Financial Update: NEC, Hitachi Invest In DRAM Plant. Maxoptix Closes Round Of Financing. Brocade Announces Revenue Growth.

December 1, 2000

SHORT TAKES

NEC, HITACHI TO INVEST $1.45 BILLION IN DRAM PLANT

Tokyo, JAPAN — Japanese electronics giants NEC Corp and Hitachi Ltd said on Tuesday they will invest 160 billion yen ($1.45 billion) to build a memory chip plant with ambitions to take the dominant share of the world market. The factory to produce advanced dynamic random access memory (DRAM) chips will be built by Elpida Memory Inc, a joint venture between NEC and Hitachi that began operating in April with ambitions to become the world’s leading DRAM maker. The move broadens the alliance of the two Japanese giants into the cost-intensive production field in addition to design and marketing to make them more competitive against foreign rivals. “This investment decision reflects the rapid success of the joint venture,” Kanji Sugihara, NEC executive vice president told a news conference. “Elpida must have its own factory to avoid lagging behind rivals in making these advanced products,” he said, adding that the company has already successfully developed next-generation chips ahead of competitors by taking advantage of the technology available from both parent firms. Elpida plans to raise the funds to build the new factory through borrowing from banks and other methods, while NEC and Hitachi will invest 20 billion yen to back up the chip joint venture in early 2001/02 (April/March).

The parent companies will inject another 30 billion yen of the total 160 billion yen investment later to help Elpida purchase production equipment for the new plant. “We aim to raise our share in the global DRAM market to 20 percent from the current 13 percent… by building our own factories,” said Kenji Tokuyama, president of Elpida Memory. The new plant, due to start producing 256-megabit DRAM chips using 0.13-micron process technology, the smallest at that memory density, in the first half of 2002, will be based in the western Japan city of Hiroshima, where NEC already has a DRAM factory. Maximum capacity will reach 20,000 wafers per month, the equivalent of 48,000 wafers at the conventional 200 mm diameter. Analysts welcomed the move, long expected since the firms announced their design alliance. “This will make Elpida more price-competitive and give it higher credibility among clients. Elpida has a good chance to boost its share of the global DRAM market in a few years,” UBS Warburg analyst Yoshiharu Izumi said.

VA LINUX MEETS REDUCED ESTIMATES

VA Linux Systems met analysts’ reduced estimates in its first quarter but still posted a loss of $7 million, or 15 cents a share, on sales of $56.1 million. First Call Corp. consensus expected the Linux-based software developer to lose 15 cents a share. Ahead of the earnings report, VA Linux (Nasdaq: LNUX) shares closed off 63 cents to a 52-week low of $12. Analysts originally pegged VA Linux for a loss of 9 cents a share in the quarter but lowered their estimates earlier this quarter when the company warned that sluggish demand from new dot-com customers would result in lower sales and wider losses.

“While top and bottom-line results did not meet our expectations for the quarter, we remain optimistic about our prospects for growth in the future,” said CEO Larry Augustin in a prepared release. “We remain committed to profitability, excluding non-cash charges, no later than the end of calendar 2001 and we anticipate revenue for fiscal 2001 to be approximately 2.25 times fiscal 2000 revenue.” The $56.1 million in sales represents a 278 percent improvement from the year-ago quarter when it lost $7.2 million, or 27 cents a share, on sales of $14.8 million. In the quarter, it posted a net loss of $51.3 million, or $1.12 a share compared to a loss of $10.1 million, or $2 a share, in the year-ago quarter. Last quarter, VA Linux topped analysts” estimates when it posted a loss of $4 million, or 10 cents a share, on sales of $50.7 million. The stock moved as high as $320 a share in December before closing at an all-time low last Thursday.

MAXOPTIX CLOSES SECOND ROUND OF FINANCING

Fremont, CALIF. — Maxoptix Corp., a technology leader of optical storage solutions, announced that it has completed a second round of funding totaling more than $18 million. The company has now secured more than $30 million in two rounds of funding. The lead investors for this round of funding include Smart Technology Ventures III SBIC with $4 million, Hunt Ventures L.P. with nearly $1 million, Vahit Yazici with $2.6 million, H.T. Ardinger Jr. with $7 million, and Lafe Holdings Limited with $2 million. Perhaps most significant on the list, said Gary D. Potts, Maxoptix President and CEO, is the investment from Hong Kong-based Lafe Holdings, a development partner with Maxoptix on the new Optical Super Density (OSD(TM)) technology. Lafe is the leading supplier of recording heads for Super DLT tape drives, and is producing the innovative new Far Field Recording head technology for the OSD drives. Further demonstrating Lafe’s support for the technology is the fact that Lafe is funding the development of the new optical head technology internally.

