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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1997
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)
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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 May 8, 1997, the registrant had 6,088,237 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 30, 1997 and June 30, 1996 2
Condensed Consolidated Statements of Operations
Three and nine months ended March 30, 1997
and March 31, 1996 3
Condensed Consolidated Statements of Cash Flows
Nine months ended March 30, 1997 and March 31, 1996 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
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Item 6. Exhibits and Reports on Form 8-K 13
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
March 30, June 30,
Assets 1997 1996
- ------ --------- --------
Current assets:
Cash and cash equivalents $ 996 $ 1,635
Accounts and notes receivable, net 13,948 12,993
Inventories, net 11,868 14,671
Prepaid expenses 1,891 1,892
Income tax receivable 355 388
------- -------
Total current assets 29,058 31,579
Property, plant and equipment, net 6,924 7,533
Other assets 518 188
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$36,500 $39,300
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Note payable to bank $ 500 $ --
Current installments of capitalized
lease obligations 156 261
Accounts payable 4,409 8,699
Accrued liabilities 5,447 5,846
Deferred income taxes 53 688
------- -------
Total current liabilities 10,565 15,494
Capitalized lease obligations,
excluding current installments 102 204
Deferred income 130 --
Deferred income taxes 2,556 1,572
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13,353 17,270
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized
(150,000 shares designated as Series A Junior Participating
Preferred Stock); none issued and outstanding -- --
Common stock, $0.20 par value; 20,000,000 shares authorized;
6,073,414 and 5,993,403 issued and outstanding at
March 30, 1997 and June 30, 1996, respectively 1,215 1,199
Additional paid-in capital 7,079 6,627
Retained earnings 14,853 14,204
------- -------
Total stockholders' equity 23,147 22,030
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$36,500 $39,300
======= =======
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 Nine Months Ended
------------------------- --------------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Net revenues $ 17,011 $ 12,702 $ 49,021 $ 35,822
Cost of sales 10,012 8,445 30,606 24,247
-------- -------- -------- --------
Gross profit 6,999 4,257 18,415 11,575
Operating expenses:
Engineering and development 2,640 2,781 7,341 8,721
Selling and marketing 1,896 2,944 5,910 8,759
General and administrative 1,138 1,243 3,570 3,719
Consolidation charges -- -- 1,280 --
-------- -------- -------- --------
Total operating expenses 5,674 6,968 18,101 21,199
-------- -------- -------- --------
Operating income (loss) 1,325 (2,711) 314 (9,624)
Nonoperating income (expense) (99) 374 27 503
-------- -------- -------- --------
Income (loss) before income taxes 1,226 (2,337) 341 (9,121)
Provision for (benefit from) income taxes 123 -- (308) (387)
-------- -------- -------- --------
Net income (loss) $ 1,103 $ (2,337) $ 649 $ (8,734)
======== ======== ======== ========
Net income (loss) per common and common
equivalent share $ 0.18 $ (0.39) $ 0.10 $ (1.47)
======== ======== ======== ========
Weighted average number of common
and common equivalent shares 6,299 5,942 6,284 5,926
======== ======== ======== ========
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)
Nine Months Ended
--------------------------
March 30, March 31,
1997 1996
--------- ---------
Cash flows from operating activities:
- -------------------------------------
Income (loss) from continuing operations $ 649 $ (8,734)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 2,028 1,761
Loss (gain) on disposal of property, plant and equipment 56 (155)
Provision for doubtful accounts 97 84
Changes in assets and liabilities:
Accounts receivable (1,052) 2,301
Inventories 2,803 776
Prepaid expenses and other assets 58 (597)
Income tax receivable 33 (26)
Long term deferred tax asset (387) (387)
Accounts payable (4,290) (2,055)
Accrued liabilities (399) 24
Deferred income 130 --
Deferred income taxes 349 --
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Net cash provided by (used in) operating activities 75 (7,008)
-------- --------
Cash flows from investing activities:
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Net proceeds from sale of property, plant and equipment 58 1,024
Additions to property, plant and equipment (1,533) (1,560)
-------- --------
Net cash used in investing activities (1,475) (536)
-------- --------
Cash flows from financing activities:
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Principal payments under capital leases (207) (181)
Proceeds from note payable to bank, net 500 --
Proceeds from issuance of common stock 468 399
-------- --------
Net cash provided by financing activities 761 218
-------- --------
Net cash used in continuing operations (639) (7,326)
Net cash used in discontinued operations -- (74)
-------- --------
Net decrease in cash and cash equivalents (639) (7,400)
Cash and cash equivalents at beginning of period 1,635 10,308
-------- --------
Cash and cash equivalents at end of period $ 996 $ 2,908
======== ========
Supplemental disclosures:
- -------------------------
Cash paid during the period (related to continuing
and discontinued operations) for:
Interest $ 168 $ 28
Income taxes 32 133
See accompanying notes to condensed consolidated financial statements.
