of common stock
outstanding.
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<PAGE> 2
EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 27, 1998 and June 28, 1998 2
Condensed Consolidated Statements of Operations
Three and six months ended December 27, 1998
and December 28, 1997 3
Condensed Consolidated Statements of Cash Flows
Six months ended December 27, 1998
and December 28, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
1
<PAGE> 3
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 27, June 28,
Assets 1998 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,425 $ 1,776
Accounts and other receivables, net 14,054 12,141
Inventories, net 7,426 9,906
Prepaid expenses 523 476
Deferred income taxes 85 85
------------- -------------
Total current assets 26,513 24,384
Property, plant and equipment, net 2,877 5,112
Other assets 670 661
------------- -------------
$ 30,060 $ 30,157
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,934 $ 6,909
Accrued liabilities 3,640 4,105
Accrued consolidation charges 422 3,173
Income taxes payable and other current liabilities 248 212
------------- -------------
Total current liabilities 13,244 14,399
Deferred income taxes and other liabilities 2,214 2,152
------------- -------------
15,458 16,551
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized (150,000 shares designated as Series A
Junior Participating Preferred Stock); none issued
and outstanding -- --
Common stock, $0.20 par value; 20,000,000 shares
authorized; 6,155,262 and 6,133,322 issued
and outstanding at December 27, 1998 and
June 28, 1998, respectively 1,231 1,227
Additional paid-in capital 7,574 7,444
Retained earnings 5,797 4,935
------------- -------------
Total stockholders' equity 14,602 13,606
------------- -------------
$ 30,060 $ 30,157
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
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 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 15,746 $ 15,493 $ 29,797 $ 30,500
Cost of sales 9,603 8,663 17,946 17,543
------------ ------------ ------------ ------------
Gross profit 6,143 6,830 11,851 12,957
Operating expenses:
Engineering and development 2,616 2,803 5,256 5,196
Selling and marketing 1,812 1,940 3,439 3,910
General and administrative 947 1,116 1,931 2,217
Consolidation charges, net 317 -- 317 --
------------ ------------ ------------ ------------
Total operating expenses 5,692 5,859 10,943 11,323
------------ ------------ ------------ ------------
Operating income 451 971 908 1,634
Nonoperating income 38 51 50 65
------------ ------------ ------------ ------------
Income before income taxes 489 1,022 958 1,699
Income tax provision (benefit) 49 (86) 96 (18)
------------ ------------ ------------ ------------
Net income $ 440 $ 1,108 $ 862 $ 1,717
============ ============ ============ ============
Net income per share:
Basic $ 0.07 $ 0.18 $ 0.14 $ 0.28
============ ============ ============ ============
Diluted $ 0.07 $ 0.18 $ 0.13 $ 0.27
============ ============ ============ ============
Number of shares used in per share computations:
Basic 6,150 6,118 6,142 6,110
============ ============ ============ ============
Diluted 6,761 6,330 6,618 6,321
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
December 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 862 $ 1,717
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 776 1,216
Loss (gain) on disposal of property, plant and equipment (750) 97
Provision for doubtful accounts 7 60
Changes in assets and liabilities:
Accounts receivable (1,920) 2,569
Inventories 2,480 (2,139)
Accounts payable 2,025 (222)
Accrued liabilities (465) (1,139)
Accrued consolidation charges (2,751) --
Income taxes receivable -- 146
Income taxes payable 65 --
Deferred revenue -- (6)
Deferred income taxes -- 1
Prepaid expenses and other assets 13 (190)
------------ ------------
Net cash provided by operating activities 342 2,110
------------ ------------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment 2,994 --
Additions to property, plant and equipment (785) (960)
------------ ------------
Net cash provided by (used in) investing activities 2,209 (960)
------------ ------------
Cash flows from financing activities:
Principal payments under capital leases (36) (88)
Proceeds from issuance of common stock 134 158
------------ ------------
Net cash provided by financing activities 98 70
------------ ------------
Net increase in cash and cash equivalents 2,649 1,220
Cash and cash equivalents at beginning of period 1,776 484
------------ ------------
Cash and cash equivalents at end of period $ 4,425 $ 1,704
