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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1995
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
COMMISSION FILE NO. 0-11007
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0300558
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
(714) 662-5600
(Registrant's telephone number, including area code)
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of February 5, 1996, the registrant had 5,940,939 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 and July 2, 1995 2
Condensed Consolidated Statements of Operations
Three and six months ended December 31, 1995
and January 1, 1995 3
Condensed Consolidated Statements of Cash Flows
Six months ended December 31, 1995 and January 1, 1995 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
December 31, July 2,
1995 1995
------------- ---------
Assets
Current assets:
Cash and cash equivalents........................................ $ 3,943 $ 10,308
Accounts and notes receivable, net............................... 9,014 12,896
Inventories, net................................................. 14,438 14,261
Prepaid expenses and other assets................................ 1,809 1,549
-------- ---------
Total current assets 29,204 39,014
Property, plant and equipment, net.................................... 8,108 8,451
Other assets.......................................................... 462 85
-------- ---------
$ 37,774 $ 47,550
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capitalized lease obligations 240 243
Accounts payable................................................. $ 5,192 $ 8,371
Accrued liabilities.............................................. 4,902 5,356
-------- ---------
Total current liabilities.................................... 10,334 13,970
Capitalized lease obligations, excluding
current installments............................................. 136 253
Deferred income taxes................................................. 2,649 2,649
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued; 150,000 shares designated as
Series A Junior Participating, $.01 par value; none issued... - -
Common stock, $.20 par value; 20,000,000 shares
authorized; 5,940,220 and 5,860,923 issued and
outstanding at December 31, 1995 and July 2, 1995,
respectively................................................. 1,188 1,172
Additional paid-in capital....................................... 6,372 6,014
Retained earnings................................................ 17,095 23,492
-------- --------
Total stockholders' equity............................................ 24,655 30,678
-------- --------
$ 37,774 $ 47,550
======== ========
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
----------------------------- ---------------------------
December 31, January 1, December 31, January 1,
1995 1995 1995 1995
------------ ------------ ------------ -----------
Net revenues...................................... $ 12,672 $ 18,277 $ 23,120 $ 36,788
Cost of sales..................................... 8,648 10,518 15,802 21,499
--------- --------- --------- ---------
Gross profit................................. 4,024 7,759 7,318 15,289
Operating expenses:
Engineering and development 2,897 2,524 5,940 5,072
Selling and marketing 2,842 2,909 5,815 5,757
General and administrative 1,240 1,432 2,476 2,836
Amortization of goodwill..................... - 84 - 168
--------- --------- --------- ---------
Total operating expenses................. 6,979 6,949 14,231 13,833
--------- --------- --------- ---------
Operating income (loss).................. (2,955) 810 (6,913) 1,456
Nonoperating income............................... 39 630 129 727
--------- --------- --------- ---------
Income (loss) before income taxes........ (2,916) 1,440 (6,784) 2,183
Provision for (benefit from) income taxes......... - 144 (387) 218
--------- --------- --------- ---------
Net income (loss)............................ $ (2,916) $ 1,296 $ (6,397) $ 1,965
========= ========= ========= =========
Net income (loss) per common and
common equivalent share...................... $ (0.49) $ 0.21 $ (1.08) $ 0.32
======== ========= ========= =========
Weighted average number of common
and common equivalent shares................. 5,936 6,124 5,917 6,049
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
December 31, January 1,
1995 1995
------------ ----------
Continuing Operations
Cash flows from operating activities:
Income (loss) from continuing operations.......................... $ (6,397) $ 1,965
Adjustments to reconcile net income (loss) from
continuing operations to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................ 1,144 1,562
Loss on disposal of property, plant and equipment......... 49 130
Provision for doubtful accounts........................... 50 31
Changes in assets and liabilities:
Accounts receivable.................................... 3,832 (1,497)
Inventories............................................ (177) 2,054
Accounts payable....................................... (3,179) (82)
Accrued liabilities.................................... (380) 221
Income tax receivable.................................. (19) 59
Long term deferred tax asset........................... (387) -
Deferred income taxes.................................. - 1,702
Deferred income........................................ - (1)
Prepaid expenses and other assets...................... (231) (125)
-------- --------
Net cash provided by (used in) operating activities....... (5,695) 6,019
-------- --------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment........... 254 4
Additions to property, plant and equipment........................ (1,104) (1,137)
-------- --------
Net cash used in investing activities..................... (850) (1,133)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases........................... (120) (141)