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EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are
normal recurring accruals) necessary to present fairly the financial
position as of March 30, 1997, and June 30, 1996, and the results of
operations for the three and nine months ended March 30, 1997, and March
31, 1996, and the statements of cash flows for the nine months then ended.
Interim results for the three and nine months ended March 30, 1997, are
not necessarily indicative of the results that may be expected for the
year ending June 29, 1997. The interim financial statements should be read
in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1996. References to dollar amounts are in
thousands, except share data, unless otherwise specified.
2. Inventories
Inventories, net, are summarized as follows:
March 30, June 30,
1997 1996
--------- --------
Raw materials $ 7,305 $ 8,074
Work-in-process 1,958 1,844
Finished goods 2,605 4,753
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$11,868 $14,671
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3. Net Income (Loss) per Share
Net income (loss) per common and common equivalent share was computed
based on the weighted average number of common and common equivalent
shares outstanding during the periods presented. The Company has granted
certain stock options which have been treated as common share equivalents
in computing both primary and fully diluted income per share. Common stock
equivalents have been excluded from the calculation of both primary and
fully diluted loss per share for the three and nine months ended March 31,
1996, 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.
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EMULEX CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the discussions in this
Form 10-Q in general may contain certain forward-looking statements. In
addition, when used in this Form 10-Q, the words "projected", "believes",
"expects" and similar expressions are intended to identify forward-looking
statements. Actual future results could differ materially from those described
in the forward-looking statements as a result of factors discussed in "Business
Environment and Risk Factors" set forth herein, and in the Company's most
recently filed Annual Report on Form 10-K. The Company cautions the reader,
however, that these lists of risk factors may not be exhaustive. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
COMPANY OVERVIEW
Emulex Corporation is a leading designer and manufacturer of network access
products, supplying high performance communications solutions for managing the
flow of time-critical data between computers and peripheral equipment. In
addition, Emulex is a leading developer of fibre channel technology, an emerging
high performance ANSI standard network interface.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenues represented by
selected items from the unaudited Condensed Consolidated Statements of
Operations. This table should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements included elsewhere herein.
