<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 26, 1999
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 3, 2000, the registrant had 35,703,237 shares of common stock
outstanding.
<PAGE> 2
EMULEX CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
Part I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 26, 1999 and June 27, 1999 2
Condensed Consolidated Statements of Income
Three and six months ended December 26, 1999
and December 27, 1998 3
Condensed Consolidated Statements of Cash Flows
Six months ended December 26, 1999
and December 27, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 23
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
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 26, June 27,
Assets 1999 1999
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,598 $ 22,284
Investments 99,509 83,164
Accounts and other receivables, net 17,233 17,088
Inventories, net 9,731 11,083
Prepaid expenses 505 475
Deferred income taxes 531 244
-------- --------
Total current assets 145,107 134,338
Property and equipment, net 3,344 3,168
Long term investments 43,628 32,216
Deferred income taxes and other assets 3,515 269
-------- --------
$195,594 $169,991
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 11,604 $ 11,395
Accrued liabilities 6,203 4,291
Income taxes payable and other current liabilities 348 358
-------- --------
Total current liabilities 18,155 16,044
Deferred income taxes 153 2,054
-------- --------
18,308 18,098
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized (150,000 shares designated as Series A
Junior Participating Preferred Stock); none issued
and outstanding - -
Common stock, $0.10 par value; 120,000,000 shares
authorized; 35,449,261 and 33,933,888 issued
and outstanding at December 26, 1999 and
June 27, 1999, respectively 3,545 3,393
Additional paid-in capital 147,974 138,300
Retained earnings 25,767 10,200
-------- --------
Total stockholders' equity 177,286 151,893
-------- --------
$195,594 $169,991
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net revenues $ 33,603 $ 15,746 $ 62,499 $ 29,797
---------- ----------- ------------ -----------
Cost of sales 17,910 9,603 33,909 17,946
Cost of sales - inventory charges
related to consolidation - 678 - 1,304
---------- ----------- ------------ -----------
Total cost of sales 17,910 10,281 33,909 19,250
---------- ----------- ------------ -----------
Gross profit 15,693 5,465 28,590 10,547
---------- ----------- ------------ -----------
Operating expenses:
Engineering and development 3,799 2,640 7,149 5,301
Selling and marketing 2,438 1,812 4,778 3,439
General and administrative 1,732 923 3,237 1,886
Consolidation charges, net - (361) - (987)
---------- ----------- ------------ -----------
Total operating expenses 7,969 5,014 15,164 9,639
---------- ----------- ------------ -----------
Operating income 7,724 451 13,426 908
Nonoperating income 2,017 38 3,871 50
---------- ----------- ------------ -----------
Income before income taxes 9,741 489 17,297 958
Income tax provision 974 49 1,730 96
---------- ----------- ------------ -----------
Net income $ 8,767 $ 440 $ 15,567 $ 862
========== =========== ============ ===========
Net income per share:
Basic $ 0.25 $ 0.02 $ 0.45 $ 0.04
========== =========== ============ ===========
Diluted $ 0.23 $ 0.02 $ 0.41 $ 0.03
========== =========== ============ ===========
Number of shares used in per share
computations:
Basic 35,278 24,598 34,847 24,567
========== =========== ============ ===========
Diluted 38,178 27,043 38,018 26,472
========== =========== ============ ===========
</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 26, December 27,
1999 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 15,567 $ 862
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 662 776
Loss (gain) on disposal of property, plant and equipment 17 (750)
Impairment of intangibles 175 -
Provision for doubtful accounts 326 7
Changes in assets and liabilities:
Accounts receivable (471) (1,920)
Inventories 1,352 2,480
Accounts payable 209 2,025
Accrued liabilities 1,912 (3,216)
Income taxes payable and deferred income taxes 1,727 65
Prepaid expenses and other assets 4 13
--------- ---------
Net cash provided by operating activities 21,480 342
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment 3 2,994
Additions to property and equipment (858) (785)
Purchases of investments (341,563) -
Maturities of investments 313,806 -
--------- ---------
Net cash provided by (used in) investing activities (28,612) 2,209
--------- ---------
Cash flows from financing activities:
Principal payments under capital leases (7) (36)
Net proceeds from issuance of common stock under stock option plans 2,453 134
--------- ---------
Net cash provided by financing activities 2,446 98
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,686) 2,649
Cash and cash equivalents at beginning of period 22,284 1,776
--------- ---------
Cash and cash equivalents at end of period $ 17,598 $ 4,425
--------- ---------
Supplemental disclosures:
Cash paid during the period for:
Interest $ 15 $ 56
Income taxes 4 53
</TABLE>
During the six months ended December 26, 1999, the Company recognized $7,373 as
a credit to additional paid-in capital related to the tax benefit from exercises
of stock options under the Company's stock option plans.
See accompanying notes to condensed consolidated financial statements.
4
<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 26, 1999, and June 27, 1999, and the results of
operations for the three and six months ended December 26, 1999, and
December 27, 1998, and the statements of cash flows for the six months
then ended. Certain reclassifications have been made to the Condensed
Consolidated Statements of Operations for the three and six months ended
December 27, 1998, to conform to the presentation for the three and six
months ended December 26, 1999. Interim results for the three and six
months ended December 26, 1999, are not necessarily indicative of the
results that may be expected for the year ending July 2, 2000. 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 27,
1999. References to dollar amounts are in thousands, except share data,
unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
<TABLE>
<CAPTION>
December 26, June 27,
1999 1999
------------ ---------
<S> <C> <C>
Raw materials $1,177 $ 805
Finished goods 8,554 10,278
----- ------
$9,731 $11,083
===== ======
</TABLE>
3. Earnings per Share
Basic net income per share is computed by dividing income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is computed by dividing income by the
weighted average number of common shares outstanding during the period
increased to include, if dilutive, the number of additional common
shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of outstanding stock options
is reflected in diluted net income per share by application of the
treasury stock method. The following table sets forth the computation of
basic and diluted net income per share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 8,767 $ 440 $15,567 $ 862
======= ======= ======= =======
Denominator:
Denominator for basic net income per
share - weighted average shares outstanding 35,278 24,598 34,847 24,567
Effect of dilutive securities:
Dilutive options outstanding 2,900 2,445 3,171 1,905
------- ------- ------- -------
Denominator for diluted net income per
share - adjusted weighted average shares 38,178 27,043 38,018 26,472
======= ======= ======= =======
Basic net income per share $ 0.25 $ 0.02 $ 0.45 $ 0.04
======= ======= ======= =======
Diluted net income per share $ 0.23 $ 0.02 $ 0.41 $ 0.03
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 7
Options to purchase 243,800 shares of common stock at prices in excess
of $73.44 per share were outstanding at December 26, 1999, but were not
included in the computation of diluted earnings per share for the three
month period then ended. Furthermore, options to purchase 253,800 shares
of common stock at prices in excess of $52.31 per share were outstanding
at December 26, 1999, but were not included in the computation of
diluted earnings per share for the six month period then ended. Options
to purchase 340,400 shares of common stock at prices in excess of $5.38
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. Additionally, options to purchase 590,400 shares of
common stock at prices in excess of $3.88 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. 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. Accrued Liabilities
Components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
December 26, June 27,
1999 1999
------------ ---------
<S> <C> <C>
Payroll and related costs $3,278 $1,849
Warranty and related reserves 956 868
Unearned revenue 881 951
Other 1,088 623
------ ------
$6,203 $4,291
</TABLE>
5. Common Stock Splits
On August 30, 1999, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common
Stock for each share of common stock outstanding to stockholders of
record on August 16, 1999. All share, per share and related data
presented in the condensed consolidated financial statements and
footnotes have been retroactively adjusted to reflect this stock split.
As the par value of the Company's common stock remained at $0.20 per
share, all periods presented reflect a reclass from additional paid-in
capital to common stock. Additionally, on December 15, 1999, the Company
completed another two-for-one stock split, and the par value of the
Company's common stock changed from $0.20 per share to $0.10 per share.
All share and per share data presented in the condensed consolidated
financial statements and footnotes have also been retroactively adjusted
to reflect this stock split.
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 December 27,
1998, the Company sold the land and buildings at its former
manufacturing facility in Puerto Rico which resulted in a gain of $777.
No impairment had previously been recognized related to the land and
buildings. Additionally, as the Company essentially completed this
consolidation plan including all remaining headcount reductions, the
Company recognized additional inventory charges related to consolidation
of $678 and $1,304 during the three and six month periods ended December
27, 1998, respectively, related to the streamlining of the Company's
products. When the initial consolidation charge was taken, management of
the Company believed this inventory would be sold at positive margins.
