<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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)
---------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.20 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of class)
---------------
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of September 17, 1998, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $65,205,583.
As of September 17, 1998, the registrant had 6,136,996 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (items 10, 11, 12 and 13) is incorporated
by reference to portions of the registrant's definitive proxy statement for the
1997 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1998 fiscal year.
================================================================================
<PAGE> 2
PART I
Item I. BUSINESS.
All references to years refer to the Company's fiscal years ended June 28, 1998,
June 29, 1997 and June 30, 1996, as applicable, unless the calendar year is
specified. References to dollar amounts are in thousands, except share data,
unless otherwise specified.
INTRODUCTION
Emulex Corporation is a leading designer and supplier of high-performance
network connectivity products including fibre channel, printer servers and
network access products. The Company's hardware and software-based networking
solutions improve communication in computer networks and enhance data flow
between computers and peripherals. Many of the Company's networking products are
based upon proprietary semiconductors designed by Emulex to maximize performance
and simultaneously reduce costs. Emulex utilizes its strengths in gigabit
networking, in-house design of application specific integrated circuits
("ASICs"), and development of local area network/wide area network ("LAN/WAN")
multiple protocol and interface communication technologies to secure original
equipment manufacturer ("OEM") design wins and end user installations. The
Company primarily markets directly to OEMs and through two-tier distribution,
where the end user is typically the operator of a large network. In 1998,
approximately 71 percent of Emulex's revenue was derived from OEMs.
Emulex was organized as a California corporation in 1979. In 1987 Emulex changed
its state of incorporation from California to Delaware by the formation of a
Delaware corporation (the "Registrant"), which acquired all of the stock of the
California corporation. The California corporation continues to operate as a
wholly-owned subsidiary of the Delaware corporation. Unless the context
indicates otherwise, the "Company" and "Emulex" each refer to the Registrant and
its subsidiaries.
In 1994 Emulex completed a major transition departing from its historic storage
controller business and spinning off its wholly owned Small Computer Systems
Interface ("SCSI") subsidiary, QLogic Corporation. In May of 1993 Paul Folino
was elected president and CEO of Emulex. During the past five years a number of
changes in the management team have been made including most recently a new vice
president of research and development in 1995, a new chief financial officer in
1998, and a new vice president of worldwide sales in 1998. The management team
has streamlined operations by reducing the number of subsidiary corporations,
narrowing product offerings in mature product lines, and refocusing the
Company's product development and marketing efforts towards networking markets
such as fibre channel and printer servers primarily through relationships with
major OEMs. In 1998 the Company implemented a strategy to improve operating
margins and working capital by outsourcing all of its manufacturing operations
with K*TEC Electronics in Texas (see discussions in Management's Discussion and
Analysis Of Financial Condition And Results Of Operations and in note 1 to the
Consolidated Financial Statements).
INDUSTRY BACKGROUND
The data communications industry encompasses a broad spectrum of technologies
which facilitate the transfer of computer data from one location to another.
These technologies extend from computer to peripheral communications managed by
input/output ("I/O") solutions, to computer communications within a building or
campus environment which typically occur over a local area network ("LAN"), to
computer communications between remote locations, which require wide area
network ("WAN") solutions. While its various technologies and market needs are
diverse, management believes the data communications industry as a whole is
being shaped by three major trends:
The ever-increasing need for higher bandwidth. While microprocessors have made
continual gains in computing capability, I/O channel and LAN speeds have not
kept pace and are increasingly responsible for overall performance constraints.
New technologies such as the American National Standard Institute ("ANSI") Fibre
Channel standard are emerging to relieve this performance bottleneck.
The worldwide growth in remote enterprise access. Enterprise access stems from
the growing interconnection of remote offices and remote users to the central
enterprise. As part of this trend, the dramatic expansion in information
services, financial services, airline reservations and on-line transaction
processing is propelling the need for real-time, mission critical communication
to and from centralized facilities. In addition, the proliferation of laptops,
home PCs and modems, and the drive to enhance the productivity of traveling and
telecommuting workers has led to the need to connect those remote computers to
the corporate LAN with a user-friendly remote access solution.
Increasing demand for flexible access to computing resources. Computing
resources, such as printers, storage devices, and other peripheral devices, are
at various stages of being attached directly to the network itself rather than
to a single computer
1
<PAGE> 3
or server. Direct attachment improves the overall efficiency of the network by
enabling peripherals to be placed anywhere on the network, thereby increasing
availability of shared resources to multiple users, eliminating bandwidth
bottlenecks imposed by port or channel interfaces and reducing server workload.
PRODUCTS
Emulex designs, manufactures, and markets three primary product families:
high-speed fibre channel products, printer servers and network access servers.
Fibre Channel
The Company's host adapter and hub products for the emerging fibre market
provide a scaleable high bandwidth communications connection among computer
systems and storage area networks ("SANs") at transmission speeds of up to one
gigabit per second, servicing both LAN and I/O requirements. By leveraging a
combination of its networking expertise, historical background in storage
interfaces, and long term relationships with OEMs, the Company believes it has
emerged as a leader in high speed fibre channel communication products. Through
June 28, 1998, Emulex had been awarded over 60 design wins with high-end
computer server and storage OEMs such as IBM Corporation, Data General, Sequent
Computer Systems, Hitachi, NEC and Compaq. The Company was one of the developers
of the ANSI standards applicable to fibre channel and has also joined the
Gigabit Ethernet Alliance associated with the evolving Gigabit Ethernet
standard, a developing high speed LAN standard partially based on the fibre
channel specifications.