Percentage of Net Revenues Percentage of Net Revenues
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
March 30, March 31, March 30, March 31,
1997 1996 1997 1996
--------- --------- --------- ---------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.9 66.5 62.4 67.7
----- ----- ----- -----
Gross profit 41.1 33.5 37.6 32.3
Operating expenses:
Engineering and development 15.5 21.9 15.0 24.3
Selling and marketing 11.1 23.1 12.1 24.5
General and administrative 6.7 9.8 7.3 10.4
Consolidation charges -- -- 2.6 --
----- ----- ----- -----
Total operating expenses 33.3 54.8 37.0 59.2
----- ----- ----- -----
Operating income (loss) 7.8 (21.3) 0.6 (26.9)
Nonoperating income (expense) (0.6) 2.9 0.1 1.4
----- ----- ----- -----
Income (loss) before income taxes 7.2 (18.4) 0.7 (25.5)
Provision for (benefit from) income taxes 0.7 -- (0.6) (1.1)
----- ----- ----- -----
Net income (loss) 6.5% (18.4)% 1.3% (24.4)%
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NET REVENUES
Net revenues for the three and nine month periods ended March 30, 1997 were
$17,011 and $49,021, respectively, compared to $12,702 and $35,822,
respectively, for the same periods of last fiscal year. These amounts represent
an increase in net revenues of $4,309, or 34 percent, for the three month period
and $13,199, or 37 percent, for the nine month period. This increase in net
revenues resulted primarily from higher sales to original equipment
manufacturers (OEMs), which increased from the levels of the comparable periods
of last fiscal year by $7,127, or 143 percent, for the three month period and
$19,538, or 171 percent, for the nine month period. The increase in sales to
OEMs is attributable to the numerous printer server design wins the Company
achieved in fiscal 1996 and 1997, higher sales of wide area network adapters to
one OEM in the current fiscal year, and sales of the Company's fibre channel
products which are primarily to OEMs during the early stages of this market
development. These increases were partially offset by reductions in distribution
and end-user net revenues. Net revenues from distribution decreased by $2,171 ,
or 34 percent, and $3,881, or 20 percent, for the three and nine month periods,
respectively. End-user net revenues for the three and nine month periods
decreased by $647, or 46 percent, and $2,458, or 50 percent, respectively.
From a product line perspective, revenues generated by the Company's emerging
fibre channel products increased to $3,062, compared to $230 in the previous
year's third quarter. Printer server revenues increased $1,716, or 31 percent,
network access revenues increased $57, or 1 percent, and other miscellaneous
product lines decreased $296, or 41 percent, from the comparable quarter of the
prior fiscal year. For the nine month period ended March 30, 1997, fibre channel
revenues increased to $6,317 compared to $571 for the same period of fiscal
1996. Printer server revenues increased $8,209, or 55 percent, network access
revenues increased $1,222, or 7 percent, and other miscellaneous product lines
decreased $506, or 21 percent, from the comparable nine month period of fiscal
1996. Net revenues for the nine month period of fiscal 1996 included $1,472 of
memory devices that had been engineered out of certain products.
Although fibre channel represented 18 percent of revenues in the third quarter
and 13 percent for the first nine months of fiscal 1997, the market is an
emerging technology and there can be no assurance that the Company's products
will adequately meet the requirements of the market, or achieve market
acceptance. Because the Company's fibre channel products are designed to provide
both an input/output (I/O) and a networking connection between computers and
storage devices, the future revenues of the fibre channel product line depend on
the availability of other fibre channel products not manufactured or sold by the
Company including, but not limited to, gigabit transmission speed fibre channel
disk drives. 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 in the quantities
desired and function as needed.
GROSS PROFIT
The gross profit percentages for the three and nine month periods ended March
30, 1997, were 41 percent and 38 percent, respectively, compared to 34 percent
and 32 percent for the three and nine month periods of the prior fiscal year,
respectively. This increase in gross profit is primarily attributable to a
combination of higher volumes, lower prices for components used in the Company's
products and a product mix which contains a higher percentage of higher margin
products.
OPERATING EXPENSES
Operating expenses for the quarter ended March 30, 1997 decreased by $1,294, or
19 percent, from the comparable quarter a year earlier. For the first nine
months of fiscal 1997, operating expenses decreased by $3,098, or 15 percent,
compared to the same period of fiscal 1996. Included in the current nine month
period were consolidation charges of $1,280 recognized during the first quarter
of fiscal 1997. Excluding these charges, operating expenses in the current nine
month period would have been $16,821. This represents a decrease of $4,378, or
21 percent, from the nine month period of fiscal 1996. Engineering and
development expenses decreased $141, or 5 percent, and $1,380, or 16 percent,
for the three and nine month periods, respectively, compared to the
corresponding periods of the prior fiscal year. Selling and marketing expenses
decreased $1,048, or 36 percent, and $2,849, or 33 percent, for the three and
nine month periods, respectively, of fiscal 1997
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compared to fiscal 1996. These reductions are primarily the result of the
Company's reduction of investment in product areas outside of the Company's core
focus in fibre channel, printer server and wide area networking markets. General
and administrative expenses declined in comparison to a year earlier by $105, or
8 percent, for the three month period and by $149, or 4 percent, for the nine
month period.