However, as the Company neared the closure of the manufacturing
facility, it determined this inventory was no longer saleable and these
additional reductions in inventory were recorded. Additionally, during
the quarter ended December 27, 1998, the Company recognized an addition
to other accrued consolidation charges of $416 recorded in operating
expenses. The additional accrued consolidation charges were required
primarily for additional costs incurred due to the longer length of time
required to sell the building than was previously estimated. Overall,
during the six months ended December 27, 1998, the Company recognized a
net reduction in other accrued consolidation charges of $210 based on
management's periodic review of the adequacy of the remaining
consolidation accrual. As of June 27, 1999, this consolidation plan was
substantially complete.
6
<PAGE> 8
7. Commitments and Contingencies
The Company is currently undergoing an examination by the California
Franchise Tax Board for the Company's 1989, 1990 and 1991 California
income tax returns. The Company is also undergoing examination by the
Internal Revenue Service of Emulex Caribe's 1995 U.S. tax return. It is
management's belief that the outcome of these examinations will not have
a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
7
<PAGE> 9
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the discussions in this
Form 10-Q in general may contain certain forward-looking statements. In
addition, when used in this Form 10-Q, the words "anticipates," "believes,"
"intends," "expects" and similar expressions are intended to identify
forward-looking statements. Actual future results could differ materially from
those described in the forward-looking statements as a result of factors
discussed in "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, developer and supplier of a broad line
of fibre channel host adapters, hubs, Application Specific Integrated Circuits
("ASICs") and software products that enhance access to, and storage of,
electronic data and applications. We believe that we are the only company that
designs, develops and markets both fibre channel host adapters and hubs, two of
the core components of a complete fibre channel solution. Our products are based
on internally developed ASIC technology, are deployable across a variety of
heterogeneous network configurations and operating systems, and support
increasing volumes of stored data. Over the course of our history, we have also
designed, developed and marketed traditional networking products such as printer
servers and network access products, including communications servers and wide
area network ("WAN") adapters. The Company markets to original equipment
manufacturers ("OEMs") and end users through its own worldwide selling
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. References to
dollar amounts are in thousands, except per share data, unless otherwise
specified.
<TABLE>
<CAPTION>
Percentage of Net Revenues Percentage of Net Revenues
For the Three Months Ended For the Six Months Ended
---------------------------- -----------------------------
December 26, December 27, December 26, December 27,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Cost of sales 53.3 61.0 54.3 60.2
Cost of sales - inventory charges related
to consolidation - 4.3 - 4.4
------ ------ ------ ------
Total cost of sales 53.3 65.3 54.3 64.6
------ ------ ------ ------
Gross profit 46.7 34.7 45.7 35.4
------ ------ ------ ------
Operating expenses:
Engineering and development 11.3 16.8 11.4 17.8
Selling and marketing 7.3 11.5 7.6 11.5
General and administrative 5.1 5.8 5.2 6.3
Consolidation charges, net - (2.3) - (3.2)
------ ------ ------ ------
Total operating expenses 23.7 31.8 24.2 32.4
------ ------ ------ ------
Operating income 23.0 2.9 21.5 3.0
Nonoperating income 6.0 0.2 6.2 0.2
------ ------ ------ ------
Income before income taxes 29.0 3.1 27.7 3.2
Income tax provision 2.9 0.3 2.8 0.3
------ ------ ------ ------
Net income 26.1% 2.8% 24.9% 2.9%
====== ====== ====== ======
</TABLE>
8
<PAGE> 10
THREE MONTHS ENDED DECEMBER 26, 1999, COMPARED TO THREE MONTHS ENDED DECEMBER
27, 1998
Net Revenues. Net revenues for the three months ended December 26, 1999, were
$33,603, an increase of $17,857, or 113 percent, from $15,746 for the three
months ended December 27, 1998. Net revenues for the quarter ended December 26,
1999, consisted of $24,452 from sales to OEMs, $9,031 from sales sold through
distribution channels and $120 from sales directly to end users. This represents
an increase in OEM sales of $13,580, or 125 percent, and an increase in
distribution sales of $4,529, or 101 percent, compared to the same relative
quarter of the prior fiscal year. These increases in net revenues were partially
offset by a decrease in end-user sales of $252, or 68 percent.
Net revenues for the second fiscal quarter ended December 26, 1999, increased
$4,707, or 16 percent, to $33,603 from $28,896 for the first fiscal quarter
ended September 26, 1999. This sequential growth from the previous quarter is
due to increased sales of the Company's fibre channel products, partially offset
by continued maturation of the Company's older traditional networking products.
There can be no assurance that the Company will continue to achieve these high
growth rates, or favorable increases at all, when compared to the preceding
quarter or the comparable period of the prior year.
From a product line perspective, net revenues generated from the Company's fibre
channel products for the second quarter of fiscal 2000 ended December 26, 1999,
were $28,304, or 84 percent of revenue. This represents an increase of $20,426,
or 259 percent, from the comparable quarter of fiscal 1999. This increase in net
revenues from the Company's fibre channel products is primarily the result of
increased size of the market for fibre channel products and increased market
acceptance of the Company's fibre channel products. Shipments in this emerging
market have continued to be primarily to domestic and European OEMs. Net
revenues from the Company's traditional networking products for the second
quarter of fiscal 2000 were $5,299, or 16 percent of revenue. This represents a
decrease of $2,569, or 33 percent, compared to the corresponding quarter of
fiscal 1999. This decrease in net revenues from the Company's traditional
networking products was principally due to ongoing maturation of these products
and a decrease in the Company's focus on these products. The Company expects
that these products will show continued maturation over fiscal 2000.
As the market for Emulex's traditional networking products matures and as Emulex
focuses more of its resources on the fibre channel market, the Company expects
that fibre channel product sales will represent a larger percentage of revenues
and that total sales of its traditional networking products will decrease. The
Company anticipates that future revenue from its fibre channel products 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
current OEMs, additional design wins and increased distribution sales as this
emerging market continues to develop. Although fibre channel represented 84
percent of the Company's net revenues for the quarter ended December 26, 1999,
the market is in the early stages of its development, and there can be no
assurance given 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 Company's
future revenues from its fibre channel products 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.
In the quarter ended December 26, 1999, sales to Compaq accounted for 23
percent; sales to EMC, including Data General and McDATA, accounted for 21
percent; sales to Avnet accounted for 15 percent; and sales to IBM, including
Sequent, accounted for 11 percent of the Company's net revenues. No other
customer accounted for more than 10 percent of net revenues during this period.
For the quarter ended December 27, 1998, sales to IBM, including Sequent,
accounted for 22 percent of the Company's net revenues, and no other customer
accounted for more than 10 percent of net revenues during this period. Sales to
the Company's top five customers accounted for 76 percent of net revenues for
the second quarter of fiscal 2000 compared to 55 percent in the comparable
period of fiscal 1999.
Domestic net revenues were $23,943, or 71 percent of total net revenues, for the
three months ended December 26, 1999, and $9,786, or 62 percent of total net
revenues, for the three months ended December 27, 1998. This increase in
domestic revenues of $14,157, or 145 percent, is principally due to the
increasing level of fibre channel product shipments during the current fiscal
year. International net revenues were $9,660, or 29 percent of total net
revenues,
9
<PAGE> 11
for the three months ended December 26, 1999, and $5,960, or 38 percent of net
revenues, for the three months ended for the December 27, 1998. This increase in
international revenues of $3,700, or 62 percent, is also principally due to the
increasing level of fibre channel product shipments during the current fiscal
year. Although both domestic and international revenues have increased, domestic
revenues have become a larger percent of net revenues due to the heavier
concentration of fibre channel shipments to domestic OEMs.
Gross Profit. Cost of products sold includes the cost of production of finished
products, as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. For the three months of
fiscal 2000 ended December 26, 1999, gross profit increased $10,228, or 187
percent, to $15,693 from $5,465 for the comparable quarter of the prior fiscal
year. Gross margin increased to 47 percent for the fiscal 2000 quarter compared
to 35 percent in the same relative quarter of fiscal 1999. During the fiscal
1999 quarter, the Company recorded $678 of inventory charges related to
consolidation in cost of products sold. When the initial consolidation charge
was taken in fiscal 1998, which is discussed in more detail below, management
believed this inventory would be sold at positive margins. However, as the
Company neared the closure of its manufacturing facility, management determined
this inventory was no longer saleable, and these additional reductions in
inventory were recorded. Excluding this charge, gross profit for the fiscal 1999
quarter ended December 27, 1998, would have been $6,143 and gross margin would
have been 39 percent. This improvement in gross margin from the prior fiscal
year is primarily due to a continuing shift in product mix towards the Company's
higher margin fibre channel products.