Emulex believes that it has established a leadership role in fibre channel
product development by introducing among other products, the first fibre channel
adapter with an integrated reduced instruction-set computing ("RISC") processor,
which enables servers to offload the host networking or I/O workload and
increase system performance. Emulex also developed the first Peripheral
Component Interface ("PCI") host adapter that supported all three fibre channel
standard classes and topologies, which enables users to transparently upgrade
from a low-end arbitrated loop to a high-end switched fabric fibre channel
environment encompassing both I/O and LAN applications. Most recently, the
Company introduced the industry's first network managed digital hub which
eliminates inherent performance issues related to earlier analog hubs in the
arbitrated loop environment. Since the introduction of the Company's first fibre
channel products in the fourth quarter of fiscal 1995, the Company has expanded
its fibre channel products to approximately $18,944, or 32 percent of net
revenues, in the year ended June 28,1998.
Fibre channel is a communication standard developed by ANSI which is backed by
more than 120 companies, including Hewlett-Packard, Seagate Technologies and Sun
Microsystems. It is designed to allow communication at speeds of up to four
gigabits per second and accelerates I/O channel communications between computers
and peripherals while also serving high-speed LAN requirements.
The market for fibre channel host adapters and hubs is projected by two leading
market research firms to grow to approximately $2.5 billion by the Year 2000.
The growing trend toward increasingly distributed computing environments, as
well as the increased demand for higher storage capacity, has stimulated demand
for fibre channel products due to fibre channel's high bandwidth characteristics
and its ability to accommodate large numbers of attached computers and storage
systems communicating over long distances. The fibre channel standard is also
designed to address emerging hybrid LAN/IO applications such as clustering, in
which multiple servers and storage systems share an application's workload, and
SANs, in which multiple servers are able to access multiple storage systems on a
fibre channel network. Fibre channel products currently are incorporated
primarily in high-end storage applications such as RAID (redundant array of
inexpensive disks). In response to this early market demand, the Company's
initial products have been primarily deployed in high-end storage applications.
However, due to the robust architecture of its ASIC solution, the Company
believes that its product lines can be adapted to a broad range of performance
applications which will enable the Company to take advantage of other
opportunities within the fibre channel market as they emerge.
Printer Servers
Emulex's family of printer server products improve performance by attaching
printers directly to the LAN, instead of to a file server. Emulex believes it is
a leading independent supplier of internal printer servers to OEMs and is a
leading supplier of printer servers to commercial end users. As a larger
percentage of printers are shipped and installed in network-ready
configurations, the printer server market has been shifting toward OEM
solutions, and the Company has emphasized this sector. The Company's printer
servers are now embedded in over 25 network printers shipping into the market
from 10 different OEM manufacturers. Currently, the Company provides printer
servers to several top printer OEMs including Canon, IBM and Xerox. According to
International Data Corporation, printer server unit shipments are expected to
grow at approximately a 26% compounded annual growth rate through the year 2001,
and total market revenues are expected to
2
<PAGE> 4
reach approximately $2.0 billion by such date. The Company believes that
approximately 30% of the total current printer server market is available to
independent third party suppliers such as the Company.
Network Access
Emulex's network access server products provide connectivity between resources
across both local and wide area networks. The two major product lines within the
network access family are WAN adapters and communications servers. Emulex
supplies WAN adapters for a number of OEM programs, and has shipped over 3
million ports worldwide to date. WAN adapters are board-level products that can
be installed in a computer to provide a communications link. Traditionally,
Emulex's WAN adapters have primarily focused on wide area networking
requirements for the PC platform. In 1996, the Company introduced a family of
PCI WAN adapters that addresses the networking requirements of workstations and
UNIX servers.
The Company's network access products consist primarily of WAN adapters that
off-load remote communications processing from host computers and, to a lesser
extent, communications servers that allow computers and peripherals to access
local networks. While the Company continues to offer network access products and
such products continue to generate a significant portion of the Company's
revenues and profits, it has focused its resources on the continued development
and expansion of its fibre channel and printer server product lines. Due to the
maturation of certain of the Company's network access products, the Company
expects that its network access product line will account for a decreasing
portion of its revenues and profits in future years.
PATENTS AND LICENSES
The Company has applied and plans to continue to apply for patents and to
copyright its trademarks both in the United States and in foreign countries when
it seems to be advantageous to do so. However, the Company believes that there
can be no assurances that patents or copyrights will be issued or that any
patent or copyright issued will provide significant protection or could be
successfully defended.
As is the case with many companies in the electronics industry, it may be
desirable in the future for the Company to obtain technology licenses from other
companies. The Company has occasionally received notices of claimed infringement
of intellectual property rights and may receive additional such claims in the
future. The Company evaluates all such claims and, if necessary, will seek to
obtain appropriate licenses. There can be no assurance that any such licenses,
if required, will be available on acceptable terms. Failure to obtain such
patents or licenses in the future could have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
SELLING AND MARKETING
The Company markets its products worldwide to OEMs, end users and through
distribution which includes Value Added Resellers ("VARs"), systems integrators,
industrial distributors and resellers. Emulex offers repair services through two
third-party organizations, one in the United Kingdom and one in the United
States. At the end of 1998, the domestic sales organization included 10 sales
and support staff, including a vice president, which are located in Costa Mesa
and 7 satellite offices. At the end of 1998, the international sales
organization included 8 sales and support staff located in 2 international sales
offices in Europe.
The Company's export revenues were 35, 45 and 40 percent of net revenues for
1998, 1997 and 1996, respectively. The majority of export shipments are to the
European marketplace.
Although the Company has broadened its line of product offerings in an attempt
to limit fluctuations in its quarterly results of operations, the Company's
markets are both cyclical and seasonal in nature which may cause the Company's
quarterly results of operations to vary significantly.
In 1998, Sequent Computer Systems and IBM Corporation accounted for 12 and 11
percent of net revenues, respectively. Furthermore, the Company's top five
customers accounted for 41 percent of net revenues in 1998. Reuters and Sequent
Computer Systems accounted for 13 and 10 percent of net revenues in 1997,
respectively. IBM Corporation accounted for 15 percent of net revenues in 1996.