============ ============
Supplemental disclosures:
Cash paid during the period for:
Interest $ 56 $ 140
Income taxes 53 24
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
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 27, 1998 and June 28, 1998, and the results of operations for
the three and six months ended December 27, 1998 and December 28, 1997, and
the statements of cash flows for the six months then ended. Interim results
for the three and six months ended December 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 Statements of Operations for the three and six months ended
December 28, 1997 to conform to the presentation for the three and six
months ended December 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>
December 27, June 28,
1998 1998
------------ ------------
<S> <C> <C>
Raw materials $ 1,009 $ 3,926
Work-in-process -- 273
Finished goods 6,417 5,707
------------ ------------
$ 7,426 $ 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> 7
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
December 27, December 28, December 27, December, 28
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 440 $ 1,108 $ 862 $ 1,717
============ ============ ============ ============
Denominator:
Denominator for basic earnings per
share - weighted average shares outstanding 6,150 6,118 6,142 6,110
Effect of dilutive securities:
Dilutive options outstanding 611 212 476 211
------------ ------------ ------------ ------------
Denominator for diluted earnings per
share - adjusted weighted average shares 6,761 6,330 6,618 6,321
============ ============ ============ ============
Basic earnings per share $ 0.07 $ 0.18 $ 0.14 $ 0.28
============ ============ ============ ============
Diluted earnings per share $ 0.07 $ 0.18 $ 0.13 $ 0.27
============ ============ ============ ============
</TABLE>
Options to purchase 85,100 shares of common stock at prices in excess of
$21.54 per share were outstanding at December 27, 1998, but were not
included in the computation of diluted earnings per share for the three
month period then ended. Furthermore, options to purchase 147,600 shares of
common stock at prices in excess of $15.52 per share were outstanding at
December 27, 1998, but were not included in the computation of diluted
earnings per share for the six month period then ended. Options to purchase
209,862 shares of common stock at prices in excess of $16.51 per share were
outstanding at December 28, 1997, but were not included in the computation
of diluted earnings per share for the three month period then ended.
Additionally, options to purchase 210,862 shares of common stock at prices
in excess of $16.33 per share were outstanding at December 28, 1997, but
were not included in the computation of diluted earnings per share for the
six 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. 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
Rican manufacturing subsidiary, to streamline the Company's product
offerings of some of its more mature, lower volume products (primarily in
the network access product lines), 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 December 27, 1998, the Company completed the
sale of its former manufacturing facility in Puerto Rico which resulted in
a gain of $777. Additionally, during the quarter, as the Company
essentially completed this consolidation plan including all remaining
headcount reductions, the Company recognized additional consolidation
expenses of $1,094 related to severance and other asset impairment charges.
As of December 27, 1998, this consolidation plan was substantially
complete, and the remaining consolidation accrual of $422 is primarily for
remaining severance and related payments to be made over the next nine
months.
6
<PAGE> 8
5. Commitments and Contingencies
During the quarter ended December 27, 1998, the Company received a
favorable response to the Ruling Request it submitted in July 1998 to the
Puerto Rico Secretary of the Treasury (the "Secretary"). The liquidation of
Emulex Caribe, a subsidiary of the Company, was structured to qualify for
tax-free liquidation treatment under the provisions of both the U.S. and
Puerto Rico Internal Revenue Code. The Secretary has agreed that neither
Emulex nor Emulex Caribe will recognize a gain or loss as a result of the
liquidation.
The Company is currently undergoing an examination by the California
Franchise Tax Board for the Company's 1989, 1990 and 1991 California income
tax returns. 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 or
results of operations.