Engineering and development. Engineering and development expenses consist
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of the Company's products. These expenses
include third-party fees paid to consultants, prototype development expenses and
computer services costs related to supporting computer tools used in the design
process. Engineering and development expenses were $3,799 and $2,640 for the
quarters ended December 26, 1999, and December 27, 1998, representing 11 percent
and 17 percent of net revenues, respectively. Engineering and development
expenses increased by $1,159, or 44 percent, from the second quarter of fiscal
1999 to the second quarter of fiscal 2000 as the Company increased its
investment in its fibre channel product development. Even though the Company has
continued to increase its investment in fibre channel product development, it
has not increased as quickly as revenue has expanded. Consequently, engineering
and development has decreased as a percent of revenue. Because of the technical
nature of the Company's products, engineering support is a critical part of the
Company's strategy during both the development of its products and the support
of its customers from product design through deployment into the market.
Management intends to continue to make significant investments in the technical
support and enhancement of the Company's current products, as well as the
continued development of new products in the fibre channel market. Engineering
and development expenses can fluctuate from quarter to quarter depending on
several factors, including new product introduction schedules.
Selling and marketing. Selling and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of the Company's products, as well as trade shows, product
literature and promotional support costs. Selling and marketing expenses were
$2,438 and $1,812 for the quarters ended December 26, 1999, and December 27,
1998, representing seven percent and 12 percent of net revenues, respectively.
Selling and marketing expenses for the second quarter of fiscal 2000 increased
by $626, or 35 percent, from the comparable period of fiscal 1999. This increase
was primarily due to increased salaries and commissions associated with the
higher revenues and increased promotion and advertising costs. However, these
selling and marketing costs have not expanded at the same rate as the Company's
net revenues have. Consequently, as a percent of net revenues, selling and
marketing expenses have decreased.
General and administrative. General and administrative expenses consist
primarily of salaries and related expenses for executives, financial accounting
support, human resources, administrative services, professional fees and other
associated corporate expenses. General and administrative expenses were $1,732
and $923 for the quarters ended December 26, 1999, and December 27, 1998,
representing five percent and six percent of net revenues, respectively. General
and administrative expenses increased by $809, or 88 percent, for the second
quarter of fiscal 2000 compared to the equivalent quarter of fiscal 1999
primarily due to higher compensation associated with the higher revenues.
Consolidation Charges. 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.
10
<PAGE> 12
This announcement resulted in, among other things, the decision to close the
Company's Puerto Rico manufacturing subsidiary and to close selected sales
offices. During the quarter ended December 27, 1998, as the Company continued
this consolidation plan, the Company completed the sale of the land and
buildings at its former manufacturing facility in Puerto Rico which resulted in
a gain of $777. No impairment had previously been recognized related to the land
and buildings. Also, during the second quarter of fiscal 1999, the Company
recorded additional consolidation charges of $416 based on management's review
of the adequacy of the remaining consolidation accrual. Also in conjunction with
the closure of the Company's Puerto Rico manufacturing operations, during the
quarter ended December 27, 1998, the Company recorded additional reductions in
inventory related to the streamlining of its product lines of $678 in cost of
sales. When the initial consolidation charge was taken, management believed this
inventory would be sold at positive margins. However, as the Company neared the
closure of the manufacturing facility, management determined that this inventory
was no longer saleable and these additional reductions in inventory were
recorded. The Company substantially completed this consolidation plan in fiscal
1999.
Nonoperating Income. Nonoperating income consists primarily of interest income.
The Company's nonoperating income increased $1,979 to $2,017 for the second
quarter of fiscal 2000 compared to $38 for the second quarter of fiscal 1999.
This increase in nonoperating income is primarily due to an increase in interest
income associated with the investments of the funds the Company received from
the secondary offering of common stock completed during the fourth quarter of
fiscal 1999.
Income Taxes. For the quarters ended December 26, 1999, and December 27, 1998,
the Company recorded a 10 percent tax provision in the amount of $974 and $49,
respectively. The Company's low effective tax rate is primarily due to
utilization in 1999 and 2000 of net operating loss carryforwards which were held
net of a substantial valuation allowance. After these net operating loss
carryforwards are utilized, and the corresponding valuation allowance is
eliminated, management believes the Company will have an effective tax rate of
approximately 35 percent assuming current enacted tax rates and current
operating structure. In addition, under current generally accepted accounting
principles and in accordance with the Company's policy, the Company could be
required to reduce some or all of its valuation allowance prior to actual
utilization of the net operating losses, which would result in the recognition
of a significant immediate tax benefit for financial statement purposes and the
expected effective tax rate of approximately 35 percent on an ongoing basis.
However, there can be no assurance that the Company will ultimately generate
adequate taxable income to utilize any or all of its existing net operating loss
carryforwards or if utilized, that the actual effective tax rate on an ongoing
basis would approximate 35 percent.
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. During 1999, the Company received a favorable response to the Ruling
Request submitted to the Secretary of the Treasury of Puerto Rico. The
liquidation of the Company's subsidiary, Emulex Caribe, during 1998 was
structured to qualify for tax-free liquidation treatment under the provisions of
both the U.S. and Puerto Rico tax law. The Company also received approval of the
Closing Agreement submitted to the Secretary of the Treasury of Puerto Rico.
Puerto Rico has agreed that neither Emulex Corporation nor Emulex Caribe will
recognize a gain or loss as a result of the liquidation. The Secretary agreed to
the Company's calculation of the amount of tollgate tax resulting from the
deemed distribution from Emulex Caribe to the Company 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.
The Company is also undergoing examination by the Internal Revenue Service of
Emulex Caribe's 1995 U.S. tax return. It is management's belief that the outcome
of these examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
SIX MONTHS ENDED DECEMBER 26, 1999, COMPARED TO SIX MONTHS ENDED DECEMBER 27,
1998
Net Revenues. Net revenues for the six months ended December 26, 1999, were
$62,499, an increase of $32,702, or 110 percent, from $29,797 for the six months
ended December 27, 1998. Net revenues for the six months ended December 26,
1999, consisted of $46,754 from sales to OEMs, $15,495 from sales sold through
distribution channels and $250 from sales directly to end users. This represents
an increase in OEM sales of $25,583, or 121 percent, and an increase in
distribution sales of $7,688, or 98 percent, compared to the same relative
period of the prior fiscal year. These increases were partially offset by a
decrease in end-user sales of $569, or 69 percent.
From a product line perspective, net revenues generated from the Company's fibre
channel products for the first six months of fiscal 2000 ended December 26,
1999, were $49,923, or 80 percent of net revenues. This represents an increase
of $36,613, or 275 percent, from the comparable period of fiscal 1999. This
increase in net revenues from the Company's fibre channel products is primarily
the result of increased size of the market for fibre channel products and
increased market acceptance of the Company's fibre channel products. Shipments
in this emerging
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market have continued to be primarily to domestic and European OEMs. Net
revenues from the Company's traditional networking products for the first six
months of fiscal 2000 were $12,576, or 20 percent of net revenues. This
represents a decrease of $3,911, or 24 percent, compared to the corresponding
period of fiscal 1999. This decrease in net revenues from the Company's
traditional networking products was principally due to ongoing maturation of
these products and a decrease in the Company's focus on these products. The
Company expects that these products will show continued maturation over fiscal
2000.
In the six months ended December 26, 1999, sales to Compaq accounted for 24
percent; sales to EMC, including Data General and McDATA, accounted for 18
percent; sales to IBM, including Sequent, accounted for 14 percent; and sales to
Avnet accounted for 12 percent of the Company's net revenues. No other customer
accounted for more than 10 percent of net revenues during this period. For the
six months ended December 27, 1998, sales to IBM, including Sequent, accounted
for 24 percent of the Company's net revenues, and no other customer accounted
for more than 10 percent of net revenues during this period. Sales to the
Company's top five customers accounted for 75 percent of net revenues for the
first six months of fiscal 2000 compared to 52 percent in the comparable period
of fiscal 1999.
Domestic net revenues were $44,402, or 71 percent of total net revenues, and
$19,453, or 65 percent of total net revenues, for the six months ended December
26, 1999, and December 27, 1998, respectively. This increase in domestic
revenues of $24,949, or 128 percent, is principally due to the increasing level
of fibre channel product shipments during the current fiscal year. International
net revenues were $18,097, or 29 percent of total net revenues, and $10,344, or
35 percent of net revenues, for the six months ended December 26, 1999, and
December 27, 1998, respectively. This increase in international revenues of
$7,753, or 75 percent, is also principally due to the increasing level of fibre
channel product shipments during the current fiscal year. Although both domestic
and international revenues have increased, domestic revenues have become a
larger percent of net revenues due to the heavier concentration of fibre channel
shipments to domestic OEMs.
