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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 September 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 November 5, 1999, the registrant had 17,694,605 shares of common stock
outstanding.
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EMULEX CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 26, 1999 and June 27, 1999 2
Condensed Consolidated Statements of Income
Three months ended September 26, 1999
and September 27, 1998 3
Condensed Consolidated Statements of Cash Flows
Three months ended September 26, 1999
and September 27, 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Qualitative and Quantitative Disclosures about Market Risk 20
Part II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 21
1
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
September 26, June 27,
Assets 1999 1999
- ------ ------------ --------
Current assets:
Cash and cash equivalents $ 15,803 $ 22,284
Investments 82,655 83,164
Accounts and other receivables, net 21,576 17,088
Inventories, net 8,755 11,083
Prepaid expenses 603 475
Deferred income taxes 378 244
-------- --------
Total current assets 129,770 134,338
Property and equipment, net 3,282 3,168
Long term investments 49,484 32,216
Deferred income taxes and other assets 413 269
-------- --------
$182,949 $169,991
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 11,285 $ 11,395
Accrued liabilities 7,913 4,291
Income taxes payable and other current liabilities 445 358
-------- --------
Total current liabilities 19,643 16,044
Deferred income taxes - 2,054
-------- --------
19,643 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, $0.20 par value; 20,000,000 shares
authorized; 17,491,906 and 16,966,944 issued
and outstanding at September 26, 1999, and
June 27, 1999, respectively 3,498 3,393
Additional paid-in capital 142,808 138,300
Retained earnings 17,000 10,200
-------- --------
Total stockholders' equity 163,306 151,893
-------- --------
$182,949 $169,991
======== ========
See accompanying notes to condensed consolidated financial statements.
2
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
-----------------------------
September 26, September 27,
1999 1998
------------- -------------
Net revenues $28,896 $14,051
------- -------
Cost of sales 15,999 8,343
Cost of sales - inventory charges related to consolidation - 626
------- -------
Total cost of sales 15,999 8,969
------- -------
Gross profit 12,897 5,082
------- -------
Operating expenses:
Engineering and development 3,350 2,661
Selling and marketing 2,340 1,627
General and administrative 1,505 963
Consolidation charges, net - (626)
------- -------
Total operating expenses 7,195 4,625
------- -------
Operating income 5,702 457
Nonoperating income 1,854 12
------- -------
Income before income taxes 7,556 469
Income tax provision 756 47
------- -------
Net income $ 6,800 $ 422
======= =======
Net income per share:
Basic $ 0.40 $ 0.03
======= =======
Diluted $ 0.36 $ 0.03
======= =======
Number of shares used in per share computations:
Basic 17,207 12,267
======= =======
Diluted 18,883 12,827
======= =======
See accompanying notes to condensed consolidated financial statements.
3
EMULEX CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
----------------------------
September 26, September 27,
1999 1998
------------- -------------
Cash flows from operating activities:
- -------------------------------------
Net income $ 6,800 $ 422
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 173 376
Loss on disposal of property and equipment - 1
Provision for doubtful accounts 158 1
Changes in assets and liabilities:
Accounts receivable (4,646) (2,123)
Inventories 2,328 2,616
Accounts payable (110) 3,425
Accrued liabilities 3,622 (2,744)
Income taxes payable and deferred income taxes 756 69
Prepaid expenses and other assets (140) (172)
--------- -------
Net cash provided by operating activities 8,941 1,871
--------- -------
Cash flows from investing activities:
- ------------------------------------
Net proceeds from sale of property and equipment 3 547
Additions to property and equipment (290) (316)
Purchases of investments (250,258) -
Maturities of investments 233,499 -
--------- -------
Net cash provided by (used in) investing activities (17,046) 231
--------- -------
Cash flows from financing activities:
- ------------------------------------
Principal payments under capital leases (7) (18)
Proceeds from issuance of common stock 1,631 25
--------- -------
Net cash provided by financing activities 1,624 7
--------- -------
Net increase (decrease) in cash and cash equivalents (6,481) 2,109
Cash and cash equivalents at beginning of period 22,284 1,776
--------- -------
Cash and cash equivalents at end of period $ 15,803 $ 3,885
========= =======
Supplemental disclosures:
- -------------------------
Cash paid during the period for:
Interest $ - $ 3
Income taxes 1 -
During the quarter ended September 26, 1999, the Company recognized $2,982 as a
credit to additional paid-in capital stock option plans.