7
<PAGE> 9
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 "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 organization, 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 Percentage of Net Revenues
For the Three Months Ended For the Six Months Ended
----------------------------- -----------------------------
December 27, December 28, December 27, December 28,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 61.0 55.9 60.2 57.5
-------- -------- -------- --------
Gross profit 39.0 44.1 39.8 42.5
Operating expenses:
Engineering and development 16.6 18.1 17.6 17.0
Selling and marketing 11.5 12.5 11.5 12.8
General and administrative 6.0 7.2 6.5 7.3
Consolidation charges, net 2.0 -- 1.0 --
-------- -------- -------- --------
Total operating expenses 36.1 37.8 36.6 37.1
-------- -------- -------- --------
Operating income 2.9 6.3 3.0 5.4
Nonoperating income 0.2 0.3 0.2 0.2
-------- -------- -------- --------
Income before income taxes 3.1 6.6 3.2 5.6
Income tax provision (benefit) 0.3 (0.6) 0.3 --
-------- -------- -------- --------
Net income 2.8% 7.2% 2.9% 5.6%
======== ======== ======== ========
</TABLE>
8
<PAGE> 10
NET REVENUES
Net revenues for the three months ended December 27, 1998, were $15,746, an
increase of $253, or 2 percent, from the comparable period of the prior fiscal
year. Net revenues sold through distribution for the three month period were
$4,502, an increase of $444, or 11 percent, over the same period of the
preceding fiscal year. This increase was due to higher sales of the Company's
fibre channel products sold through distribution. Net revenues for the three
month period from sales to OEMs were $10,872, a decrease of $121, or 1 percent,
compared to the same period of the prior fiscal year. Additionally, net revenues
from sales to end users were $372 which represented a decrease of $70, or 16
percent, when compared to the same period of the previous fiscal year.
Net revenues for the six months ended December 27, 1998, were $29,797, a
decrease of $703, or 2 percent, compared to the six month period of the prior
fiscal year. This reduction was due to a decrease in net revenues from
distribution of $480, or 6 percent, to $7,807, as well as a decrease in net
revenues from end-user sales of $499, or 38 percent, to $819, from the
comparable period of the preceding fiscal year. These decreases from the first
six months of fiscal 1998 were partially offset by an increase in net revenues
from sales to OEMs of $276, or 1 percent, to $21,171 for the first six months of
fiscal 1999.
From a product line perspective, net revenues from the Company's fibre channel
product line for the three and six month periods ended December 27, 1998, were
$7,878, or 50 percent of net revenues, and $13,310, or 45 percent of net
revenues, respectively. When compared to the same relative periods of the
preceding fiscal year, that equates to an increase of $2,982, or 61 percent, for
the three month period and an increase of $3,239, or 32 percent, for the six
month period. The Company anticipates that future revenue from its fibre channel
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 $4,401, or 28 percent of net
revenues, and $9,432, or 32 percent of net revenues, for the three and six month
periods ended December 27, 1998, respectively. This represents decreases in net
revenues from printer servers of $1,691, or 28 percent, and $2,238, or 19
percent, for the three and six month periods, respectively, compared to the same
relative periods of the prior fiscal year. These decreases in printer server net
revenues were principally due to lower average selling prices and ongoing
maturation of this product line. Net revenues from network access products were
$3,342, or 21 percent of the Company's net revenues, for the three month period
ended December 27, 1998. For the six month period, network access product line
net revenues were $6,712, or 22 percent of the Company's net revenues. Compared
to the three and six month periods of the preceding fiscal year, net revenues
for this mature product area decreased by $907, or 21 percent, and $1,470, or 18
percent, respectively. The Company expects net revenues from network access
products to show continued maturation in the future. 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
decreased by $131, or 51 percent, to $125 for the three month period and by
$234, or 41 percent, to $343 for the six month period ended December 27, 1998,
compared to the same relative periods of the prior fiscal year.
Although fibre channel represented 50 and 45 percent of net revenues for the
three and six month periods ended December 27, 1998, respectively, 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. Additionally, 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 three and six month periods ended December 27, 1998, gross profit
decreased by $687, or 10 percent, to $6,143 and by $1,106, or 9 percent, to
$11,851, respectively, when compared to the corresponding periods of the prior
fiscal year. Gross profit as a percentage of net revenues decreased to 39
percent for the quarter from 44 percent in the comparable quarter of last fiscal
year. For the first six months of fiscal 1999, gross profit as a percentage of
net revenues decreased to 40 percent from 43 percent in the comparable period of
fiscal 1998. This reduction in gross profit as a percentage of net revenues is
primarily the result of average selling price erosion and a
9
<PAGE> 11
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 December 27, 1998, were $5,692, a
decrease of $167, or 3 percent, compared to $5,859 for the same period of the
prior fiscal year. For the six month period, operating expenses were $10,943, a
decrease of $380, or 3 percent, compared to $11,323 for the six month period of
the prior year. Included within operating expenses for the three and six month
periods ended December 27, 1998, are $317 of net charges related to the
consolidation discussed in the next paragraph. Excluding this net consolidation
charge, operating expenses for the three and six month periods were $5,375 and
$10,626, respectively, compared to $5,859 and $11,323 for the same three and six
month periods of fiscal 1998, respectively. This represents a decrease of $484,
or 8 percent, for the three month periods and a decrease of $697, or 6 percent,
for the six month periods, primarily as a result of the streamlining actions
that accompanied the Company's decision to outsource manufacturing, discussed in
the following paragraph. Engineering and development expenses decreased by $187,
or 7 percent, to $2,616 for the three month period ended December 27, 1998,
compared to the same period of the prior year. For the first six months of
fiscal 1999, engineering and development expenses increased slightly by $60, or
1 percent, to $5,256 from the comparable period of fiscal 1998. Engineering and
development expenses can fluctuate from quarter to quarter depending on new
product introduction schedules, as seen in the three month period ended December
27, 1998. However, the Company remains committed to, and intends to continue to
heavily invest in, its fibre channel product development. Selling and marketing
expenses decreased by $128, or 7 percent, to $1,812 for the three month period
and decreased by $471, or 12 percent, to $3,439 for the six month period when
compared to the corresponding periods of fiscal 1998 as a result of the
streamlining of the Company's products and related sales and marketing efforts.