Gross Profit. For the six months of fiscal 2000 ended December 26, 1999, gross
profit increased $18,043, or 171 percent, to $28,590 from $10,547 for the
comparable six months of the prior fiscal year. Gross margin increased to 46
percent for the fiscal 2000 six-month period compared to 35 percent for the
respective period of fiscal 1999. During the six-month period ended December 27,
1998, the Company recorded $1,304 of inventory charges related to consolidation
in cost of sales. When the initial consolidation charge, which is discussed in
more detail below, was taken in fiscal 1998 management believed this inventory
would be sold at positive margins. However, as the Company neared the closure of
its manufacturing facility, management determined this inventory was no longer
saleable, and these additional reductions in inventory were recorded. Excluding
this charge, gross profit for the six months ended December 27, 1998, would have
been $11,851 and gross margin would have been 40 percent. This improvement in
gross margin from the prior fiscal year is primarily due to a continuing shift
in product mix towards the Company's higher margin fibre channel products.
Engineering and development. Engineering and development expenses were $7,149
and $5,301 for the six months ended December 26, 1999, and December 27, 1998,
representing 11 percent and 18 percent of net revenues, respectively.
Engineering and development expenses increased by $1,848, or 35 percent, for the
first six months of fiscal 2000 compared to the first six months of fiscal 1999
as the Company increased its investment in its fibre channel product
development. Even though the Company has continued to increase its investment in
fibre channel product development, it has not increased as quickly as revenue
has expanded. Consequently, engineering and development has decreased as a
percent of revenue. Because of the technical nature of the Company's products,
engineering support is a critical part of the Company's strategy during both the
development of its products and the support of its customers from product design
through deployment into the market. Management intends to continue to make
significant investments in the technical support and enhancement of the
Company's current products, as well as the continued development of new products
in the fibre channel market.
Selling and marketing. Selling and marketing expenses were $4,778 and $3,439 for
the six months ended December 26, 1999, and December 27, 1998, representing
eight percent and 12 percent of net revenues, respectively. Selling and
marketing expenses for the first six months of fiscal 2000 increased by $1,339,
or 39 percent, from the comparable period of fiscal 1999. This increase was
primarily due to increased salaries and commissions associated with the higher
revenues and increased promotion and advertising costs. However, these selling
and marketing costs have not expanded at the same rate as the Company's net
revenues have. Consequently, as a percent of net revenues, selling and marketing
expenses have decreased.
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General and administrative. General and administrative expenses were $3,237 and
$1,886 for the six months ended December 26, 1999, and December 27, 1998,
representing five percent and six percent of net revenues, respectively. General
and administrative expenses increased by $1,351, or 72 percent, for the first
six months of fiscal 2000 compared to the equivalent period of fiscal 1999
primarily due to higher compensation associated with the higher revenues.
Consolidation charges. As previously discussed, on March 25, 1998, the Company
announced plans to outsource the manufacturing of its product lines to K*TEC
Electronics. During the six months ended December 27, 1998, the Company
completed the sale of the land and buildings at its former manufacturing
facility in Puerto Rico that resulted in a gain of $777. No impairment had
previously been recognized related to the land and buildings. Also in
conjunction with the closure of the Company's Puerto Rico manufacturing
operations, during the six months ended December 27, 1998, the Company recorded
additional reductions in inventory related to the streamlining of its product
lines of $1,304 in cost of sales. When the initial consolidation charge was
taken in fiscal 1998, management believed this inventory would be sold at
positive margins. However, as the Company neared the closure of the
manufacturing facility, management determined that this inventory was no longer
saleable and these additional reductions in inventory were recorded.
Furthermore, during the first six months of fiscal 1999, the Company recorded a
reduction of other accrued consolidation charges of $210 based on management's
review of the adequacy of the remaining consolidation accrual. The Company
substantially completed this consolidation plan in fiscal 1999.
Nonoperating Income. The Company's nonoperating income increased $3,821 to
$3,871 for the first six months of fiscal 2000 compared to $50 for the first six
months of fiscal 1999. This increase in nonoperating income is primarily due to
an increase in interest income associated with the investments of the funds the
Company received from the secondary offering of common stock completed during
the fourth quarter of fiscal 1999.
Income Taxes. For the six months ended December 26, 1999, and December 27, 1998,
the Company recorded a 10 percent tax provision in the amount of $1,730 and $96,
respectively. The Company's low effective tax rate is primarily due to
utilization of a portion of the Company's valuation allowance against certain
net operating losses as discussed previously.
YEAR 2000
Many existing computer systems and applications use two digits rather than four
to define the applicable year. These programs were designed without considering
the impact of the upcoming change from 1999 to 2000. If such programs are not
corrected, many computer systems could fail or create erroneous results at or
beyond the year 2000. We consider a product to be "Year 2000 compliant" if the
product's performance and functionality are unaffected by the processing of
dates prior to, during and after the year 2000. The Company has considered the
impact of Year 2000 issues on our products, computer systems, and applications.
All of our current products are Year 2000 compliant; however, some products
previously sold by the Company may not be Year 2000 compliant. The Company is
prepared to update these non-compliant products as required under Company
warranties and as required by law for all Year 2000 issues. Furthermore, the
Company believes that the related financial exposure for any required updates to
non-compliant products is not material. Additionally, the Company has reviewed
and tested its internal computer systems and applications. The Company has
identified and corrected all of the Year 2000 compliance issues according to
vendor specifications. 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;
however, if any additional Year 2000 issues are identified, the related costs
would continue to evolve. The Company completed a survey prior to the beginning
of 2000 of its suppliers, contract manufacturer, significant customers, 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 third parties to continue conducting business with the Company. The
Company received satisfactory responses to these surveys. The Company believes
that the most likely worst-case scenarios related to the Year 2000 issue that it
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. The Company also believes it
is possible to see a business slowdown if customers have purchased higher levels
of inventories in prior periods in anticipation of a product disruption at the
end of the calendar year. These events, if experienced, could have a material
adverse effect on the Company's business, results of operations, and financial
condition. Therefore, as a contingency plan to ensure the Company's ability to
provide products and services to its customers, the Company has taken the
additional precaution of maintaining a finished goods inventory sufficient to
cover shipments for 30 to 45 days, and is maintaining an additional supply of
key raw materials for the manufacture of its products. The Company
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<PAGE> 15
has also asked key suppliers to increase their inventory levels of critical
materials and components to act as a further safeguard. The Company also
monitors the inventory levels of our customers to determine if an inventory
build-up is occurring. The Company believes it has fully addressed all areas of
this issue, including internal systems, products and third parties. To date, the
Company has not experienced any significant impact from the change to Year 2000.
However, the Company will continue to closely monitor this area through the
quarter which will end on March 26, 2000.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("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, 2000. 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 decreased by $4,686 during the first six
months of fiscal 2000 from $22,284 as of June 27, 1999, to $17,598 as of
December 26, 1999. This decrease in cash and cash equivalents is primarily due
to the Company's investing activities, and is partially offset by an increase in
cash and equivalents from operating activities. Operating activities, which
include net income of $15,567, as well as changes in working capital balances,
provided $21,480 of cash and cash equivalents for the six month period of fiscal
2000 compared to providing $342 of cash and cash equivalents during the six
month period of the prior fiscal year. Investing activities, which include
purchases of investments of $341,563, maturities of investments of $313,806, as
well as the acquisition and disposition of property, plant and equipment, used
$28,612 of cash and cash equivalents during the six month period of fiscal 2000
compared to providing $2,209 in the comparable period of fiscal 1999. The
Company completed the sale of its production equipment and its former
manufacturing facility in Puerto Rico during the six month period of fiscal
1999. The Company received net proceeds of $2,447 in cash and recognized a gain
of $777 associated with the sale of this manufacturing facility. Net financing
activities, which were limited to payments under capital lease obligations and
proceeds from the exercise of stock options, provided $2,446 of cash and cash
equivalents during the first six months of fiscal 2000 compared to providing $98
of cash and cash equivalents in the same relative period of the prior year.
The Company believes that its existing cash balances, facilities and equipment
leases and anticipated cash flows from operating activities will be sufficient
to support its working capital needs and capital expenditure requirements for
at least the next twelve months.
RISK FACTORS
WE HAVE EXPERIENCED LOSSES IN OUR HISTORY.