The Company derived approximately 71, 64 and 39 percent of its net revenues from
sales to OEMs in 1998, 1997 and 1996, respectively. Emulex's operating results
could be adversely affected if sales to one or more of such customers
significantly decline or if any one of these customers develop alternative
sources for Emulex's products.
3
<PAGE> 5
ORDER BACKLOG
At June 28, 1998, the Company had unshipped product orders of approximately
$3,503 compared with approximately $2,110 at June 29, 1997. At year-end, all
backlog was scheduled for delivery within six months or less with the exception
of orders pending release dates. Orders are subject to rescheduling and/or
cancellation with little or no penalty. Purchase order release lead times depend
upon the scheduling practices of the individual customer, and the rate of
booking new orders fluctuates from month to month. Therefore, the level of
backlog at any one time is not necessarily indicative of trends in the Company's
business.
ENGINEERING AND DEVELOPMENT
At June 28, 1998, the Company employed approximately 72 engineers, other
technicians and support personnel engaged in the development of new products and
the improvement of existing products. Engineering and development expenses were
$11,071, $10,006 and $11,387 for 1998, 1997 and 1996, respectively.
COMPETITION
Primary competition for the Company's fibre channel products includes
Hewlett-Packard ("HP"), QLogic Corporation, LSI Logic's Symbios product line,
Vixel, Gadzoox Microsystems and a number of smaller companies. The Company's
primary competitor for its HP-compatible network printing products is HP which
offers its own network printer server, as well as several other manufacturers in
the non-HP printer marketplace including Lexmark and Intel. The Company's
high-performance communications server products compete with a number of
companies, including Compaq Computer Corporation (formerly Digital Equipment
Corporation). Competition for the Company's WAN adapters is primarily IBM, which
holds the largest market share. The Company believes it competes successfully
due to its broad product line, which includes low cost, high value products, as
well as high-performance products. The Company operates in a volatile and
dynamic market, and more aggressive market and product positioning by certain of
these significantly larger competitors would have a material adverse effect on
the Company's business, results of operations, financial condition and/or
liquidity.
MANUFACTURING AND SUPPLIES
In 1998, the Company implemented a strategy to outsource the manufacture of all
of its products with a third party, K*TEC Electronics. The Company's products
consist primarily of electronic component parts assembled on internally designed
printed circuit boards which are sold as board-level products. Most component
parts can be purchased from two or more sources. However, certain other
component parts, which represent a small percentage of the overall number of
parts used by the Company, can only be obtained from single sources. In
addition, the Company designs its own semiconductors which are embedded in its
printer server and fibre channel products, and these are manufactured by third
party semiconductor foundries. In addition to hardware, the Company designs
software to provide functionality to its hardware products. The Company also
licenses software from third party providers for use with its fibre channel and
PCWAN products. Most of these providers are the sole source for this software.
An inability or an unwillingness on the part of any of these suppliers to
provide the Company, or its contract manufacturer, with the quality and quantity
of products, parts or software that it needs in a timely fashion could have an
adverse impact on the Company's ability to supply products in accordance with
customer requirements. Both the Company's software and the third party software
are sold primarily as embedded programs within the hardware products, but may be
purchased separately as a software-only update for the Company's products.
K*TEC Electronics' SMT Division, the Company's contract manufacturer, provides a
state-of-the-art continuous flow production line featuring Ball Grid Array
capability and in-line testing for the manufacture of the Company's products.
The assembly operations required by the Company's products are typical of the
electronics industry and no unusual methods, procedures or equipment are
required. The sophisticated nature of the products, in most cases, requires
extensive testing by specialized test devices operated by skilled personnel.
This testing is provided by K*TEC Electronics; however, the Company also
maintains an internal test engineering group for continuing support of test
operations. At June 28, 1998, the Company had 58 manufacturing employees which
included 53 permanent and 5 temporary employees, primarily at its manufacturing
facility in Puerto Rico. As the Company completes its transition to contract
manufacturing and closes its manufacturing facility in Puerto Rico, 37 permanent
and 5 temporary employees of the 58 manufacturing employees the Company had at
year-end will be terminated.
4
<PAGE> 6
EMPLOYEES
The Company had 193 employees at June 28, 1998, including 188 with permanent
status and 5 temporaries, compared to 280 at June 29, 1997. This decrease is
primarily attributable to the manufacturing transition discussed below. None of
the Company's employees are represented by a labor union.
During the quarter ended March 29, 1998, the Company initiated a program to
outsource the manufacturing of all of its product lines to K*TEC Electronics, a
state-of-the-art contract manufacturer 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. In conjunction with this transition to subcontracted
manufacturing, the Company plans to close its Puerto Rican manufacturing
facility, streamline its offerings of some of the Company's more mature
products, primarily in the network access product lines, and close selected
domestic sales offices. The Company has recorded consolidation charges of
$10,646 in 1998 related to the planned closure of its manufacturing plant and
the associated streamlining of its product lines. The Company anticipates a
total worldwide reduction of approximately 130 full-time employees, or 48% of
the workforce, and 45 temporary workers in Puerto Rico when this transition is
complete.
RISK FACTORS
HISTORY OF LOSSES; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company incurred a net loss of $12,755 for the quarter ended March 29, 1998,
and $10,838 for the year ended June 28, 1998, respectively. Fiscal 1998 included
$1,899 of incremental inventory reserves and $10,646 of consolidation charges in
conjunction with the planned closure of the Company's Puerto Rican manufacturing
operations. While the Company generated net income for six of the last seven
quarters, there can be no assurances that revenues will remain at current levels
or improve or that the Company would be profitable at such revenue levels.