During the first quarter of fiscal 1997, the Company initiated a consolidation
of its operations to reduce its ongoing expense base and focus its activities in
the fibre channel, printer server and wide area networking markets. Emulex's
remote access and host software businesses, previously headquartered out of a
Bellevue, Washington facility, have been relocated to Emulex headquarters in
Costa Mesa, California. In addition, the Company has downsized its Pacific Rim
sales organization and also made selected reductions at its manufacturing plant
in Dorado, Puerto Rico and at its corporate headquarters. The Company incurred
charges of $1,280 in connection with this consolidation.
NONOPERATING INCOME (EXPENSE)
Nonoperating income (expense) for the three months ended March 30, 1997,
decreased by $473 compared to the same period a year earlier. The prior year
included a $312 gain on the sale of a building at the production facility in
Puerto Rico. The remaining decrease of $161 resulted primarily from reduced
interest income and an increase in interest expense due to the Company's current
financing activities. For the nine month period ended March 30, 1997,
nonoperating income decreased by $476 compared to the same period of the prior
fiscal year. The current year includes $238 of interest income associated with
prior years' tax returns and the prior fiscal year includes a $312 gain on the
sale of a building at the production facility in Puerto Rico. Excluding these
nonrecurring items, nonoperating income (expense) decreased $402, also primarily
from reduced interest income and an increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its recent working capital needs and capital
expenditure requirements from internally generated funds, its line of credit,
facilities leases and equipment leases. As of March 30, 1997, the company had
cash and cash equivalents of $996, down $639 from June 30, 1996.
In addition to its cash balances, the Company has a line of credit of up to
$7,000 with Silicon Valley Bank. The facility is available through September
1997, unless extended by the parties. At the end of the third quarter of fiscal
1997, the Company had a $500 borrowing outstanding under the line of credit.
Under the terms of the line of credit, the Company is required to grant Silicon
Valley Bank a security interest in its accounts receivable, inventories,
equipment and other property upon any borrowing. The line of credit with Silicon
Valley Bank requires the Company to satisfy certain financial and other
covenants and conditions, including prescribed levels of tangible net worth,
profitability and liquidity. In the event the Company fails to comply with any
financial or other covenant in its loan agreement with Silicon Valley Bank, the
line of credit could become unavailable to the Company. In addition, since
borrowings have been made under the line of credit, a failure to continue to
satisfy such covenants in the future would constitute an event of default,
giving rise to the various remedies available to a secured lender. At the end of
the third quarter of fiscal 1997, the Company was in compliance with all the
terms of the line of credit; however, there can be no assurance that the Company
will continue to satisfy the financial and other covenants and conditions of the
line of credit or that the line of credit will continue to be available to meet
the Company's liquidity requirements.
The Company believes that its existing cash balances, facilities and equipment
leases, anticipated cash flows from operating activities 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. The Company's
ability to meet its future liquidity requirements is dependent upon its ability
to operate profitably or, in the absence thereof, to borrow on its line of
credit and to arrange additional debt and/or equity financing. If the Company
were to again experience losses at the rate experienced in fiscal 1996 and the
first quarter of fiscal 1997, additional debt or equity financing would be
required within six to twelve months. There can be no assurance that revenues
will remain at current levels or return to the levels experienced in previous
years or that the Company would be profitable at such revenue levels. In
addition, as a larger percentage of the Company's revenue is derived from OEMs,
the Company may experience liquidity issues due to the timing of orders from
OEMs. Furthermore, there can be no assurance that future requirements to fund
operations will not require the Company to make
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additional borrowings 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 to a large extent on its ability to enhance its existing products and to
introduce new products on a timely basis to meet changes in customer
preferences, emerging technologies and evolving industry standards. There can be
no assurance that the Company will be successful in developing, manufacturing
and marketing new products or product enhancements that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. Nor can there be any assurance that the Company will be able to
develop or license from third parties the underlying core technologies necessary
for new products and enhancements. Additionally, there can be no assurance that
services, products or technologies developed by others will not render the
Company's products or technologies uncompetitive or obsolete. If the Company is
unable, for technological or other reasons, to develop new products or
enhancements of existing products in a timely manner in response to changing
market conditions or customer preferences, the Company's business, results of
operations, financial condition and/or liquidity would be materially and
adversely affected.