See accompanying notes to condensed consolidated financial statements.
4
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the financial position as of
September 26, 1999, and June 27, 1999, and the results of operations for the
three months ended September 26, 1999, and September 27, 1998, and the
statements of cash flows for the three months then ended. Certain
reclassifications have been made to the condensed consolidated financial
statements for the three months ended September 27, 1998, to conform to the
presentation for the three months ended September 26, 1999. Interim results
for the three months ended September 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:
September 26, June 27,
1999 1999
------------- --------
Raw materials $ 434 $ 805
Finished goods 8,321 10,278
------ -------
$8,755 $11,083
====== =======
3. Earnings per Share
------------------
The Company applies the provision of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Basic net income per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period increased to include, 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:
Three Months Ended
-----------------------------
September 26, September 27,
1999 1998
------------- -------------
Numerator:
Net income $ 6,800 $ 422
======= =======
Denominator:
Denominator for basic net income per
share - weighted average shares outstanding 17,207 12,267
Effect of dilutive securities:
Dilutive options outstanding 1,676 560
------- -------
Denominator for diluted net income per
share - adjusted weighted average shares 18,883 12,827
======= =======
Basic net income per share $ 0.40 $ 0.03
======= =======
Diluted net income per share $ 0.36 $ 0.03
======= =======
5
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
All outstanding options to purchase shares of common stock at September 26,
1999, were included in the computation of diluted net income per share for
the three month period then ended. Options to purchase 549,790 shares of
common stock at prices in excess of $4.75 per share were outstanding at
September 27, 1998, but were not included in the computation of diluted net
income per share for the three month period then ended. These options were
excluded from the computation of diluted net income 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:
September 26, June 27,
1999 1999
------------- --------
Payroll and related costs....... $4,934 $1,849
Warranty and related reserves... 1,278 868
Unearned revenue................ 895 951
Other........................... 806 623
------ ------
$7,913 $4,291
====== ======
5. Common Stock Split
------------------
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, at
the Company's annual stockholders meeting scheduled to be held on November
18, 1999, stockholders of record on October 4, 1999, will be entitled to vote
on an amendment to the Company's Certificate of Incorporation which increases
the number of authorized shares of Common Stock to 120,000,000 and authorizes
a two-for-one 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 decision resulted in, among other
things, the closing of the Company's Puerto Rico manufacturing subsidiary and
closing selected sales offices. As a result of these actions, the Company
anticipated a worldwide reduction of approximately 130 full-time employees
and 45 temporary workers in Puerto Rico. During the quarter ended September
27, 1998, as the Company was completing this consolidation plan, the Company
recognized additional inventory charges related to this consolidation of $626
related to the streamlining of the Company's products and a reduction of
other accrued consolidation charges of $626 as the Company reviewed the
adequacy of its remaining consolidation accrual. When the initial
consolidation charge was taken, management of the Company believed this
inventory would be sold at positive margins. However, as the Company
continued the closure of the manufacturing facility, it determined this
inventory was no longer saleable and these additional reductions in inventory
were recorded. As of June 27, 1999, this consolidation plan was
substantially complete.