The Company's revenues and results of operations have varied on a quarterly
basis in the past and there can be no assurances that the Company's revenues and
results of operations will not vary significantly in the future. Accordingly,
the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. The Company's revenue 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 individual
transactions; the relatively long sales and deployment cycles for the Company's
products, particularly through its OEM channel; changes in the Company's
operating expenses; the ability of the Company to develop and market new
products; the ability of the Company's contract manufacturer to produce and
distribute the Company's products in a timely fashion; market acceptance of new
products, particularly in the fibre channel market; timing of the introduction
or enhancement of products by the Company, its OEMs or its competitors; the
level of product and price competition; the ability of the Company to expand its
OEM and distributor relationships; activities of and acquisitions by
competitors; changes in printer server, network access and fibre channel
technology and industry standards; changes in the mix of products sold, since
the Company's network access and fibre channel host adapter products typically
have higher margins than the Company's printer server and fibre channel hub
products; changes in the mix of channels through which products are sold; levels
of international sales; seasonality; personnel changes; changes in customer
budgeting cycles; foreign currency exchange rates; and general economic
conditions. As a result of the foregoing or other factors in some future period,
the Company's results of operations, financial condition and/or liquidity could
fail to meet the expectations of public market analysts or investors, and the
price of the Company's common stock could be materially adversely affected.
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 whose purchases 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 shortfall of
demand in relation to the Company's quarterly expectations or any delay of
customer orders would have an immediate and adverse impact on the Company's
quarterly results of operations, financial condition and/or liquidity.
5
<PAGE> 7
Reliance on OEMs, Distributors and Key Customers
In 1998, the Company derived approximately 25 percent of its revenue from
distributors and 71 percent from OEMs. In 1997 and 1996, respectively, the
Company derived approximately 31 percent and 50 percent of its revenues from
distributors and 64 percent and 39 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. There can be no
assurance that the Company will retain its current OEMs or distributors or that
it will be able to recruit additional or replacement OEMs or distributors. The
loss of important distributors or OEMs would adversely affect the Company's
business, results of operations, financial condition and/or liquidity. The
Company negotiates individual agreements with the majority of its OEMs and
distributors. Although these agreements are substantially standardized, due to
the individual negotiations, variances do occur. Furthermore, some of these
agreements may provide for discounts based on expected or actual volumes of
products purchased or resold in a given period and do not require minimum
purchases. Certain of these agreements provide manufacturing rights and access
to source code upon the occurrence of specified conditions or defaults. The
Company expects that certain of its OEMs could in the future develop competitive
products and, if they were to do so, they could decide to terminate their
relationship with the Company. Any reduction or delay in sales of the Company's
products by its OEMs or distributors could have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
In 1998, Sequent Computer Systems and IBM Corporation represented 12 and 11
percent of net revenues, respectively. In 1997, Reuters and Sequent Computer
Systems represented 13 and 10 percent of net revenues, respectively. In 1996,
IBM Corporation represented 15 percent of net revenues. Furthermore, the
Company's top five customers accounted for 41 percent and 44 percent of net
revenues in 1998 and 1997, respectively.
The Company's revenues are significantly dependent upon the ability and
willingness of its OEMs to timely develop and promote products that incorporate
the Company's technology. The ability and willingness of these 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/or 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
Historically, revenues from the Company's top OEM customers have accounted for a
significant portion of net revenues. In 1998 and 1997, the Company's top five
OEM customers accounted for 41 percent and 40 percent of the Company's net
revenues, respectively. 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 period to period 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. 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. The Company also is subject to credit risk
associated with the concentration of its accounts receivable from these OEMs.
Any loss or significant decrease in the Company's current OEMs or any failure of
the Company to replace its existing OEMs, or any delay in or failure to receive
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.
Dependence on Emerging Fibre Channel Market and Acceptance of
Fibre Channel Standard
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, is rapidly evolving and is attracting an increasing
number of market entrants. The Company's investment in fibre channel designs
represented over 70% of the Company's engineering and development expenditures
for 1998. The Company's future success in the fibre channel market will depend
to a significant degree upon broad market acceptance of fibre channel
technology. Competing or alternative technologies, including Gigabit Ethernet
and SCSI, are being or are likely in the future to be promoted by current and
potential competitors of the
6
<PAGE> 8
Company, some of which have well-established relationships with current and
potential customers of the Company, extensive knowledge of the markets served by
the Company, better name recognition and more extensive development, sales and
marketing resources than the Company. The Company's success will be dependent in
part on the ability of the Company's OEM customers, as well as the Company, 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. While the Company has
secured numerous design wins for its fibre channel products from its OEM
customers, nearly all of these customers are currently developing systems that
incorporate the Company's products, and only a limited number of OEM customers
have shipped products that incorporate the Company's fibre channel products. To
the extent these customers are unable to or otherwise do not deploy or ship
systems that incorporate the Company's products, or if these systems are not
commercially successful, this would have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
The Company believes the fibre channel market will continue to expand, and that
the Company's investment in the fibre channel market represents a significant
portion of the Company's opportunities for revenue growth and profitability in
the future. However, there can be no assurance that customers will choose the
Company's technology for use, or that fibre channel products will gain market
acceptance. If the fibre channel market fails to develop, develops more slowly
than anticipated or attracts competitors (as discussed below), or if the
Company's products do not achieve market acceptance, the Company's business,
results of operations, financial condition and/or liquidity would be materially
adversely affected.
Competition
The Company's products are targeted at the fibre channel, printer server and
network access markets. 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. In
the fibre channel market, the Company primarily competes against Hewlett
Packard, QLogic Corporation, LSI Logic's Symbios product line, Vixel, Gadzoox
Microsystems and to a lesser extent against several smaller companies. In the
printer server market, the Company competes directly against a number of smaller
companies and indirectly against Hewlett-Packard and Lexmark, the two largest
printer vendors, who primarily use their own internally developed printer
servers. In the network access market, the Company competes against the numerous
networking companies who offer network access solutions. The Company expects
that other companies will enter its markets, particularly the new and evolving
fibre channel market. Additionally, although the Company has development
agreements with many of its customers, these agreements are not exclusive, and
it is not uncommon, especially with an emerging technology, for OEMs to arrange
second source agreements to meet their requirements. Furthermore, the Company's
OEM customers may in the future develop competitive products or purchase from
the Company's competitors, and may then decide to terminate their relationships
with the Company.