Proceeds from issuance of common stock............................ 374 505
-------- --------
Net cash provided by financing activities................. 254 364
-------- --------
Net cash provided by (used in) continuing operations................... (6,291) 5,250
Net cash used in discontinued operations............................... (74) (182)
-------- --------
Net increase (decrease) in cash and cash equivalents................... (6,365) 5,068
Cash and cash equivalents at beginning of period....................... 10,308 6,772
-------- --------
Cash and cash equivalents at end of period............................. $ 3,943 $ 11,840
======== ========
Supplemental disclosures:
Cash paid during the period (related to continuing and
discontinued operations) for:
Interest ......................................................... $ 23 $ 15
Income taxes...................................................... 128 2
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments (which are normal recurring
accruals) necessary to present fairly the financial position as of December
31, 1995 and July 2, 1995, and the results of operations for the three and
six months ended December 31, 1995 and January 1, 1995 and the statements
of cash flows for the six months then ended. Interim results for the three
and six months ended December 31, 1995 are not necessarily indicative of
the results that may be expected for the year ending June 30, 1996.
References to dollar amounts are in thousands, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
December 31, July 2,
1995 1995
------------ --------
Raw materials $ 6,049 $ 9,223
Work in process 2,566 2,036
Finished goods 5,823 3,002
--------- --------
$ 14,438 $ 14,261
========= ========
3. Net Income (Loss) per Share
Net income (loss) per common and common equivalent share was computed based
on the weighted average number of common and common equivalent shares
outstanding during the periods presented. The Company has granted certain
stock options which have been treated as common share equivalents in
computing both primary and fully diluted income per share. Common share
equivalents have been excluded from the calculation of both primary and
fully diluted loss per share for the three and six months ended December
31, 1995, as the effect would have been antidilutive. The primary and fully
diluted income (loss) per share computations are approximately the same.
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Part I. Item 2.
EMULEX CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(in thousands)
RESULTS OF OPERATIONS
The following table sets forth selected items from the Condensed Consolidated
Statements of Operations. This table should be read in conjunction with the
Condensed Consolidated Financial Statements included elsewhere herein.
Percentage of Net Revenue Percentage of Net Revenue
For the Three Months Ended For the Six Months Ended
---------------------------- ---------------------------
December 31, January 1, December 31, January 1,
1995 1995 1995 1995
------------ ---------- ------------ ----------
Net revenues................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................. 68.2 57.5 68.3 58.4
------ ------ ------ ------
Gross profit.............................. 31.8 42.5 31.7 41.6
Operating expenses:
Engineering and development............... 22.9 13.8 25.7 13.8
Selling and marketing..................... 22.4 15.9 25.2 15.6
General and administrative................ 9.8 7.9 10.7 7.7
Amortization of goodwill.................. - 0.5 - 0.5
------ ------ ------ ------
Total operating expenses.............. 55.1 38.1 61.6 37.6
------ ------ ------ ------
Operating income (loss)............... (23.3) 4.4 (29.9) 4.0
Nonoperating income............................ 0.3 3.5 0.6 1.9
------ ------ ------ ------
Income (loss) before income taxes..... (23.0) 7.9 (29.3) 5.9
Provision for (benefit from) income taxes...... - 0.8 (1.6) 0.6
------ ------ ------ ------
Net income (loss)......................... (23.0)% 7.1% (27.7)% 5.3%
====== ====== ====== =====
NET REVENUES
Net revenues for the three and six month periods ended December 31, 1995 were
$12,672 and $23,120, respectively, as compared to $18,277 and $36,788 for the
same periods last fiscal year. These amounts represent a decrease in net
revenues compared to the prior year of $5,605, or 31 percent, for the three
month period and $13,668, or 37 percent, for the six month period. These
decreases in net revenues are primarily attributable to lower sales to original
equipment manufacturers (OEMs), which declined from the levels recorded in the
comparable periods a year ago by $5,475, or 56 percent, for the three month
period and by $14,665, or 69 percent, for the six month period. The lower level
of OEM sales resulted primarily from a collective $5,911, or 78 percent,
reduction in second quarter shipments to Xerox, Cisco Systems and Reuters when
compared to the second quarter a year earlier and a $13,349 reduction in
shipments to these same three customers for the six month period when compared
to the six month period of fiscal 1995. While Xerox took delivery of their new
generation of printer servers during the second quarter of the current year,
volumes were lower than a year earlier for the previous generation of printer
servers. Additionally, one product reached the end of its life cycle with Cisco
Systems in the fourth quarter of last fiscal year and, as anticipated, shipments
of that product have stopped. Sales to Reuters declined from the levels recorded
in the three and six month periods a year earlier due to the completion of
certain of Reuters' modernization projects in Europe. While Emulex believes that
it will be asked to participate in Reuters's future WAN applications in other
geographic regions, there can be no assurance that any such business will, in
fact, be awarded to Emulex.