7. Commitments and Contingencies
-----------------------------
The Company is currently undergoing an examination by the California
Franchise Tax Board of the Company's 1989, 1990 and 1991 California income
tax returns. It is anticipated that this examination will be completed
during the current fiscal year. The Company is also undergoing examination
by the Internal Revenue Service of Emulex Caribe's 1995 U.S. tax return. The
Company does not anticipate that the examination by the Internal Revenue
Service will be resolved during the current fiscal year. It is management's
belief that the outcome of these examinations will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.
6
Part I. Item 2.
- ----------------
EMULEX CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands)
Forward-Looking Statements
Except for the historical information contained herein, the discussions in this
Form 10-Q in general may contain certain forward-looking statements. In
addition, when used in this Form 10-Q, the words "anticipates," "believes,"
"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 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.
Percentage of Net Revenues
For the Three Months Ended
-----------------------------------
September 26, September 27,
1999 1998
------------- -------------
Net revenues 100.0% 100.0%
----- -----
Cost of sales 55.4 59.4
Cost of sales - inventory charges related to consolidation - 4.4
----- -----
Total cost of sales 55.4 63.8
----- -----
Gross profit 44.6 36.2
----- -----
Operating expenses:
Engineering and development 11.6 18.9
Selling and marketing 8.1 11.6
General and administrative 5.2 6.9
Consolidation charges, net - (4.4)
----- -----
Total operating expenses 24.9 33.0
----- -----
Operating income 19.7 3.2
Nonoperating income 6.4 0.1
----- -----
Income before income taxes 26.1 3.3
Income tax provision 2.6 0.3
----- -----
Net income 23.5% 3.0%
===== =====
7
Net Revenues
Net revenues for the quarter ended September 26, 1999, were $28,896, an increase
of $14,845, or 106 percent, from $14,051 in the comparable quarter of the prior
fiscal year. Net revenues for the quarter consisted of $22,302 from sales to
OEMs, $6,464 from sales sold through distribution channels and $130 from sales
directly to end users. This represents a reduction in sales to end users of
$317, or 71 percent when compared to the quarter ended September 27, 1998. This
decrease in net revenues was offset by an increase in net revenues from sales to
OEMs of $12,003, or 117 percent and an increase in distribution net revenues of
$3,159, or 96 percent.
From a product line perspective, net revenues from the Company's fibre channel
product line for the first quarter of fiscal 2000 were $21,619, or 75 percent of
net revenues, an increase of $16,187, or 298 percent, versus the first quarter
of fiscal 1999. Shipments in this emerging market have continued to be
primarily to domestic OEMs. The Company anticipates that future revenue from
this product line will be a function of continued demand from OEMs which are
currently shipping fibre channel products, launches of new fibre channel-based
systems by the Company's OEMs, additional design wins and increased distribution
sales as this emerging market continues to develop. Net revenues from the
Company's traditional networking product line accounted for $7,277, or 25
percent of net revenues, a decrease of $1,342, or 16 percent, for the quarter,
compared to the same period of the prior fiscal year. This decrease in
traditional networking net revenues was principally due to ongoing maturation of
these products. The Company expects net revenues from network access products to
show continued maturation over this fiscal year.
Although fibre channel represented 75 percent of net revenues for the quarter
ended September 26, 1999, the market is an emerging technology and there can be
no assurance that the Company's products will adequately meet the requirements
of the market, or achieve market acceptance. Because the Company's fibre
channel products are designed to provide both an input/output and a networking
connection between computers and storage devices, the future revenues of the
fibre channel product line depend on the availability of other fibre channel
products not manufactured or sold by the Company. Furthermore, the Company's
fibre channel products are dependent upon components supplied by third parties
for this emerging technology and there can be no assurance that these components
will be available at a competitive price and in the quantities desired, or if
available, will function as needed.