The Company's current and potential competition 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. Increased competition could result in significant price
competition, reduced profit margins or loss of market share, any of which would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity. There can be no assurance that the Company
will be able to compete successfully against either current or potential
competitors in the future.
Rapid Technological Change and New Product Development
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. The Company believes that its future success will
depend in large part on its ability to enhance its existing products and to
introduce new products on a timely basis to meet changes in customer
preferences, emerging technologies and evolving industry standards. There can be
no assurance that the Company will be successful in developing, manufacturing
and marketing new products or product enhancements that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. There can be no assurance that the Company will be able to develop
or license from third parties the underlying core technologies necessary for new
products and enhancements. A key element of the Company's strategy is the
development of multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing the price/performance of the Company's
printer server and fibre channel products. There can be no assurance that the
Company will be successful at developing and incorporating ASICs effectively and
in a timely manner. 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
7
<PAGE> 9
in response to changing market conditions or customer preferences, the Company's
business, results of operations, financial condition and/or liquidity would be
materially adversely affected.
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 resource 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 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 Company's product markets, any delay or
unanticipated difficulty associated with new product introductions or product
enhancements could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
The Company has in the past engaged and expects that it will continue in the
future to engage in joint development projects with third parties. Joint
development creates several risks for the Company, including loss of control
over the development of aspects of the jointly developed product and over the
timing of product availability. There can be no assurance that joint development
activities will result in products, or that any products developed will be
commercially successful or available in a timely fashion.
Reliance on Third Party Suppliers
The Company relies on third party suppliers who supply the components to the
Company and its subcontracted manufacturer which are used in the Company's
products. Most components are readily available from alternate sources. However,
the unavailability of certain components from current suppliers, especially
custom components fabricated for the Company, such as ASICs, 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. Additionally, as the Company transitions the production of its
product lines to a subcontracted manufacturer, the Company plans to maintain
only a minimal supply of certain key components. Furthermore, the Company will
now rely on its contract manufacturer to complete the majority of the component
purchases. Consequently, there can be no assurance that the necessary 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 some of the
software incorporated in some of the Company's products. These software items
are not generally readily available from alternate sources. The Company's future
inability to supply product due to a lack of components or software or to
redesign its products to accept alternatives, in a timely manner, or any
resulting significant increase in prices would materially adversely affect the
Company's business, results of operations, financial condition and/or liquidity.
Dependence on 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. This is
especially critical as the Company transitions the manufacturing of its products
from its Puerto Rican subsidiary to a contract manufacturer. The Company's
future success also depends upon its ability to attract, train and retain highly
qualified technical, sales, marketing and managerial personnel. An increase in
technical staff with experience in highspeed networking applications will be
required as the Company further develops its fibre channel product line.
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 would have a
material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
8
<PAGE> 10
Risks Associated with International Operations and Regulatory Standards
In 1998, sales in the United States, Europe and the Pacific Rim countries
accounted for 65 percent, 26 percent and 9 percent of the Company's net
revenues, respectively. In 1997, sales in the United States, Europe and the
Pacific Rim countries accounted for 55 percent, 39 percent and 6 percent of the
Company's net revenues, respectively. Similarly, in 1996, sales in the United
States, Europe and the Pacific Rim countries accounted for 60 percent, 35
percent and 5 percent of net revenues, respectively. The Company expects that
sales in the United States and Europe will continue to account for the
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.
All of the Company's sales are currently denominated in U.S. dollars. 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, cost and 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 a material adverse effect on the Company's future international
sales and consequently, the Company's business, results of operations, financial
condition and/or liquidity.
Risks Associated With Transition From Puerto Rican Manufacturing Facility To
Subcontracted Manufacturer
The Company is in the process of transitioning the manufacturing of its product
lines from its Puerto Rican manufacturing facility to a contract manufacturer
located in Texas. The Company expects this transition to be completed during the
first half of fiscal 1999. Consequently, until this transition is completed, a
significant portion of the Company's inventory may still be located at the
Company's subsidiary 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 ship products to the Company's new contract
manufacturer for distribution would have a material adverse impact on the
Company's business, results of operations, financial condition and/or liquidity.
The Company is currently completing the transition of the production of its
product lines from its Puerto Rican manufacturing subsidiary to a contract
manufacturer. Any unanticipated delays or issues related to events such as the
transfer of test equipment, supply of components, unavailability of finished
goods in-transit from one location to the other, loss of key personnel and/or
production start up at the Company's contract manufacturer, as well as any
unanticipated events, could have a material adverse effect on the Company's
business, results of operations, financial condition and/or liquidity.
Furthermore, if for any reason, the Company's selected contract manufacturer is
unable or unwilling to complete, or experiences any significant delays in
completing, the production runs for the Company during the transition period or
in the future, the Company's resulting inability to supply product and/or costs
to qualify and shift production to an alternative manufacturing facility would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Dependence on Proprietary Technology
Although the Company believes that its continued success will depend primarily
on continuing innovation, sales, marketing and technical expertise and the
quality of product support and customer relations, the Company's success is
dependent in part on 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 technology. Any such claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. 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 and on commercially
reasonable terms would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
9
<PAGE> 11
Year 2000 Issue
The Year 2000 issue is the result of computer programs, microprocessors and
embedded date reliant systems using two digits rather than four to define the
applicable year. If such programs are not corrected, date data concerning the
Year 2000 could cause many systems to fail or generate erroneous information.