Additionally, general and administrative expenses decreased by $169, or 15
percent, to $947 for the three month period and decreased by $286, or 13
percent, to $1,931 for the six month period from the comparable periods of the
preceding fiscal year primarily due to reduced staffing levels.
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 Rican manufacturing subsidiary, to
streamline the Company's product offerings of some of its more mature, lower
volume products (primarily in the network access product lines), and to close
selected sales offices. During the quarter ended December 27, 1998, the Company
completed the sale of its former manufacturing facility in Puerto Rico which
resulted in a gain of $777. Additionally, during the quarter, as the Company
essentially completed this consolidation plan including all remaining headcount
reductions, the Company recognized additional consolidation expenses of $1,094
related to severance and other asset impairment charges. As of December 27,
1998, this consolidation plan was substantially complete, and the remaining
consolidation accrual of $422 is primarily for remaining severance and related
payments to be made over the next nine months.
NONOPERATING INCOME
Nonoperating income for the three month period ended December 27, 1998 decreased
by $13 to $38 compared to $51 for the corresponding three month period of the
prior fiscal year. For the six month period, nonoperating income decreased by
$15 to $50 compared to $65 in the same six month period of the preceding fiscal
year. These decreases are primarily the net result of a $37 gain from the sale
of certain property in Puerto Rico in the prior fiscal year which is partially
offset by increased levels of interest income in the current fiscal year,
associated with the Company's improved cash position.
INCOME TAXES
The Company recorded a 10 percent tax provision for the three and six months
ended December 27, 1998.
During the quarter ended December 27, 1998, the Company received a favorable
response to the Ruling Request it submitted in July 1998 to the Puerto Rico
Secretary of the Treasury. The liquidation of Emulex Caribe, a subsidiary of the
Company, was structured to qualify for tax-free liquidation treatment under the
provisions of both the U.S. and Puerto Rico Internal Revenue Code. The Secretary
has agreed that neither Emulex Corporation nor Emulex Caribe will recognize a
gain or loss as a result of the liquidation.
10
<PAGE> 12
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's 1989, 1990 and 1991 California income tax returns.
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 or results of operations.
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 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 $2,649 during the first six
months of fiscal 1999 from $1,776 to $4,425 as of December 27, 1998. Operating
activities, which include changes in working capital balances, provided $342 of
cash and cash equivalents for the six month period compared to providing $2,110
of cash and cash equivalents during the six month period of the prior fiscal
year. Included in the $342 of cash and cash equivalents provided by operating
activities during the first six months of fiscal 1999 was $2,751 of cash and
cash equivalents consumed in relation to the consolidation charges discussed
previously. Investing activities, which were limited to the acquisition and
disposition of property, plant and equipment, provided $2,209 of cash and cash
equivalents during the six month period compared to using $960 in the comparable
period of fiscal 1998, as the Company completed the sale of its production
equipment and its former manufacturing facility in Puerto Rico. Net financing
activities, which were limited to payments under capital lease obligations and
proceeds from the exercise
11
<PAGE> 13
of employee stock options, provided $98 of cash and cash equivalents during the
first six months of fiscal 1999 compared to providing $70 of cash and cash
equivalents in the same relative period of the prior year. As of December 27,
1998, the Company had a remaining consolidation accrual of $422 primarily for
severance and related items which the Company anticipates will be paid over the
next nine months. Additionally, on October 29, 1998, the Company completed the
sale of its manufacturing facility in Puerto Rico. The Company received net
proceeds of $2,447 in cash and recognized a gain of $777 associated with the
sale of this property.