Gross Profit
For the quarter ended September 26, 1999, gross profit increased $7,815, or 154
percent, to $12,897 compared to $5,082 in the same quarter of the previous
fiscal year. During the first quarter of fiscal 1999, inventory charges related
to consolidation of $626 were recorded in cost of sales. When the initial
consolidation charge was taken in the third quarter of 1998, which is discussed
in more detail below, we believed this inventory would be sold at positive
margins; however, as we continued the closure of the Company's manufacturing
facility, we determined this inventory was no longer saleable and these
additional reductions in inventory were recorded. Gross profit as a percentage
of net revenues increased to 45 percent for the quarter, an increase of nine
percentage points from 36 percent in the comparable quarter of last fiscal year.
Excluding the inventory charges previously discussed, gross margins for the
comparable quarter of last fiscal year would have been 41 percent. This
improvement in gross profit as a percentage of net revenues is primarily due to
a continuing shift in product mix towards higher margin products.
Operating Expenses
Operating expenses for the three months ended September 26, 1999, were $7,195,
an increase of $2,570, or 56 percent, compared to $4,625 for the same period of
the prior fiscal year. Included within operating expenses for the three month
period ended September 27, 1998, is a reduction of other accrued consolidation
charges of $626 based on a review of the adequacy of the Company's remaining
consolidation accrual discussed in the next paragraph. Excluding this $626
reduction in the prior fiscal year, operating expenses for the three months
ended September 26, 1999, increased by $1,944, or 37 percent. Engineering and
development expenses increased $689, or 26 percent, to $3,350 for the first
quarter of fiscal 2000 compared to $2,661 in the same quarter of fiscal 1999 as
the Company increased its investment in its fibre channel product development.
Selling and marketing expenses increased by $713, or 44 percent, to $2,340 for
the quarter ended September 26, 1999, in contrast to $1,627 for the
corresponding period of the prior year. This increase was primarily due to
increased salaries and commissions associated with the higher revenues and, to a
lesser extent, increased promotion and advertising. Additionally, general and
administrative expenses increased by $542, or 56 percent, to $1,505 for the
first quarter of fiscal 2000 compared to
8
$963 in the equivalent quarter of the prior fiscal year primarily due to higher
compensation associated with the higher revenues.
On March 25, 1998, the Company announced plans to outsource the manufacturing of
its product lines to K*TEC Electronics, a contract manufacturing division of
Kent Electronics with advanced manufacturing capabilities which the Company
requires for its new generation fibre channel designs. The Company made this
strategic decision in an attempt to reduce required future capital expenditures
and production costs, as well as to take advantage of K*TEC Electronics'
consolidated purchasing power and materials management capabilities. This
announcement resulted, among other things, in the decision to close the
Company's Puerto Rico manufacturing subsidiary and to close selected sales
offices. During the quarter ended September 27, 1998, as the Company continued
this consolidation plan, the Company recorded a reduction of other accrued
consolidation charges of $626 in operating expenses based on a review of the
adequacy of its remaining consolidation accrual. Also in conjunction with the
closure of the Company's Puerto Rico manufacturing operations, during the
quarter ended September 27, 1998, the Company recorded additional reductions in
inventory related to the streamlining of its product lines of $626 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 for the quarter ended September 26, 1999, increased $1,842
to $1,854 compared to $12 for the quarter ended September 27, 1998. This
increase in nonoperating income was due primarily to interest income associated
with the investments of the funds the Company raised during its follow-on
offering in the fourth quarter of fiscal 1999.
Income Taxes
For the quarters ended September 26, 1999, and September 27, 1998, the Company
recorded a 10 percent tax provision on its pre-tax net income in the amount of
$756 and $47, respectively. The Company's low effective tax rate is primarily
due to utilization 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 Internal Revenue Codes. Through its response to
the Ruling Request, the Secretary of the Treasury of Puerto Rico has agreed that
neither Emulex Corporation nor Emulex Caribe will recognize a gain or loss as a
result of the liquidation. The Company also received approval of the Closing
Agreement submitted to the Secretary of the Treasury of Puerto Rico. 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 of the Company's 1989, 1990 and 1991 California income tax returns.