Dependence on Proprietary Technology
Although the Company believes that its continued success will depend primarily
on continuing innovation, sales, marketing, technical expertise, the quality of
product support and customer relations, the Company must also protect the
proprietary technology contained in its products. The Company currently relies
on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect proprietary rights in its
products. There can be no assurance that the steps taken by the Company in this
regard will be adequate to deter misappropriation or independent third party
development of its technology. Although the Company believes that its products
and technology do not infringe proprietary rights of others, there can be no
assurance that third parties will not assert infringement claims or that the
Company will not be required to obtain licenses of third party technologies. No
assurance can be given that any necessary licenses will be available or that if
available, such licenses can be obtained on commercially reasonable terms. The
failure to obtain such royalty or licensing agreements on a timely basis would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Early Stage of the Fibre Channel Market
The Company has invested and continues to invest substantially in the
engineering of products to address the fibre channel market, which is at an
early stage of development and is rapidly evolving. The Company's investment in
fibre channel designs was over 50 percent of the Company's engineering and
development expenditures for the current quarter and over 45 percent
year-to-date. The Company's future success in the fibre channel market will
depend to a significant degree upon the ability of the Company to acquire
components for its fibre channel products from third party suppliers that
perform as needed and in the quantities needed, as well as broad market
acceptance of the technology under development. This success will be dependent
in part on the ability of the Company's OEMs to develop new products that
provide the functionality, performance, speed and network connectivity demanded
by the market at acceptable prices, and to convince end-users to adopt fibre
channel technology. The Company believes the projected fibre channel market
represents a significant portion of the opportunities for revenue growth in the
future; however, there can be no assurance that the fibre channel market will
continue to expand, that the Company's investment in fibre channel will achieve
a profitable return, that customers will choose the Company's technology for
use, or that fibre channel will gain market acceptance. The failure of any of
these events to occur would have a material adverse effect on the Company's
business, results of operations, financial condition and/or liquidity.
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Competition
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, price erosion, frequent new
product introductions and evolving industry standards. The industry consists of
major domestic and international companies, many of which have substantially
greater financial, technical, marketing and distribution resources than the
Company, as well as emerging companies attempting to obtain a share of the
existing market. The Company's competitors continue to introduce products with
improved price/performance characteristics, and the Company will have to do the
same to remain competitive. The Company operates in a volatile and dynamic
market, and more aggressive market and product positioning by certain
competitors would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
Reliance on OEMs, Distributors and Key Customers
In the third quarter of fiscal 1997, the Company derived approximately 24
percent of its revenue from distributors and 71 percent from OEMs. For the first
nine months of fiscal 1997, the Company derived approximately 32 percent of its
revenue from distributors and 63 percent of its revenue from OEMs. The Company's
agreements with distributors and OEMs are typically non-exclusive and in many
cases may be terminated by either party without cause, and many of the Company's
distributors and OEMs carry competing product lines. Therefore, there can be no
assurance that any distributors or OEMs will continue to purchase the Company's
products. The loss of important distributors or OEMs would adversely affect the
Company's business, results of operations, financial condition and/or liquidity.
Among the Company's key customers, Reuters Limited and Sequent Computer Systems
accounted for 18 percent and 10 percent, respectively, of the Company's revenue
in the third quarter of fiscal 1997. The Reuters project now underway is
expected to continue for another two to three quarters. After that time,
significant volume from Reuters is dependent upon the award of new design wins
and initiation of new products. The Company's revenues are significantly
dependent upon, among other things, the ability and willingness of its OEMs to
timely develop and promote products that incorporate the Company's technology.