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 Company last utilized the line of credit in
the quarter ended September 28, 1997. There were no borrowings outstanding under
this line at December 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 December 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.
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 collections related to these
shipments. 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
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 $1,899 of incremental inventory reserves and $10,646 of
consolidation charges in conjunction with the planned closure of the Company's
Puerto Rican manufacturing operations. While the Company has generated net
income for eight of the last nine 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;
12
<PAGE> 14
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 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
For the three and six month periods ended December 27, 1998, the Company derived
approximately 69 and 71 percent of its net revenues from OEMs and 29 and 26
percent from distributors, respectively. In the comparable periods of the prior
fiscal year, the Company derived approximately 71 and 69 percent of its net
revenues from OEMs and 26 and 27 percent from 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 December 27, 1998, IBM Corporation represented 16 percent
of net revenues. In the comparable quarter of the prior fiscal year, Sequent
Computer Systems and IBM Corporation represented 16 and 11 percent of net
revenues, respectively. Furthermore, the Company's top five customers accounted
for 48 and 49 percent of net revenues for the quarters ended December 27, 1998
and December 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 in general. 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
13
<PAGE> 15
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 December 27, 1998
and December 28, 1997, the Company's top five OEM customers accounted for 43 and
49 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.
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 75% of the Company's engineering and development expenditures
for the six month period ended December 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.
Even though fibre channel products accounted for 50 percent of the Company's net
revenues for the quarter ended December 27, 1998, the Company's traditional
printer server and network access product lines still accounted for 28 and 21
percent of net revenues, respectively. If the Company were to experience faster
than anticipated maturation in these product lines, the Company's business,
results of operations, financial condition and/or liquidity would be materially
adversely affected. 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,
14
<PAGE> 16
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.
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
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 the Company or 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, its
suppliers 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.
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<PAGE> 17
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 and a Subcontracted Manufacturer
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 has transitioned 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 subcontracted 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 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.
Furthermore, if for any reason, the Company's selected subcontracted
manufacturer is unable or unwilling to complete, or experiences any significant
delays in completing, the production runs for the Company 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. 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 high-speed 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
16
<PAGE> 18
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 December 27, 1998, sales in the United States, Europe
and the Pacific Rim countries accounted for 62, 33 and 5 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 65, 28 and 7 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 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
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<PAGE> 19
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.
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.
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 19, 1998.
There were 6,141,976 shares of the Company's common stock issued, outstanding
and entitled to vote at the meeting as of the record date, October 5, 1998.
Proxies representing 5,868,074 common shares were received and tabulated. 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 5,852,152 15,922
Michael P. Downey 5,852,172 15,902
Paul F. Folino 5,852,189 15,885
Robert H. Goon 5,852,169 15,905
Don M. Lyle 5,851,872 16,202
</TABLE>
In addition, the stockholders of the Company ratified the selection of KPMG LLP
as the Company's independent public accountants for fiscal year 1999. The number
of shares voted for ratification was 5,829,067. The number of shares voted
against ratification was 5,610. The number of shares abstaining was 33,397.
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.
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<PAGE> 20
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 9, 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)
19
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<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 SIX MONTH PERIOD ENDED DECEMBER
27, 1998 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-27-1999
<PERIOD-END> DEC-27-1998
<CASH> 4,425
<SECURITIES> 0
<RECEIVABLES> 14,054
<ALLOWANCES> 0
<INVENTORY> 7,426
<CURRENT-ASSETS> 26,513
<PP&E> 2,877
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,060
<CURRENT-LIABILITIES> 13,244
<BONDS> 0
0
0
<COMMON> 1,231
<OTHER-SE> 13,371
<TOTAL-LIABILITY-AND-EQUITY> 30,060
<SALES> 29,797
<TOTAL-REVENUES> 29,797
<CGS> 17,946
<TOTAL-COSTS> 17,946
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 958
<INCOME-TAX> 96
<INCOME-CONTINUING> 862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 862
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.13
</TABLE>