It is anticipated that this examination will be completed during the current
fiscal year. The Company is also undergoing examination by the Internal Revenue
Service of Emulex Caribe's 1995 U.S. tax return. The Company does not
anticipate that the examination by the Internal Revenue Service will be resolved
during the current fiscal year. It is management's belief that the outcome of
these
9
examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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 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. 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 has completed a survey 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 has
received satisfactory responses to these surveys and will continue to monitor
the Year 2000 plans of our suppliers and customers through the coming event.
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 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;
however, the Company will continue to monitor these areas.
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 $6,481 during the first
quarter of fiscal 2000 from $22,284 to $15,803 as of September 26, 1999.
Operating activities, which include changes in working capital balances,
provided $8,941 of cash and cash equivalents for the quarter compared to
providing $1,871 of cash and cash equivalents during the first quarter of the
prior fiscal year. Investing activities, which include purchases of investments
of $250,258, maturities of investments of $233,499, as well as the acquisition
and disposition of property and equipment, used $17,046 in the current quarter
compared to generating $231 in the comparable period of fiscal 1999. Net
financing activities, which were limited to payments under capital lease
obligations and proceeds from the exercise of stock options, provided $1,624 of
cash and cash equivalents during the first quarter of fiscal 2000 compared to
generating $7 of cash and cash equivalents in the same period of the prior year.
10
In addition to its cash balances, the Company has a line of credit of up to $10
million with Silicon Valley Bank which is available through January 2000, unless
extended by the parties. The agreement allows the Company to borrow at the
bank's prime rate (7.75 percent at September 26, 1999) plus one-half percent.
The Company last utilized the line of credit in the quarter ended September 28,
1997. There were no borrowings outstanding under this line at September 26,
1999, or June 27, 1999. Under the terms of the line of credit, the Company has
granted Silicon Valley Bank a security interest in its accounts receivable,
inventories, equipment and other property. The line of credit requires the
Company to satisfy certain financial and other covenants and conditions,
including prescribed levels of tangible net worth, profitability and liquidity.
In the event the Company fails to comply with any financial or other covenant in
its loan agreement, the line of credit could become unavailable to the Company.
In addition, after borrowings have been made under the line of credit, a failure
to continue to satisfy such covenants would constitute an event of default,
giving rise to the various remedies available to a secured lender. As of
September 26, 1999, the Company was in compliance with all covenants of the line
of credit; however, there can be no assurance that the Company will continue to
satisfy the financial and other covenants and conditions of the line of credit
or that the line of credit will continue to be available to meet the Company's
liquidity requirements.
The Company believes that its existing cash, cash equivalents and investment
balances, facilities and equipment leases, anticipated cash flows from operating
activities and available borrowings under its line of credit will be sufficient
to support its working capital needs and capital expenditure requirements for at
lease 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 11 of the last 12
quarters through the quarter ended September 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;
. 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;
11
. Activities of, and acquisitions by, our competitors;
. Changes in technology, industry standards or consumer preferences;
. 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 which contribute to the variability of our sales as
well. We generally ship products quickly after we receive orders, meaning that
we do not typically have a significant backlog of unfilled orders. As a result,
our revenues in a given quarter depend substantially on orders booked in that
quarter. Also, we typically generate 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.
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 75 percent of net
revenues in the first quarter ended September 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
12
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 limited number 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 period ended September 26, 1999, sales to our top customer, Compaq,
represented 26 percent of our net revenues. Additionally, sales to IBM and Data
General accounted for 17 percent and 12 percent of our net revenues
respectively. Sales to IBM represented 18 percent of net revenues in the prior
year's comparable period. Sales to our top five customers accounted for 71
percent of net revenues for the quarter ended September 26, 1999, and for 46
percent of net revenues for the prior year's comparable period. 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.