The Company considers a product to be "Year 2000 compliant" if the product's
performance and functionality are unaffected by processing of dates prior to,
during and after the Year 2000. The Company believes its current products are
Year 2000 compliant, although older products previously sold by the Company
which may still be covered under warranty may not be Year 2000 compliant. The
Company believes it is prepared to update these older products as required for
all issues that the Company has been able to identify. However, there can be no
assurance that all potential Year 2000 issues have been identified and will be
successfully resolved to the customers' satisfaction. Consequently, litigation
may be brought against vendors, including the Company. Any such claims, with or
without merit, could result in a material adverse effect on the Company's
business, results of operations, financial condition and/or liquidity.
The Company has committed resources in an attempt to identify and correct
potential Year 2000 issues, both in its products and in its internal computer
systems and applications. Although the Company believes it has identified and
either corrected or has a plan in place to correct any Year 2000 issues in these
areas, the Company has not conducted any formal surveys of its suppliers,
customers or 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 suppliers to continue to provide goods and services to the
Company. Furthermore, the Company relies in various ways, both domestically and
internationally, upon government agencies, utility companies, telecommunication
companies and other service providers. There can be no assurance that all such
suppliers, government agencies, customers, financial institutions and other
third parties will not suffer business disruption caused by a Year 2000 issue.
Such failures could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
As the Company has not yet completed its full Year 2000 assessment (as
previously discussed), the Company has not developed a contingency plan. The
Company anticipates that its full Year 2000 review, necessary remediation
actions and contingency plan will be substantially complete by the end of June
1999. Although this process has not generated any material expenditures to date
and the Company does not foresee any needed material expenditures, the costs
related to this issue will continue to evolve as the remaining issues are
identified and addressed by the Company. Although the Company currently does not
believe that the Year 2000 issue will pose any significant operational problems,
delays in the Company's efforts to address the Year 2000 issue or a failure to
fully identify all Year 2000 issues in the Company's systems, equipment or
processes or those of its vendors, customers, financial institutions or other
third parties could have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
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, changes in earnings
estimates by analysts, and general conditions in the computer and communications
markets, among other factors, 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.
Item 2. PROPERTIES.
The Company's corporate offices and principal product development facilities are
currently located in an approximately 55,000 square foot leased building in
Costa Mesa, California. The lease expires in October 1999. Under the terms of
this agreement, the Company has the option to renew this lease for a period of
30 months.
As of June 28, 1998, the Company still owned its production facility located in
two adjacent buildings in Dorado, Puerto Rico. The two buildings have an
aggregate of approximately 41,000 square feet. Subsequent to year-end, the
Company entered into an agreement to sell this manufacturing facility as part of
the Company's transition to a contract manufacturer (see note 11 to the
Consolidated Financial Statements).
The Company leases approximately 9 sales offices throughout the world.
10
<PAGE> 12
The Company's future facilities requirements will depend upon the Company's
business, but the Company believes additional space, if required, may be
obtained on reasonable terms.
Item 3. LEGAL PROCEEDINGS.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company is not aware of any pending legal proceedings which could have a
material adverse effect on the financial position or operations of the Company.
The Company believes that it is in compliance with all city, state, and federal
rules and regulations as pertaining to environmental impact and use.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of 1998.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRINCIPAL MARKET AND PRICES
The Company's common stock is traded on the Nasdaq National Market under the
symbol EMLX. The following table sets forth for the indicated periods the high
and low sales prices of the common stock, as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
1998 First Quarter..................... 19 1/2 14 1/8
Second Quarter.................... 19 3/4 13 3/8
Third Quarter..................... 15 1/2 8
Fourth Quarter.................... 9 3/4 5 5/16
1997 First Quarter..................... 16 1/4 12 7/8
Second Quarter.................... 18 3/8 14 1/2
Third Quarter..................... 20 3/8 15
Fourth Quarter.................... 21 1/4 14 3/4
</TABLE>
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as of
September 17, 1998 was 364.
DIVIDENDS
The Company has never paid cash dividends on its common stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain its earnings for the development of its business.
11
<PAGE> 13
At a special meeting of stockholders of the Company held on February 24, 1994,
the stockholders voted on a single, unified proposal which in part provided for
the distribution to stockholders, on a share-for-share basis, of all outstanding
shares of common stock of QLogic Corporation. On February 28, 1994, subsequent
to stockholders approving the aforementioned proposal, the Company declared a
special distribution to the Company's stockholders of all the shares of QLogic
Corporation effective on the record date, February 25, 1994.
On January 19, 1989, the Board of Directors declared a dividend distribution of
one preferred stock purchase right for each outstanding share of common stock.
The rights were distributed on February 2, 1989, to stockholders of record on
the close of business on that date (see note 9 to the Consolidated Financial
Statements).
12
<PAGE> 14
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table summarizes certain selected consolidated financial data.