From a product line perspective, when compared to the prior year, network access
revenues for the three and six month periods ended December 31, 1995 declined by
$4,323, or 44 percent, and $9,001, or 47 percent, respectively, and
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printer server revenues declined by $1,792, or 23 percent, and $6,624, or 41
percent, respectively. The Company's emerging Fibre Channel product line
contributed revenues of $209 and $341 for the three and six month periods ended
December 31, 1995. There were no shipments of Fibre Channel products in the same
periods a year earlier. For the three and six month periods ended December 31,
1995 other product lines increased by $301, or 55 percent and by $143, or 9
percent, respectively when compared to the comparable periods. Additionally, in
the first quarter of fiscal 1996, the Company sold $1,472 of memory devices that
had been engineered out of certain products.
GROSS PROFIT
Gross profit for the three and six month periods ended December 31, 1995 was
31.8 percent and 31.7 percent of net revenues, respectively, compared to 42.5
percent and 41.6 percent in the same periods in the prior fiscal year. The
decreases in gross profit percentages from the levels recorded a year earlier
are primarily due to a lower absorption of manufacturing overhead in the current
fiscal year which resulted from the lower level of production activity.
OPERATING EXPENSES
During the three and six month periods ended December 31, 1995, total operating
expenses increased by $30 and $398, respectively, when compared to the
comparable periods in the prior fiscal year. Engineering and development
expenses for the three and six month periods ended December 31, 1995 increased
in comparison to the prior fiscal year by $373, or 15 percent, and $868, or 17
percent, respectively. These increases in the current year reflect the Company's
continuing support for new product development programs despite the decline in
net revenues. Selling and marketing expenses were essentially flat, decreasing
by $67, or 2 percent, in the three month period ended December 3, 1995 and
increasing by $58, or 1 percent, for the six month period when compared to the
same periods in the prior year. General and administrative expenses declined in
comparison to a year earlier by $192, or 13 percent, for the three month period
and by $360, or 13 percent, for the six month period. These decreases resulted
from reductions in administrative staff and other cost control measures that
were implemented in the current fiscal year. Amortization of goodwill was $0 for
the three and six month periods ended December 31, 1995 compared to $84 and $168
in the same periods a year earlier. This decrease in amortization of goodwill is
due to the write off of goodwill and other intangible assets in the fourth
quarter of the prior fiscal year.
NONOPERATING INCOME
During the three and six month periods ended December 31, 1995, nonoperating
income decreased by $591, or 94 percent, and $598, or 82 percent, respectively,
when compared to the same periods a year earlier. These decreases for the three
and six month periods are primarily due to $538 of nonrecurring interest income
associated with a tax refund that was recognized in the second quarter of the
prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $6,365 during the first six
months of fiscal 1996 to $3,943. This decrease in available cash balances since
July 2, 1995 resulted primarily from the net loss experienced in the first six
months of the current year. Operating activities used $5,695 of cash in the six
month period ended December 31, 1995, compared to providing $6,019 of cash in
the same period a year earlier. Investing activities, which were limited to the
acquisition and disposition of property and equipment, used $850 of cash in the
first half of the current fiscal year compared to using $1,133 in the comparable
period a year ago. Financing activities, which were limited to payments under
capital lease obligations and proceeds from the exercise of employee stock
options, provided $254 of cash during the first six months of fiscal 1996
compared to providing $364 of cash for the same period last fiscal year.