We incurred a net loss of $10,838 for the fiscal year ended June 28, 1998. This
net loss in 1998 included $5,314 of inventory charges related to consolidation
and $7,231 of consolidation charges in conjunction with the closure of our
Puerto Rico manufacturing operations and selected sales offices. Additionally,
in fiscal year 1999, we had $1,304 of additional inventory charges related to
this consolidation. While we have generated net income for 12 of the last 13
quarters through the quarter ended December 26, 1999, we cannot be certain that
revenues will remain at current levels or improve or that we will be profitable
at such revenue levels.
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST AND MAY BE ADVERSELY AFFECTED BY
MANY FACTORS.
Our revenues and results of operations have varied on a quarterly basis in the
past and potentially may vary significantly in the future. Accordingly, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful, and you should not rely on such comparisons as
indications of our future performance. Our revenues and results of operations
are difficult to forecast and could be adversely affected by many factors,
including, among others:
- The size, timing and terms of customer orders;
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- The relatively long sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
- Changes in our operating expenses;
- Our ability to develop and market new products;
- The ability of our contract manufacturer to produce and distribute our
products in a timely fashion;
- The market acceptance of our new fibre channel products;
- The timing of the introduction or enhancement of products by us, our OEM
customers and our competitors;
- The level of product and price competition;
- Our ability to expand our relationships with OEMs and distributors;
- Activities of, and acquisitions by, our competitors;
- Acquisitions made by us;
- Changes in technology, industry standards or consumer preferences;
- Increases in interest rates;
- Changes in the mix of products sold, as our fibre channel adapter
products typically have higher margins than our traditional networking
products and our fibre channel hubs;
- Changes in the mix of sales channels;
- The level of international sales;
- Seasonality;
- Personnel changes;
- Changes in customer budgeting cycles;
- Foreign currency exchange rates; and
- General economic conditions.
As a result of these and other factors, our business, results of operations and
financial condition could be materially adversely affected.
There are other factors that contribute to the variability of our sales as well.
Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially on
orders booked in that quarter. Also, we have typically generated a large
percentage of our quarterly revenues in the last month of the quarter.
Additionally, OEM customer purchases can vary significantly from quarter to
quarter.
A decrease in the number of orders we receive is likely to adversely and
disproportionately affect our quarterly results of operations. This is because
our expense levels are partially based on our expectations of future sales and
our expenses may be disproportionately large as compared to sales in a quarter
with reduced orders. Hence, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any shortfall in
sales in relation to our quarterly expectations or any delay of customer orders
would likely have an immediate and adverse impact on our business, quarterly
results of operations and financial condition.
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OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE FIBRE CHANNEL MARKET, AND OUR
REVENUES WILL BE LIMITED IF SUCH DEVELOPMENT DOES NOT OCCUR OR OCCURS MORE
SLOWLY THAN WE ANTICIPATE.
The size of our potential market is dependent upon the broad acceptance of fibre
channel technology as an alternative to other technologies traditionally
utilized for network and storage communications. The fibre channel market, while
rapidly evolving and attracting an increasing number of market participants, is
still at an early stage of development. We believe the fibre channel market will
continue to expand and that our investment in the fibre channel market
represents our greatest opportunity for revenue growth and profitability in the
future. However, we cannot be certain that fibre channel products will gain
broader market acceptance or that customers will choose our technology and
products. Fibre channel products accounted for 84 percent of net revenues in the
quarter ended December 26, 1999. If the fibre channel market fails to develop,
develops more slowly than anticipated or attracts more competitors than we
expect (as discussed below), our business, results of operations and financial
condition would be materially adversely affected. A similar result would occur
if our products do not achieve market acceptance.
Alternative technologies such as SCSI compete with fibre channel technology for
customers. Some SCSI technology companies already have well-established
relationships with our current and potential customers, have extensive knowledge
of the markets we serve and have better name recognition and more extensive
development, sales and marketing resources than we have. Our success also
depends both on our own ability and on the ability of our OEM customers to
develop fibre channel solutions that are competitive with other technologies.
Ultimately, our business depends upon our ability, along with the ability of our
OEM customers, to convince end users to adopt fibre channel technology.
While we have secured numerous design wins for our fibre channel products from
OEM customers, nearly all of these customers are still at the very early stages
of initial commercial shipments or at the developmental stage of incorporating
fibre channel into their systems. Only a portion of OEM customers are in full
commercial production of products that incorporate our fibre channel products.
If our developmental and early stage customers are unable to or otherwise do not
ship systems that incorporate our products, or if their shipped systems are not
commercially successful, our business, results of operations and financial
condition would be materially adversely affected.
THE LOSS OF ONE OR MORE CUSTOMERS COULD HARM OUR REVENUES.
For the six months ended December 26, 1999, sales to our top customer, Compaq,
represented 24 percent of our net revenues. Additionally, sales to EMC,
including Data General and McDATA, were 18 percent; sales to IBM, including
Sequent, were 14 percent; and sales to Avnet were 12 percent of our net revenues
for the six months ended December 26, 1999. Sales to IBM, including Sequent,
represented 24 percent of our net revenues in the prior year's comparable
period. Sales to our top five customers accounted for 75 percent of net revenues
for the six months ended December 26, 1999, and for 52 percent of net revenues
for the six months ended December 27, 1998. Although we have attempted to expand
our base of customers, our revenues in the future may nonetheless be similarly
derived from a limited number of customers especially given the consolidation
the industry has recently experienced.
THE FAILURE OF ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS TO MAKE TIMELY PAYMENTS
COULD ADVERSELY AFFECT OUR BUSINESS.
We are also subject to credit risk associated with the concentration of our
accounts receivable from our customers. If we were to lose one of our current
significant customers or did not receive their payments due to us, we could
experience a material adverse effect on our business, results of operations and
financial condition.
THE LOSS OF ONE OR MORE OF OUR OEM OR DISTRIBUTOR CUSTOMERS COULD ADVERSELY
AFFECT OUR BUSINESS.
We rely almost exclusively on OEMs and distributors for our sales. For the six
months ended December 26, 1999, we derived approximately 75 percent of our net
revenues from OEMs and 25 percent from distributors. In the comparable period of
fiscal 1999, we derived approximately 71 percent of our net revenues from OEMs
and 26 percent from distributors. We cannot be certain that we will retain our
current OEM and distributor customers or that we will be able to recruit
additional or replacement customers. As is common in an emerging technology
industry, our agreements with OEMs and distributors are typically non-exclusive,
have no volume commitments, and
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often may be terminated by either party without cause. Indeed, many of our OEM
and distributor customers carry or utilize competing product lines. If we were
to suddenly lose one or more important OEM or distributor customers to a
competitor, our business, results of operations and financial condition could be
materially adversely affected.
SOME OF OUR OEM CUSTOMERS COULD BECOME COMPETITORS.
Some of our OEM customers could develop products internally that would replace
our products. The resulting reduction in sales of our products to our OEM
customers could have a material adverse effect on our business, results of
operations and financial condition.
OUR INDUSTRY IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND WE MUST KEEP PACE
WITH THE CHANGES TO SUCCESSFULLY COMPETE.
The markets for our products are characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in a large part on our ability to
enhance our existing products and to introduce new products on a timely basis to
meet changes in customer preferences and evolving industry standards. We cannot
be certain that we will be successful in developing, manufacturing and marketing
new products or product enhancements that respond to such changes in a timely
manner and achieve market acceptance. We also cannot be certain that we will be
able to develop the underlying core technologies necessary to create new
products and enhancements, or that we will be able to license the core
technologies from third parties.
A key element of our business strategy is to develop multiple ASICs in order to
increase system performance and reduce manufacturing costs, thereby enhancing
the price/performance of our fibre channel products. We cannot be certain that
we will be successful at developing and incorporating ASICs effectively and in a
timely manner. Additionally, changes in technology and consumer preference could
potentially render our current products uncompetitive or obsolete. If we are
unable, for technological or other reasons, to develop new products or enhance
existing products in a timely manner in response to technological and market
changes, our business, results of operations and financial condition would be
materially adversely affected.
THE FAILURE OF OUR OEM CUSTOMERS TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE
COULD ADVERSELY AFFECT OUR BUSINESS.
Our revenues depend significantly upon the ability and willingness of our OEM
customers to develop and promote products on a timely basis that incorporate our
technology. The ability and willingness of OEM customers to develop and promote
such products is based upon a number of factors, such as:
- The timely development by us and our OEM customers of new products with
new functionality, increased speed and enhanced performance at
acceptable prices;
- The development costs facing our OEM customers;
- The compatibility of new products with both existing and emerging
industry standards;
- Technological advances;
- Intellectual property issues; and
- Competition in general.