Certain reclassifications have been made to the 1994 data to conform to the
1998, 1997, 1996 and 1995 presentation. The consolidated results of operations
data for the year ended July 3, 1994 has been restated to present QLogic
Corporation, a former subsidiary, as a discontinued operation. The consolidated
balance sheet data presented in the following tables have not been retroactively
restated for the spin off of QLogic Corporation. Additionally, 1997, 1996, 1995
and 1994 earnings (loss) per share have been restated in conformance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Selected Consolidated Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
June 28, June 29, June 30, July 2, July 3,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues ............................... $ 59,485 $ 64,763 $ 51,338 $ 75,475 $ 61,558
Cost of sales .............................. 36,658 39,924 34,538 44,412 38,248
-------- -------- -------- -------- --------
Gross profit ............................ 22,827 24,839 16,800 31,063 23,310
-------- -------- -------- -------- --------
Operating expenses:
Engineering and development ............. 11,071 10,006 11,387 10,674 8,498
Selling and marketing ................... 7,743 7,918 11,381 12,170 13,361
General and administrative .............. 4,406 4,643 4,940 5,435 5,393
Amortization of goodwill ................ -- -- -- 337 467
Impairment of goodwill .................. -- -- -- 785 1,001
Consolidation charges ................... 10,646 1,280 -- -- 2,413
-------- -------- -------- -------- --------
Total operating expenses ................... 33,866 23,847 27,708 29,401 31,133
-------- -------- -------- -------- --------
Operating income (loss) .................... (11,039) 992 (10,908) 1,662 (7,823)
Nonoperating income ........................ 113 71 483 1,120 123
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes ........... (10,926) 1,063 (10,425) 2,782 (7,700)
Income tax benefit ......................... 88 506 1,137 1,156 23
-------- -------- -------- -------- --------
Income (loss) from continuing operations ... (10,838) 1,569 (9,288) 3,938 (7,677)
Discontinued operations:
Loss from discontinued
Operations, net of income tax ......... -- -- -- -- (4,558)
Loss on disposal of discontinued
operations, net of income tax ......... -- -- -- -- (2,994)
-------- -------- -------- -------- --------
Net income (loss) .......................... $(10,838) $ 1,569 $ (9,288) $ 3,938 $(15,229)
======== ======== ======== ======== ========
Earnings (loss) per share from continuing
operations:
Basic ................................. $ (1.77) $ 0.26 $ (1.56) $ 0.69 $ (1.39)
======== ======== ======== ======== ========
Diluted ............................... $ (1.77) $ 0.25 $ (1.56) $ 0.64 $ (1.39)
======== ======== ======== ======== ========
Earnings (loss) per share:
Basic ................................. $ (1.77) $ 0.26 $ (1.56) $ 0.69 $ (2.75)
======== ======== ======== ======== ========
Diluted ............................... $ (1.77) $ 0.25 $ (1.56) $ 0.64 $ (2.75)
======== ======== ======== ======== ========
Number of shares used in share computations:
Basic ................................. 6,121 6,044 5,936 5,714 5,537
======== ======== ======== ======== ========
Diluted ............................... 6,121 6,294 5,936 6,172 5,537
======== ======== ======== ======== ========
</TABLE>
13
<PAGE> 15
Selected Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
June 28, June 29, June 30, July 2, July 3,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total current assets .................. $24,384 $29,328 $31,579 $39,014 $26,152
Total current liabilities ............. 14,399 10,859 15,494 13,970 9,223
------- ------- ------- ------- -------
Working capital ....................... 9,985 18,469 16,085 25,044 16,929
Total assets .......................... 30,157 37,175 39,300 47,550 37,354
Long-term capitalized lease obligations 7 79 204 253 506
Retained earnings ..................... 4,935 15,773 14,204 23,492 19,554
Total stockholders' equity ............ 13,606 24,276 22,030 30,678 25,559
</TABLE>
14
<PAGE> 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SUBSEQUENT EVENTS
After the fiscal year-end of June 28, 1998, the Company entered into agreements
to sell the production equipment and manufacturing facility located in Puerto
Rico. Additionally, the Company's Board of Directors approved a repricing of
outstanding stock options granted under the Emulex Corporation Employee Stock
Option Plan (see note 11 to the Consolidated Financial Statements).
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the discussions in this
Form 10-K in general may contain certain forward-looking statements. In
addition, when used in this Form 10-K, the words "anticipates," "in the
opinion," "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 "Risk Factors" set forth herein. The Company cautions the reader,
however, that this list 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.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Form 10-K. All
references to years refer to the Company's fiscal years ended June 28, 1998,
June 29, 1997 and June 30, 1996, as applicable, unless the calendar year is
specified. References to dollar amounts are in thousands unless otherwise
specified.
<TABLE>
<CAPTION>
Percentage of Net Revenues
------------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net revenues .................... 100.0% 100.0% 100.0%
Cost of sales ................... 61.6 61.6 67.3
----- ----- -----
Gross profit ................. 38.4 38.4 32.7
Operating expenses:
Engineering and development . 18.6 15.5 22.2
Selling and marketing ....... 13.1 12.2 22.1
General and administrative .. 7.4 7.2 9.6
Consolidation charges ....... 17.9 2.0 --
----- ----- -----
Total operating expenses ....... 57.0 36.9 53.9
----- ----- -----
Operating income (loss) ......... (18.6) 1.5 (21.2)
Nonoperating income ............. 0.2 0.1 0.9
----- ----- -----
Income (loss) before income taxes (18.4) 1.6 (20.3)
Income tax benefit .............. 0.2 0.8 2.2
----- ----- -----
Net income (loss) ............... (18.2)% 2.4% (18.1)%
===== ===== =====
</TABLE>
15
<PAGE> 17
EMULEX CORPORATION AND SUBSIDIARIES
NET REVENUES
Fiscal 1998 versus Fiscal 1997
Net revenues for 1998 were $59,485, a decrease of $5,278, or 8.1 percent, from
1997. This decrease in net revenues was principally the result of reductions in
distribution net revenues of $5,294, or 26.3 percent, and decreases in net
revenues from sales to end users of $939, or 30.0 percent, in 1998 compared to
1997. These decreases were partially offset by an increase in net revenues from
sales to original equipment manufacturers ("OEMs") of $955, or 2.3 percent,
compared to the prior fiscal year. In 1998, Sequent Computer Systems and IBM
Corporation represented 12.2 and 11.2 percent of net revenues, respectively.
Furthermore, the Company's top five customers accounted for 40.5 percent of net
revenues in 1998.