Discontinued operations used $74 of cash in the first half of fiscal 1996
compared to using $182 of cash in the same period a year ago.
In addition to its cash balances, the Company has a line of credit of up to
$5,000 with Silicon Valley Bank. There were no borrowings under the line of
credit during the first six months of fiscal 1996. Under the terms of the line
of credit, the Company is required to grant Silicon Valley Bank a security
interest in its accounts receivable, inventories, equipment and other property
upon any borrowing. The line of credit with Silicon Valley Bank requires the
Company to satisfy certain financial and other covenants and conditions,
including prescribed levels of tangible net worth,
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profitability and liquidity. In the event the Company fails to comply with any
financial or other covenant in its loan agreement with Silicon Valley Bank, the
line of credit could become unavailable to the Company. In addition, after
borrowings have been made under the line of credit a failure to satisfy such
covenants would constitute an event of default, giving rise to the various
remedies available to a secured lender. There can be no assurance that the line
of credit will continue to be available to meet the Company's liquidity
requirements. The Company anticipates that borrowings under the line of credit
will be required during the last six months of fiscal 1996.
The Company believes that its existing cash balances, facilities and equipment
leases, anticipated cash flows from operating activities and borrowings under
its line of credit will be sufficient to support its working capital needs and
capital expenditure requirements for the next twelve months. However, the
Company has recently experienced reductions in revenue levels and significant
losses from operations. The Company's ability to meet its future liquidity
requirements is dependent upon its ability to operate profitably or, in the
absence thereof, to draw on its line of credit and to arrange additional
financing. If the Company were to continue to experience losses, additional debt
or equity financing would be required within six to nine months. While the
Company expects to return to profitability, there can be no assurances that
revenues will return to the levels experienced in the prior fiscal year or that
the Company would be profitable at such revenue levels. Furthermore, there can
be no assurances that future requirements to fund operations will not require
the Company to draw on its line of credit and seek additional financing, or that
such line of credit or additional financing will be available on terms favorable
to the Company and its stockholders, or at all.
BUSINESS ENVIRONMENT AND RISK FACTORS
RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. The Company believes that its future success will
depend in large part on its ability to enhance its existing products and to
introduce new products on a timely basis to meet changes in customer
preferences, emerging technologies and evolving industry standards. There can be
no assurance that the Company will be successful in developing, manufacturing
and marketing new products or product enhancements that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. Nor can there be any assurance that the Company will be able to
develop or license from third parties the underlying core technologies necessary
for new products and enhancements. Additionally, there can be no assurance that
services, products or technologies developed by others will not render the
Company's products or technologies uncompetitive or obsolete. If the Company is
unable, for technological or other reasons, to develop new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer preferences, the Company's business, results of
operations and financial condition could be materially and adversely affected.
RELIANCE ON OEMS, DISTRIBUTORS AND KEY CUSTOMERS
The Company's agreements with distributors and OEMs are typically non-exclusive
and in many cases may be terminated by either party without cause, and many of
the Company's distributors and OEMs carry, or have ready access to, competing
product lines. Therefore, there can be no assurance that any distributor or OEM
will continue to purchase the Company's products. The loss of or decline in
sales to important distributors or OEMs has in the past and would in the future
adversely affect the Company's business, results of operations and financial
condition.
EARLY STAGE OF THE FIBRE CHANNEL MARKET
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The Company has invested and continues to invest substantially in the
engineering of products to address the Fibre Channel market, which is at an
early stage of development. For the first six months of fiscal 1996,
approximately 30 percent of the Company's engineering and development
expenditures have been invested in Fibre Channel designs. There can be no
assurance that the Fibre Channel market will continue to expand or that the
Company's investment in Fibre Channel will achieve a profitable return.