We cannot be certain of the ability or willingness of our OEM customers to
continue developing, marketing and selling products that incorporate our
technology. Our business is dependent on our relationships with our OEM and
distributor customers, so the inability or unwillingness of any of our
significant customers to develop or promote products that use our technology
would have a material adverse effect on our business, results of operations and
financial condition.
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A SIGNIFICANT PERCENTAGE OF OUR REVENUES ARE FROM PRODUCT LINES THAT ARE BEING
PHASED OUT.
We have shifted the focus of our business to fibre channel technology. However,
our revenues still depend significantly on sales of our traditional networking
products. These traditional networking products accounted for 20 percent of our
net revenues for the first six months of fiscal 2000. If the maturation of these
products were to occur faster than we anticipate, our business, results of
operations and financial condition would be materially adversely affected.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product introductions
and evolving industry standards. Our current and potential competition consists
of major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than we have.
We expect that an increasing number of companies will enter the markets for our
fibre channel products. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their significant
resources, such as distribution channels and brand recognition, to acquire
significant market share. Emerging companies attempting to obtain a share of the
existing markets act as potential competition as well. Our competitors continue
to introduce products with improved price/performance characteristics, and we
will have to do the same to remain competitive. Increased competition could
result in significant price competition, reduced revenues, lower profit margins
or loss of market share, any of which would have a material adverse effect on
our business, results of operations and financial condition. We cannot be
certain that we will be able to compete successfully against either current or
potential competitors in the future.
In the fibre channel market, we compete primarily against Agilent, Gadzoox,
Interphase, JNI, LSI Logic, QLogic, Vixel and, to a lesser extent, several
smaller companies. In the printer server market, we compete against
Hewlett-Packard, Intel, Lexmark and a number of smaller companies. In the
network access market, we compete against numerous networking companies who
offer network access solutions. As is common in an emerging technology industry
with non-exclusive development arrangements, many of our OEM customers arrange
second source agreements to meet their requirements. Furthermore, in the future
our OEM customers may develop products that compete with ours or purchase from
our competitors and may terminate their relationships with us as a result.
A DECREASE IN THE AVERAGE UNIT SELLING PRICES OF OUR FIBRE CHANNEL PRODUCTS
COULD ADVERSELY AFFECT OUR BUSINESS.
As the market for fibre channel products matures, it is likely that we will
experience downward pressure on the average unit selling prices of our fibre
channel products. To the extent that average unit selling prices of our fibre
channel products decrease without a corresponding decrease in the costs of such
products, our gross margins and financial performance could be materially
adversely affected.
DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR BUSINESS.
We have experienced delays in product development in the past and may experience
similar delays in the future. Given the short product life cycles in the markets
for our products, any delay or unanticipated difficulty associated with new
product introductions or product enhancements could have a material adverse
effect on our business, results of operations and financial condition. Prior
delays have resulted from numerous factors, such as:
- Changing OEM product specifications;
- Difficulties in hiring and retaining necessary personnel;
- Difficulties in reallocating engineering resources and other resource
limitations;
- Difficulties with independent contractors;
- Changing market or competitive product requirements;
- Unanticipated engineering complexity;
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- Undetected errors or failures in software and hardware; and
- Delays in the acceptance or shipment of products by OEM customers.
OUR JOINT DEVELOPMENT ACTIVITIES MAY RESULT IN PRODUCTS THAT ARE NOT
COMMERCIALLY SUCCESSFUL OR THAT ARE NOT AVAILABLE IN A TIMELY FASHION.
We have engaged in joint development projects with third parties in the past and
we expect to continue doing so in the future. Joint development creates several
risks for us, including the loss of control over development of aspects of the
jointly-developed products and over the timing of product availability.
Accordingly, we face the risk that joint development activities will result in
products that are not commercially successful or that are not available in a
timely fashion.
THE LOSS OF THIRD-PARTY SUPPLIERS OR OUR CONTRACT MANUFACTURER COULD ADVERSELY
AFFECT OUR BUSINESS.
We rely on third-party suppliers for components which are used in our products,
and we have experienced delays or difficulty in securing components in the past.
Delays or difficulty in securing components may be caused by numerous factors
including, but not limited to:
- Discontinued production by a vendor;
- Natural disasters;
- Disruption in shipping channels;
- Difficulties associated with foreign operations, and
- Market shortages.
Additionally, key components that we use in our products may only be available
from single sources with which we do not have long-term contracts. In
particular, Intel is currently our sole supplier for microprocessors used in our
fibre channel products. IBM, Finisar and Hewlett-Packard are currently our sole
suppliers for components that enable some of our fibre channel products to
connect to networks. Motorola is currently our sole supplier of a memory device
incorporated into our fibre channel products. In addition, we rely on LSI Logic,
Chip Express, Quicklogic and VLSI to manufacture ASICs for our products. The
components we use for our fibre channel products are based on an emerging
technology and may not be available with the performance characteristics or in
the quantities that we require. Our future inability to supply products due to a
lack of components or our inability to redesign products to accept alternatives
in a timely manner would materially adversely affect our business, results of
operations and financial condition.
Because we transitioned the production of our products to a contract
manufacturer, K*TEC Electronics, a division of Kent Electronics Corporation, we
plan to maintain only a minimal supply of product components. We now rely on
K*TEC Electronics to complete the majority of the component purchases for our
products. Consequently, we cannot be certain that the necessary components will
be available to meet our future requirements at favorable prices, if at all.
Moreover, because we rely on K*TEC Electronics to manufacture, store and ship
our products, if K*TEC Electronics is unable or unwilling to complete production
runs for us in the future, or experiences any significant delays in completing
production runs or shipping product, the manufacturing and sale of our products
would be temporarily suspended. An interruption in supply of our products and
the cost of qualifying and shifting production to an alternative manufacturing
facility would have a material adverse effect on our business, results of
operations and financial condition.
A DECREASE IN THE DEMAND FOR HIGH PERFORMANCE COMPUTER AND STORAGE SYSTEMS COULD
ADVERSELY AFFECT OUR BUSINESS.
A significant portion of our products are currently used in high-performance
computer and storage systems. Our fibre channel growth has been supported by
increasing demands for sophisticated networking and data storage solutions which
support enterprise computing requirements, including on-line transaction
processing, data mining,
19
<PAGE> 21
data warehousing, multimedia and Internet applications. Should there be a
slowing in the growth of demand for such systems, our business, results of
operations and financial condition could be materially adversely affected.
THE INADEQUACY OF OUR INTELLECTUAL PROPERTY PROTECTIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of product
support and customer relations. At the same time, our success is partially
dependent on the proprietary technology contained in our products. We currently
rely on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect our intellectual property rights
in our products. For a more complete description of our intellectual property,
you should read "Business--Intellectual Property" in the Company's recently
filed Form 10-K. We cannot be certain that the steps we take to protect our
intellectual property will adequately protect our proprietary rights, that
others will not independently develop or otherwise acquire equivalent or
superior technology, or that we can maintain such technology as trade secrets.
In addition, the laws of some of the countries in which our products are or may
be developed, manufactured or sold may not protect our products and intellectual
property rights to the same extent as the laws of the United States or at all.
Our failure to protect our intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY COULD
ADVERSELY AFFECT OUR BUSINESS.
We believe that our products and technology do not infringe on the intellectual
property rights of others or upon intellectual property rights that may be
granted in the future pursuant to pending applications. We occasionally receive
communications from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement claims against us.
Any such claims, with or without merit, could result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. However, we have in the past and may be required in the future to
obtain licenses of technology owned by other parties. We cannot be certain that
the necessary licenses will be available or that they can be obtained on
commercially reasonable terms. If we were to fail to obtain such royalty or
licensing agreements in a timely manner and on reasonable terms, our business,
results of operations and financial condition would be materially adversely
affected.
THE LOSS OF KEY TECHNICAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends to a significant degree upon the performance and continued
service of engineers involved in the development of our fibre channel technology
and technical support of fibre channel products and customers. Our future
success depends upon our ability to attract, train and retain such personnel. We
will need to increase the number of technical staff members with experience in
high-speed networking applications as we further develop the fibre channel
product line. Competition for such highly skilled employees in our industry is
intense, and we cannot be certain that we will be successful in recruiting and
retaining such personnel. In addition, employees may leave our company and
subsequently compete against us. The loss of these key technical employees could
have a material adverse effect on our business, results of operations and
financial condition.
OUR INTERNATIONAL BUSINESS ACTIVITIES SUBJECT US TO RISKS THAT COULD ADVERSELY
AFFECT OUR BUSINESS.