The failure of one or more of our significant customers to timely make 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
period ended September 26, 1999, we derived approximately 77 percent of our net
revenues from OEMs and 22 percent from distributors. In the comparable period
of fiscal 1998, we derived approximately 73 percent of our net revenues from
OEMs and 24 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
and 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.
13
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 which use our technology
would have a material adverse effect on our business, results of operations and
financial condition.
A significant percentage of our revenues are from product lines which 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 25 percent of our
net revenues for the first quarter ended September 26, 1999. 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
products, particularly the new and evolving fibre channel market. 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.
14
In the fibre channel market, we compete primarily against Gadzoox, Hewlett-
Packard, Interphase, JNI, LSI Logic, QLogic, Vixel and several smaller companies
to a lesser extent. 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;
. 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;
15
. 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 and Hewlett-Packard are currently our sole
suppliers for components that enable our fibre channel products to connect to
networks. Motorola is currently our sole supplier of memory devices
incorporated into our fibre channel products. In addition, we rely on LSI
Logic, Chip Express 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, 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 also believe that we
will not be required to obtain licenses of technology owned by other parties.
However, we occasionally receive
16
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. 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 quarter ended September 26, 1999, sales in the United States
accounted for 71 percent of our net revenues, sales in Europe accounted for 27
percent of our net revenues, and sales in the Pacific Rim countries accounted
for 2 percent of our net revenues. During the comparable quarter in the prior
fiscal year, sales in the United States accounted for 69 percent of net
revenues, sales in Europe accounted for 25 percent of our net revenues, and
sales in the Pacific Rim countries accounted for 6 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;
. The costs and risks of localizing products for foreign countries;
. Restrictions on the export of technology;
. Financial and stock market dislocations;
. 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.
17
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 upcoming 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.
We committed resources to identify and correct potential Year 2000 issues, both
in our products and in our review and tests of our internal computer systems and
applications. We have 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,
we do not anticipate any material expenditures in the future related to these
issues. We have completed a survey of our 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 providing goods
and services to us. We have received satisfactory responses to these surveys
and will continue to monitor the Year 2000 plans of our suppliers and customers
through the coming event. We believe that the most likely worst-case scenarios
related to the Year 2000 issue that we 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 slow
down 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 our business,
results of operations, and financial condition. Therefore, as a contingency
plan to ensure our ability to provide products and services to our customers, we
will take the additional precaution of maintaining a finished goods inventory at
calendar year end sufficient to cover shipments for 30 to 45 days, and will
maintain an additional store of key raw materials for the manufacture of our
products. The Company also monitors the inventory levels of our customers to
determine if an inventory build up is occurring. We have also asked key
suppliers to increase their inventory levels of critical materials and
components to act as a further safeguard.
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 delays in our efforts to address the Year 2000 issue or we could
fail to fully identify all Year 2000 issues in our systems, equipment, or
processes, or those of third parties which affect us. Such delays or failures
could have a material adverse effect on our business, results of operations, and
financial condition.
18
We may need additional capital in the future and such additional financing may
not be available.
We currently anticipate that our available cash resources and financing
available through our credit facility, 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;
. Changes in analysts' earnings estimates;
. Pricing pressures;
19
. 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. In addition, the terms of our credit facility
prohibit us from paying dividends on our capital stock.
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 September 26, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $132,139.
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 September 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.
20
Part II. Other Information
- --------------------------
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 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 10.1 Press Release related to August 30, 1999, stock split.
Exhibit 10.2 Press Release of October 12, 1999, regarding proposed stock
split to be voted on at annual stockholders meeting on
November 18, 1999.
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: November 10, 1999
EMULEX CORPORATION
By: /s/ PAUL F. FOLINO
-------------------
Paul F. Folino
President and Chief Executive Officer
By: /s/ MICHAEL J. ROCKENBACH
--------------------------
Michael J. Rockenbach
Vice President and
Chief Financial Officer
(Principal Financial & Chief Accounting Officer)
22