The ability and willingness of OEMs to do so is based upon a number of factors
such as: the timely development by the Company and the OEMs of new products with
new functionality, increased speed and enhanced performance at acceptable prices
to end-users; development costs of the OEMs; compatibility with both existing
and emerging industry standards; technological advances; patent and other
intellectual property issues and competition generally. No assurance can be
given as to the ability or willingness of the Company's OEMs to continue
developing, marketing and selling products incorporating the Company's
technology. Since the Company's business is dependent on its relationships with
its OEMs and distributors, the inability or unwillingness of any of the
Company's significant customers to continue their relationships with the Company
and to develop and promote products incorporating the Company's technology would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Concentration of OEM Customers
Over the past two years, the Company secured over 20 new printer server design
wins, many of which already have or will enter volume production over the next
three to six months. The Company has also been an early entrant and leading
developer of gigabit fibre channel products. Based on its initial positioning in
this market, the Company has secured 30 initial design wins with storage and
computing OEM customers. In the most recent quarter, revenues from fibre channel
products have increased to 18 percent of total Company revenues. Historically,
revenues from the Company's top OEM customers have accounted for a significant
portion of the Company's total revenues. Although the Company has attempted to
expand its base of OEMs, there can be no assurance that its revenues in the
future will not be similarly derived from a limited number of OEM customers. The
Company's largest OEM customers vary to some extent from year to year as product
cycles end, contractual relationships expire and new products and customers
emerge. Many of the arrangements with the Company's OEMs are provided on a
project-by-project basis, are terminable with limited or no notice, and, in
certain instances, are not governed by long-term agreements. The Company also is
subject to a credit risk associated with the concentration of its accounts
receivable from these OEMs, as well as liquidity issues due to timing of orders
from these OEMs. No assurance can be given as to the ability or willingness of
any of the Company's OEMs to continue utilizing the Company's products and
technology or as to the ability of the Company in the
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future to sell its products and technology to its existing or new OEMs. Any
significant decrease in sales of products by the Company's larger OEMs, any
failure of the Company to replace its existing OEMs or to enter into
relationships with new OEM customers in accordance with the Company's
expectations, or any delay in or failure to make the payments due to the Company
from such OEMs would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
Risks Associated with Product Development; Product Delays
The Company in the past has experienced delays in product development, and the
Company may experience similar delays in the future. Prior delays have resulted
from numerous factors such as changing OEM product specifications, difficulties
in hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resources limitations, difficulties with
independent contractors, changing market or competitive product requirements and
unanticipated engineering complexity. In addition, the Company's software and
hardware have in the past, and may in the future, contain undetected errors or
failures that become evident upon product introduction or as product production
volume increases. There can be no assurance, despite testing by the Company and
its OEMs, that errors will not be found, that the Company will not experience
development challenges resulting in unanticipated problems or delays in the
acceptance of products by the Company's OEMs or shipment of the OEMs' products,
or that the Company's new products and technology will meet performance
specifications under all conditions or for all anticipated applications. Given
the short product life cycles in the markets for the company's products, any
delay or unanticipated difficulty associated with new product introductions or
product enhancements would have a material adverse effect on the Company's
business, results of operations, financial condition and/or liquidity.
Reliance on Third Party Suppliers
The Company relies on third party suppliers who supply the components used in
the Company's products. Most components are readily available from alternate
sources. However, the unavailability of certain components from current
suppliers, especially components custom designed for the Company, could result
in delays in the shipment of the Company's products as well as additional
expense associated with obtaining and qualifying a new supplier or redesigning
the Company's product to accept more readily available components. In addition,
certain key components used in the Company's products are available only from
single sources and the Company does not have long-term contracts ensuring the
supply of such components. Furthermore, the components used for the Company's
fibre channel products are based on an emerging technology and may not be
available with the performance characteristics and in the quantities required by
the Company. As the Company typically attempts to maintain less than 90 days
supply of such components, there can be no assurance that components will be
available to meet the Company's future requirements at favorable prices, if at
all. The Company also relies on third party suppliers for software that is
bundled with some of the Company's products. The Company currently has
agreements with these suppliers; however, these software items are not generally
readily available from alternate sources. The Company's future inability to
obtain components or software, any significant increase in prices of these
components or software or the inability to redesign its products to accept
alternatives in a timely manner would materially and adversely affect the
Company's business, results of operations, financial condition and/or liquidity.