During the six months ended December 26, 1999, sales in the United States
accounted for 71 percent of our net revenues, sales in Europe accounted for 26
percent of our net revenues, and sales in the Pacific Rim countries accounted
for three percent of our net revenues. During the comparable six months in the
prior fiscal year, sales in the United States accounted for 65 percent of net
revenues, sales in Europe accounted for 29 percent of our net revenues, and
sales in the Pacific Rim countries accounted for six percent of our net
revenues. We expect that sales in the United States and Europe will continue to
account for the substantial majority of our revenues for the foreseeable future.
We encounter risks inherent in international operations. All of our sales are
currently denominated in U.S. dollars. As a result, if the value of the U.S.
dollar increases relative to foreign currencies, our products could become less
competitive in international markets. Our international business activities
could be limited or disrupted by any of the following factors:
- The imposition of governmental controls and regulatory requirements;
20
<PAGE> 22
- The costs and risks of localizing products for foreign countries;
- Restrictions on the export of technology;
- Financial and stock market dislocations;
- Increases in interest rates;
- Longer accounts receivable payment cycles;
- Potentially adverse tax consequences;
- The repatriation of earnings;
- The burden of complying with a wide variety of foreign laws;
- Trade restrictions; and
- Changes in tariffs.
In addition, the revenues we earn in various countries in which we do business
may be subject to taxation by more than one jurisdiction, thereby adversely
affecting our earnings. These factors could harm future sales of our products to
international customers and have a material adverse effect on our business,
results of operations and financial condition.
EXPORT RESTRICTIONS MAY ADVERSELY AFFECT OUR BUSINESS.
Our fibre channel products are subject to U.S. Department of Commerce export
control restrictions. Neither we nor our customers may export such products
without obtaining an export license. These U.S. export laws also prohibit the
export of our fibre channel products to a number of countries deemed by the
United States to be hostile. These restrictions may make foreign competitors
facing less stringent controls on their products more competitive in the global
market than we or our fibre channel customers are. The U.S. government may not
approve any pending or future export license requests. In addition, the list of
products and countries for which export approval is required, and the regulatory
policies with respect thereto, could be revised. The sale of our fibre channel
products could be harmed by our failure or the failure of our customers to
obtain the required licenses or by the costs of compliance.
OUR BUSINESS MAY BE HARMED BY YEAR 2000 ISSUES.
Many existing computer systems and applications use two digits rather than four
to define the applicable year. These programs were designed without considering
the impact of the change in the century. If such programs are not corrected,
many computer systems could fail or create erroneous results at or beyond the
year 2000. We consider a product to be "Year 2000 compliant" if the product's
performance and functionality are unaffected by the processing of dates prior
to, during and after the year 2000. Our current products are Year 2000
compliant. However, products which we previously sold and which may still be
covered under warranties, may not be Year 2000 compliant. We are prepared to
update these non-compliant products as required under Company warranties and as
required by law for all Year 2000 issues. However, we cannot be certain that all
potential Year 2000 issues have been identified or that the issues will be
successfully resolved to the customers' satisfaction. Consequently, customers
may bring litigation against vendors, including us. Any such claims, with or
without merit, could result in a material adverse effect on our business,
results of operations, and financial condition.
To date, we have not experienced any significant impact from the change to Year
2000. However, we will continue to closely monitor this area through our quarter
which ends March 26, 2000.
Although our Year 2000 assessment and remediation processes have not generated
any material expenditures to date, and we do not currently foresee any in the
future, the costs related to this issue would continue to evolve if we identify
and address any additional issues. The Company believes it has fully addressed
all areas of this issue, including internal systems, products and third parties;
however, the Company will continue to monitor these areas. Although we do not
believe that the Year 2000 issue will pose any significant operational problems,
there could be
21
<PAGE> 23
significant delays or failures in our systems, equipment, or processes, or those
of third parties which affect us that have not yet arisen. Such delays or
failures could have a material adverse effect on our business, results of
operations, and financial condition.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND SUCH ADDITIONAL FINANCING MAY
NOT BE AVAILABLE.
We currently anticipate that our available cash resources will be sufficient to
meet our expected working capital and capital expenditure requirements for at
least the next 12 months. However, we cannot assure you that such resources will
be sufficient for anticipated or unanticipated working capital and capital
expenditure requirements. We may need to raise additional funds through public
or private debt or equity financings in order to:
- Take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
- Develop new products or services; or
- Respond to unanticipated competitive pressures.
We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms. We cannot
assure you that any additional financing we may need will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to take advantage of
unanticipated opportunities, develop new products or services or otherwise
respond to unanticipated competitive pressures. In any such case, our business,
results of operations and financial condition could be materially adversely
affected.
POTENTIAL ACQUISITIONS MAY BE MORE COSTLY OR LESS PROFITABLE THAN ANTICIPATED.
We may pursue acquisitions that could provide new technologies, products or
service offerings. Future acquisitions may involve the use of significant
amounts of cash, potentially dilutive issuances of equity or equity-linked
securities, incurrence of debt, or amortization expenses related to goodwill and
other intangible assets. In addition, acquisitions involve numerous risks,
including:
- Difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- The diversion of management's attention from other business concerns;
- Risks of entering markets in which we have no or limited prior
experience; and
- The potential loss of key employees of the acquired company.
We currently have no commitments or agreements with respect to any such
acquisition. In the event that such an acquisition does occur and we are unable
to successfully integrate businesses, products, technologies or personnel that
we acquire, our business, results of operations and financial condition could be
materially adversely affected.
OUR STOCK PRICE IS VOLATILE.
The stock market in general, and the stock prices in technology-based companies
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of any specific public companies. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in the
future as well. Any of the following factors could have a significant impact on
the market price of our common stock:
- Quarterly variations in operating results;
- Announcements of new products by us or our competitors;
- The gain or loss of significant customers;
22
<PAGE> 24
- Changes in analysts' earnings estimates;
- Pricing pressures;
- Short-selling of our common stock;
- General conditions in the computer, storage or communications markets;
or
- Events affecting other companies that investors deem to be comparable to
us.
In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain future
earnings, if any, to finance the growth and expansion of our business and for
general corporate purposes.
OUR STOCKHOLDER RIGHTS PLAN, CERTIFICATE OF INCORPORATION AND DELAWARE LAW COULD
ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK.
Our stockholder rights plan and provisions of our certificate of incorporation
and of the Delaware General Corporation Law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. The stockholder rights plan and these provisions of our
certificate of incorporation and Delaware law are intended to encourage
potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could harm our stock
price. You should read Note 9 to the Consolidated Financial Statements contained
in the Company's recently filed form 10-K, our certificate of incorporation and
Delaware law for more information on the anti-takeover effects of provisions of
our stockholder rights plan.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
At December 26, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $143,137.
The Company has the positive intent and ability to hold these securities to
maturity. Currently, the carrying amount of these securities approximates fair
market value. However, the fair market value of these securities is subject to
interest rate risk and would decline in value if market interest rates
increased. If market interest rates were to increase immediately and uniformly
by 10 percent from the levels existing as of December 26, 1999, the decline in
the fair value of the portfolio would not be material to the Company's financial
position, results of operations and cash flows.
23
<PAGE> 25
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 18, 1999.
All share amounts related to the stockholder's meeting are the actual shares as
of that date. They have not been adjusted for the two-for-one stock split on
December 15, 1999. There were 17,519,618 shares of the Company's common stock
issued, outstanding and entitled to vote at the meeting as of October 4, 1999,
the record date. Proxies representing 15,721,695 common shares were received and
tabulated. Five proposals were voted on at this meeting. First, 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 13,278,292 2,443,403
Michael P. Downey 13,278,184 2,443,511
Paul F. Folino 13,276,534 2,445,161
Robert H. Goon 13,278,234 2,443,461
Don M. Lyle 13,278,184 2,443,511
</TABLE>
The second proposal was to amend the Company's certificate of incorporation to
increase the authorized common shares from 20,000,000 to 120,000,000 shares.
This proposal also included a two-for-one stock split of outstanding shares of
common stock of the Company and reduction in the par value of the common stock
of the Company from $0.20 per share to $0.10 per share. This proposal was
approved with 14,859,436 shares voted for approval, 859,413 against, 2,546
abstaining and broker non-votes of 300 shares.
The third proposal was for an amendment of the Company's Employee Stock Option
Plan to increase the number of shares authorized by 725,000. This proposal was
approved with 10,129,660 shares voted for approval, 5,550,418 against, 41,317
abstaining and broker non-votes of 300 shares.