COMPETITION
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, price erosion, frequent new
product introductions and evolving industry standards. The industry consists of
major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than the
Company, as well as emerging companies attempting to obtain a share of the
existing market. The Company's competitors continue to introduce products with
improved performance characteristics, and the Company will have to do the same
to remain competitive. The Company operates in a volatile and dynamic market,
and more aggressive market and product positioning by certain competitors could
have a material adverse effect on the Company's business, results of operations
and financial position.
RELIANCE ON THIRD PARTY SUPPLIERS
The Company's manufacturing process requires components supplied by outside
suppliers, some of which the Company obtains from single sources. There can be
no assurance that in the future the Company's suppliers will be able to meet the
Company's demand for such components in a timely and cost effective manner. The
Company's operating results and customer relationships could be adversely
affected by either an increase in prices for, or an interruption or reduction in
the supply of, any key components.
DEPENDENCE OF KEY PERSONNEL
The Company's success depends to a significant degree on the performance and
continued service of its senior management and certain key employees.
Competition for such highly skilled employees with technical, management,
marketing, sales product development and other specialized skills is intense,
and there can be no assurance that the Company will be successful in recruiting
and retaining such personnel. In addition, there can be no assurance that
employees will not leave the Company and, after leaving, compete against the
Company. The loss of key management, technical and sales personnel could have a
materially adverse effect on the Company's business, financial condition and
operating results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. Typically the Company generates a large percentage of its
quarterly revenues in the last month of the quarter. Adding further to the
variability of sales are certain large OEM customers that tend to order
sporadically and in large amounts. A small variation in the timing of orders is
likely to adversely and disproportionately affect the Company's quarterly
results of operations as the Company's expense levels are based, in part, on its
expectations of future sales and only a small portion of the Company's expenses
vary directly with its sales. Therefore, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall of demand in relation to the Company's
quarterly expectations or any material delay of customer orders could have an
immediate and adverse impact on the Company's quarterly results of operations
and financial condition.
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POSSIBLE VOLATILITY OF STOCK PRICE
As is the case with many technology based companies, the market price of the
Company's common stock has been, and is likely to continue to be, extremely
volatile. Factors such as new product introductions by the Company or its
competitors, fluctuations in the Company's quarterly operating results, the gain
or loss of significant contracts, pricing pressures and general conditions in
the computer market, and general events and circumstances beyond the Company's
control may have a significant impact on the market price of the Company's
common stock. In addition, the stock market recently has experienced significant
price and volume fluctuations which have particularly affected the market price
for many high technology companies like the Company.
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 16, 1995.
The following members were elected to the Company's Board of Directors to hold
office for the ensuing year:
Nominee In Favor Withheld
- ------- -------- --------
Fred B. Cox 5,023,210 32,950
Paul F. Folino 5,006,385 49,775
Michael P. Downey 5,023,385 32,775
Robert H. Goon 5,022,935 33,225
Gary E. Liebl 5,023,385 32,775
Don M. Lyle 5,023,335 32,825
In addition, the stockholders of the Company voted on the selection of KPMG Peat
Marwick LLP as the Company's independent public accountants for fiscal year
1996. The number of shares voted for ratification was 5,032,911. The number of
shares voted against ratification was 3,075. The number of shares abstaining was
20,174.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit: 10.1 Loan and security agreement, dated as of March 31, 1994,
between Emulex Corporation, InterConnections, Inc.,
Emulex Europe Limited and Silicon Valley Bank, as amended
April 25, 1994, July 1, 1994, June 26, 1995, July 24,
1995, October 5, 1995 and January 18, 1996.
Exhibit: 27.1 Financial Data Schedule
(b) The registrant has not filed any reports on Form 8-K during the period for
which this report is filed.
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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 7, 1996
EMULEX CORPORATION
By: /s/ Paul F. Folino
------------------------------------------------
Paul F. Folino
President and Chief Executive Officer
By: /s/ Walter J. McBride
------------------------------------------------
Walter J. McBride
Sr. Vice President & Chief Financial Officer
(Principal Financial & Chief Accounting Officer)
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