Risks Associated with International Operations and Regulatory Standards
For the third quarter of fiscal 1997, sales in the United States, Europe, and in
the Pacific Rim countries accounted for 47 percent, 44 percent and 9 percent of
the Company's net revenues, respectively. For the first nine months of the
current fiscal year, sales in the United States, Europe and the Pacific Rim
countries accounted for 51 percent, 43 percent and 6 percent of the Company's
net revenues, respectively. The Company expects that sales in the United States
and Europe will continue to account for a substantial majority of the Company's
revenues for the foreseeable future. There can be no assurance that the Company
will achieve significant penetration in other markets.
The Company's worldwide price list uses U.S. dollars in all markets. An increase
in the value of the U.S. dollar relative to foreign currencies would make the
Company's products more expensive and therefore potentially less competitive in
those markets. Additional risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
tariffs and other trade barriers, costs and
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risks of localizing products for foreign countries, longer accounts receivable
payment cycles, potentially adverse tax consequences, repatriation of earnings
and the burdens of complying with a wide variety of foreign laws. In addition,
revenues of the Company earned in various countries where the Company does
business may be subject to taxation by more than one jurisdiction, thereby
adversely affecting the Company's earnings. There can be no assurance that such
factors will not have an adverse effect on the revenues from the Company's
future international sales and, consequently, the Company's business, results of
operations, financial condition and/or liquidity.
The Company's primary manufacturing operation is located in Dorado, Puerto Rico,
an area which is subject to hurricanes at certain times of the year. Damage to
this facility or an interruption in the ability to receive components or ship
products to its customers would have a material adverse impact on the Company's
business, results of operations, financial condition and/or liquidity.
Dependence of Key Personnel
The Company's success depends to a significant degree on the performance and
continued service of its senior management and certain key employees.
Competition for such highly skilled employees with technical, management,
marketing, sales, product development and other specialized skills is intense,
and there can be no assurance that the Company will be successful in recruiting
and retaining such personnel. In addition, there can be no assurance that
employees will not leave the Company and, after leaving, compete against the
Company. The loss of key management, technical and sales personnel could have a
material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Fluctuations in Quarterly Operating Results
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. Typically, the Company generates a large percentage of its
quarterly revenues in the last month of the quarter. Adding further to the
variability of sales are certain large OEM customers that tend to order
sporadically and volumes can vary significantly from quarter to quarter. A small
variation in the timing of orders is likely to adversely and disproportionately
affect the Company's quarterly results of operations as the Company's expense
levels are based, in part, on its expectations of future sales and only a small
portion of the Company's expenses vary directly with its sales. Therefore, the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
demand in relation to the Company's quarterly expectations or any material delay
of customer orders would have an immediate and adverse impact on the Company's
quarterly results of operations, financial condition and/or liquidity.
Recent History of Losses from Continuing Operations
The Company incurred net losses of $9,288 in fiscal 1996 and $941 in the first
quarter of fiscal 1997. Results for the first quarter included consolidation
charges of $1,280. While the Company has generated net income for the last two
quarters, and for the nine month period ended March 30, 1997, there can be no
assurances that revenues will remain at current levels or return to the levels
experienced in previous years or that the Company would be profitable at such
revenue levels.
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.
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PART II. OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibit 27.1 Financial Data Schedule
(b) The registrant has not filed any reports on Form 8-K during the period for
which this report is filed.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 1997
EMULEX CORPORATION
By: /s/ Paul F. Folino
-------------------------------------
Paul F. Folino
President and Chief Executive Officer
By: /s/ Michael J. Rockenbach
-------------------------------------
Michael J. Rockenbach
Vice President Finance and
Acting Chief Financial Officer
(Principal Financial & Chief
Accounting Officer)
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