The fourth proposal was for an amendment to the Company's 1997 Stock Option Plan
for Non-Employee Directors to increase the number of shares authorized by
100,000 shares. This amendment was also approved with 15,006,503 shares voted
for approval, 664,169 voted against, 50,723 abstaining and 300 broker non-votes.
The final proposal submitted to the stockholders of the Company was to ratify
the selection of KPMG LLP as the Company's independent public accountants for
fiscal year 2000. This proposal was approved with 15,680,486 shares voted for
ratification, 4,034 voted against and 37,175 abstaining from the vote.
24
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 3.1 Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for fiscal 1997).
Exhibit 3.2 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for fiscal 1997).
Exhibit 3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K filed February 2,
1989).
Exhibit 3.4 Certificate of Amendment of Certificate of Incorporation of
the Registrant.
Exhibit 4.1 Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K filed February 2, 1989).
Exhibit 4.2 Certificate regarding extension of Final Expiration Date of
Rights Agreement, dated January 18, 1999 (incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form S-3 filed April 26, 1999).
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Press Release related to December 15, 1999, stock split.
(b) The registrant has not filed any reports on Form 8-K during the period for
which this report is filed.
25
<PAGE> 27
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, 2000
EMULEX CORPORATION
By: /s/ Paul F. Folino
--------------------------------------
Paul F. Folino
President and Chief Executive Officer
By: /s/ Michael J. Rockenbach
--------------------------------------
Michael J. Rockenbach
Vice President and
Chief Financial Officer
(Principal Financial & Chief
Accounting Officer)
26
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Exhibit 3.1 Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Registrant's Annual Report
on Form 10-K for fiscal 1997).
Exhibit 3.2 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.2 to the Registrant's Annual Report on
Form 10-K for fiscal 1997).
Exhibit 3.3 Certificate of Designations of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K filed February 2,
1989).
Exhibit 3.4 Certificate of Amendment of Certificate of Incorporation of
the Registrant.
Exhibit 4.1 Rights Agreement, dated January 19, 1989, as amended
(incorporated by reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K filed February 2, 1989).
Exhibit 4.2 Certificate regarding extension of Final Expiration Date of
Rights Agreement, dated January 18, 1999 (incorporated by
reference to Amendment No. 1 to the Company's Registration
Statement on Form S-3 filed April 26, 1999).
Exhibit 27.1 Financial Data Schedule.
Exhibit 99.1 Press Release related to December 15, 1999, stock split.
</TABLE>
<PAGE> 1
Exhibit 3.4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EMULEX CORPORATION
Emulex Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
FIRST: That at a meeting of the Board of Directors of the
Corporation, resolutions were duly adopted setting forth a proposed amendment of
the Certificate of Incorporation, as amended, of the Corporation, declaring said
amendment to be advisable and to be presented to the stockholders at the annual
meeting of stockholders of the Corporation for consideration thereof. The
resolution setting forth the proposed amendment is as follows:
"RESOLVED, that, Article IV of the Corporation's Certificate of
Incorporation, as previously amended, be further amended, without
effect upon any stock designation heretofore filed, to read as
follows:
ARTICLE IV
Authorized Capital Stock
The corporation is authorized to issue two classes of capital
stock, designated Common Stock and Preferred Stock. The amount of
total authorized capital stock of the corporation is 121,000,000
shares, divided into 120,000,000 shares of Common Stock, par value
$0.10 per share, and 1,000,000 shares of Preferred Stock, par value
$0.01 per share. Upon the effectiveness of this Amendment, each
outstanding share of Common Stock, par value $0.20 per share, shall
be split, converted and changed into two shares of Common Stock, par
value $0.10 per share. The effective date of this Amendment shall be
11:59 p.m. (Eastern Standard Time) on December 15, 1999.
The shares of Preferred Stock may be issued from time to time
in one or more series. The board of directors is hereby authorized
to fix by resolution or resolutions the designations and the powers,
preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of any
series of shares of Preferred Stock, including without limitation
the dividend rate, conversion rights, redemption price and
liquidation preference, of any such series, and to fix the number of
shares constituting such series, and to increase or decrease the
number of shares of any such series (but not below the number of
shares thereof then outstanding). In case the number of shares of
any such series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the
adoption of the resolution or resolutions originally fixing the
number of shares of such series."
<PAGE> 2
SECOND: That thereafter, pursuant to resolutions of the Board of
Directors, the proposed amendment was presented to the stockholders at the
annual meeting of stockholders of the Corporation held on November 18, 1999,
upon notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by Paul F. Folino, its President and Chief Executive Officer, and
Michael J. Rockenbach, its Vice President, Chief Financial Officer, Secretary
and Treasurer, this 18th day of November, 1999.
By: /s/ Paul F. Folino
-------------------------------------
Paul F. Folino,
President and Chief Executive Officer
Attest:
/s/ Michael J. Rockenbach
-------------------------------------
Michael J. Rockenbach, Vice President,
Chief Financial Officer, Secretary
and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMULEX
CORPORATION AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEET, STATEMENT OF
INCOME AND STATEMENT OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDED DECEMBER 26,
1999 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> JUL-2-2000
<PERIOD-END> DEC-26-1999
<CASH> 17,598
<SECURITIES> 99,509
<RECEIVABLES> 17,233
<ALLOWANCES> 0
<INVENTORY> 9,731
<CURRENT-ASSETS> 145,107
<PP&E> 3,344
<DEPRECIATION> 0
<TOTAL-ASSETS> 195,594
<CURRENT-LIABILITIES> 18,155
<BONDS> 0
0
0
<COMMON> 3,545
<OTHER-SE> 173,741
<TOTAL-LIABILITY-AND-EQUITY> 195,594
<SALES> 62,499
<TOTAL-REVENUES> 62,499
<CGS> 33,909
<TOTAL-COSTS> 33,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 17,297
<INCOME-TAX> 1,730
<INCOME-CONTINUING> 15,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,567
<EPS-BASIC> 0.45
<EPS-DILUTED> 0.41
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FOR IMMEDIATE RELEASE Contact: Michael J. Rockenbach
Chief Financial Officer
(714) 513-8213
EMULEX ANNOUNCES TWO-FOR-ONE STOCK SPLIT
Costa Mesa, Calif., November 19, 1999. . . Emulex Corporation
(NASDAQ:EMLX), a leader in fibre channel technology and products, announced
today that its shareholders have authorized the Company to amend its Certificate
of Incorporation to increase its authorized shares of common stock from
20,000,000 to 120,000,000 and to split its outstanding shares on a two-for-one
basis. The stock split will apply to each share of common stock outstanding to
stockholders of record on November 30, 1999. The new shares of stock will be
payable on December 15, 1999. Subsequent to the issuance of the new shares,
Emulex will have approximately 35 million shares outstanding.
Emulex is a leading designer, developer and supplier of a broad line of
fibre channel host adapters, hubs, ASICs and software products that enhance
access to, and storage of, electronic data and applications. The company's
products are based on internally developed ASIC technology, are deployable
across a variety of heterogeneous network configurations and operating systems,
and enhance data flow between computers and peripherals. Emulex's products offer
customers the combination of critical reliability, scalability, high performance
and customization for mission-critical server and storage system applications.
The company also markets traditional networking products such as printer servers
and network access products, including communications servers and WAN adapters.
Emulex markets to OEMs and end users through its own worldwide selling
organization, as well as two-tier distribution partners. Corporate headquarters
are located in Costa Mesa, California. News releases and other information about
Emulex are available via the Web at http://www.emulex.com.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: With the exception of historical information, the statements set
forth above include forward-looking statements that involve risk and
uncertainties. The Company wishes to caution readers that a number of
important factors could cause actual results to differ materially from
those in the forward-looking statements. Those factors include the
following: the fact that the Company's markets are characterized by rapidly
changing technology, evolving industry standards and frequent introductions
of new products and enhancements, and the Company's ability to respond to
such changes; difficulties which the Company may experience in exiting its
manufacturing operations; the fact that the fibre channel market is at an
early stage of development; the highly competitive nature of the markets
for the Company's products; the Company's ability to attract and retain
skilled personnel; the Company's reliance on third party suppliers for
components used in the Company's products; and the Company's reliance on
certain contract manufacturers, OEMs, distributors and key customers. These
and other factors which could cause actual results to differ materially
from those in the forward-looking statements are also discussed in the
Company's filings with the Securities and Exchange Commission, including
its recent filings on Form 10-K and Form 10-Q.
EMULEX -- the fibre channel company
This news release refers to various products and companies by their trade names.
In most, if not all, cases these designations are claimed as trademarks or
registered trademarks by their respective companies.