“The investment community has sent a strong signal of endorsement of the outstanding executive team we have assembled, as well as the technology roadmap we have established with OSD,” said Potts. “The investment by Lafe is especially meaningful, as it demonstrates their absolute commitment to Maxoptix and OSD.” According to Potts, the new investments will be used to complete the final development phase of OSD technology, which is scheduled for first customer shipments in the third quarter of 2001, more than 18 months ahead of the schedule announced by others for ultra-high capacity optical formats.

PROCOM ANNOUNCES FIRST QUARTER RESULTS

Irvine, CALIF. — Procom Technology Inc., provider of data storage and access appliances and pioneer in network attached storage (NAS), reported that revenue for the first quarter ended Oct. 31, 2000 was $13.3 million, compared to revenue of $14.2 million in the immediately prior quarter and revenue of $18.9 million for the first quarter of fiscal 1999. Net loss for the quarter totaled $1.1 million, or $0.09 per share, compared to a net loss of $1.2 million, or $0.11 per share for the July 2000 quarter and a net loss of $1.6 million, or $0.14 per share for the same quarter one year ago. Sales of network attached storage products continued to climb, increasing 15 percent quarter-over-quarter to $7.9 million, from $6.9 million in the fourth quarter of fiscal 2000, and up 172 percent over NAS sales of $2.9 million in the first quarter of last year. NAS sales now account for 60 percent of total Procom revenue.

Sales of non-OEM NetFORCE products (Procom’s flagship NAS line) grew by 53 percent, from $3.6 million in the immediately prior quarter to $5.5 million in the first quarter of fiscal 2001. NetFORCE sales in the first quarter of fiscal 2000 were $960,000. In commenting on first quarter results, Alex Razmjoo, Procom president and CEO said, “We are very pleased with the increase in our NAS business, especially the excellent revenue growth of our NetFORCE filer products. Overall demand for Procom’s NAS appliances continues to expand, and – by successfully executing our strategy toward an exclusive focus on network attached storage – we are well on our way to profitability.” With increasing revenue contribution from higher margin NAS products, gross margins for the first quarter reached 36.8 percent as compared to gross margins of 32.8 percent for the immediately prior quarter and 23.3 percent for the first quarter of fiscal 2000. During the quarter, research and development expenses were $1.8 million, or 13.4 percent of net sales. A large amount of R&D dollars were expended in the first quarter toward the development of Procom’s recently introduced Fibre channel-based NetFORCE 3000 series.

BROCADE ANNOUNCES RECORD REVENUE GROWTH

San Jose, CALIF. — Brocade Communications Systems, Inc., a leading provider of Storage Area Networking infrastructure, reported record revenue and earnings for the fourth quarter of fiscal 2000 (Q4 00). For Q4 00, net revenues were $132.1 million, an increase of $102.0 million from the $30.1 million reported in the fourth quarter of fiscal 1999 (Q4 99). Brocade’s fiscal year 2000 (FY 00) revenues were $329.0 million, which is an increase of $260.4 million from the prior year. Net income for Q4 00 was $27.2 million, a $23.7 million improvement over the same quarter a year ago. For FY 00, net income was $67.9 million, up from the $2.5 million for FY 99. Diluted net income per share for Q4 00 was $0.22, a $0.19 improvement over the same quarter a year ago. For FY 00, diluted earnings per share were $0.56, up from the $0.02 reported in FY 99.

Operating income as a percentage of net revenues in Q4 00 increased to 26.6 percent of revenues, up from 26.1 percent in Q3 00. This marks the sixth consecutive quarter of increasing operating income as a percentage of revenues. In Q4 00 Brocade generated $25.4 million in cash after purchasing $19.7 in capital equipment and making $5.3 million in minority investments. For FY 00, Brocade generated $65.7 million in cash, after investing $40.7 million in capital equipment and making $14.3 million in minority equity investments. Brocade enters fiscal year 2001 with $155.0 million in cash. For Q4 00, accounts receivable days sales outstanding was 50 days and the annualized return on assets exceeded 38 percent and annualized return on equity was approximately 50 percent.

In addition, Brocade announced a two-for-one split of Brocade Common Stock in the form of a stock dividend. Stockholders of record at the close of business on December 11, 2000 will receive one additional share for each one share of Common Stock held on that date. The stock will begin trading on a split-adjusted basis on December 22, 2000. Greg Reyes, Brocade President and CEO, commented: “2000 has been a phenomenal year in which storage area networking came of age and secured a position as one of the most strategic IT investments that companies will make in this decade. Brocade’s outstanding results for fiscal year 2000 underscore our leadership and the role that are customers are playing in driving each phase of the evolution of the market for storage area networks (SANs.) During 2000, we furthered our competitive lead in the marketplace as we continued to execute on all cylinders, delivering best-in-class products to allow our customers to deploy the world’s largest SANs, move block data over increasingly longer distance, and create a networking platform to simplify the administration, management and movement of data.”

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