From a product line perspective, net revenues from the Company's fibre channel
product line increased by $7,423, or 64.4 percent, to $18,944 for fiscal 1998
compared to fiscal 1997 as OEMs in this emerging market have begun to take
volume shipments. The Company expects that future revenue from this product line
will be a function of continued demand from OEMs which are currently shipping
fibre channel product, launches of new fibre channel based systems by some of
the Company's other OEMs, achievement of additional design wins and increased
distribution sales. Net revenues generated from the Company's printer server
product line decreased by $4,465, or 15.7 percent, to $23,963 in 1998 versus the
prior fiscal year. These decreases in printer server revenues are primarily the
result of lower distribution sales which the Company believes are principally
due to a combination of lower average selling price and decreased demand for
after-market solutions, as more OEMs are shipping network-ready printers. Net
revenues from the Company's network access products in 1998 decreased by $6,973,
or 31.0 percent, to $15,506 compared to 1997. This decrease in network access
net revenues is principally the result of lower shipments to Reuters, as its
current project with Emulex approaches end of life, and the maturation of
certain of the Company's network access products. Net revenues from other
miscellaneous product lines decreased by $1,263, or 54.1 percent, to $1,072
during the current fiscal year compared to the prior fiscal year, primarily due
to the fact that the first quarter of the prior fiscal year included end-of-life
sales of an OEM storage product.
Domestic revenue increased by $3,340, or 9.4%, to $38,773 in 1998. This increase
in domestic revenues is principally due to the higher level of fibre channel
shipments in the current year which have been primarily to the domestic market
place to date. Export revenues decreased by $8,618, or 29.4 percent, from 1997
to $20,712 in 1998 principally due to the decreased shipments to Reuters as
discussed above. Exports accounted for 34.8 percent of net revenues in 1998,
down from 45.3 percent in 1997. As the Company's net revenues from shipments to
the Pacific Rim countries were less than 10 percent of net revenues in 1998 and
1997, the Company does not believe the current Asian crisis poses a significant
risk to the Company.
Although fibre channel represented 31.8 and 17.8 percent of net revenues for
1998 and 1997, respectively, 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. 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, at a competitive price
and function as needed.
Fiscal 1997 versus Fiscal 1996
Net revenues for 1997 were $64,763, an increase of $13,425, or 26.2 percent,
from 1996. This increase in net revenues was primarily due to a $21,370, or
106.3 percent, increase in sales to OEMs. The higher level of OEM sales was
attributable to significantly improved shipments to Xerox and Reuters when
compared to the depressed results of 1996; numerous printer server design wins
the Company achieved in 1997 and 1996, and shipments of the Company's fibre
channel products which, as expected, have been primarily to OEMs during the
early stages of the fibre channel market development. The increase in net
revenues to OEMs is partially offset by reductions in net revenues from
distribution and end user sales. Net revenues from distribution decreased by
$5,302, or 20.8 percent, and end user net revenues decreased by $2,643, or 45.8
percent, compared to the prior year.
From a product line perspective, net revenues generated by the Company's
emerging fibre channel products increased by $10,383, or 912.4 percent, to
$11,521 in the current fiscal year as OEMs in this emerging market have begun to
take volume shipments. Printer server net revenues increased by $4,217, or 17.4
percent, to $28,428 in 1997 due to increased sales to OEMs, partially offset by
reductions in distribution sales of printer servers. The Company believes this
decrease in net
16
<PAGE> 18
revenues from distribution sales of printer servers was the result of a
combination of lower average selling price and decreased demand for after-market
solutions, as more OEMs are shipping their printers with the printer server
included. Network access net revenues increased by $1,342, or 6.3%, to $22,479,
and net revenues from other miscellaneous product lines decreased by $1,045, or
30.9%, to $2,335. Net revenues from 1996 also included $1,472 of memory devices
that had been engineered out of certain products.
Export revenues increased by $8,630, or 41.7 percent, to $29,330 in 1997.
Exports accounted for 45.3 percent of net revenues in 1997, up from 40.3 percent
in 1996. Domestic revenues increased by $4,795, or 15.7 percent, to $35,433 in
the current year. During 1997, Reuters and Sequent Computer Systems accounted
for 12.6 and 10.1 percent of net revenues, respectively. The Company's top five
customers accounted for 44.2 percent of net revenues in 1997.
GROSS PROFIT
Fiscal 1998 versus Fiscal 1997
Gross profit in 1998 decreased by $2,012, or 8.1 percent, to $22,827. Gross
profit as a percent of net revenues remained substantially unchanged from the
prior year at 38.4 percent. In conjunction with the planned closure of the
Company's Puerto Rican manufacturing operations and transition to subcontracted
manufacturing (discussed below in Operating Expenses), during the three month
period ended March 29, 1998, the Company recorded $1,899 of incremental excess
and obsolete inventory reserves in cost of sales (exclusive of the reductions in
inventory related to the streamlining of the Company's product lines included in
the consolidation charges in 1998). Excluding this incremental inventory reserve
charge of $1,899, gross profit for 1998 would have been $24,726, a decrease of
$113, or 0.5 percent, compared to 1997. Gross profit as a percent of revenue,
excluding the incremental inventory reserves of $1,899, improved to 41.6
percent. The improvement in gross profit as a percentage of net revenues is
principally due to a product mix that contained a greater percentage of higher
margin products.
Fiscal 1997 versus Fiscal 1996
In 1997, gross profit increased by $8,039, or 47.9 percent, to $24,839. Gross
profit was 38.4 percent of net revenues in 1997 compared to 32.7 percent in
1996. The improvement in the 1997 gross profit percentage was primarily due to a
product mix which contained a higher percentage of higher margin products, lower
prices for components used in the Company's products and higher absorption of
manufacturing overhead which resulted from the higher level of production
activity in the current year compared to the prior year.
OPERATING EXPENSES
Fiscal 1998 versus Fiscal 1997
During the three month period ended March 29, 1998, the Company initiated a
program to outsource the manufacturing of all of its product lines to K*TEC
Electronics, a state-of-the-art contract manufacturer 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. In conjunction with this transition to subcontracted
manufacturing, the Company plans to close its Puerto Rican manufacturing
facility, streamline its offerings of some of the Company's more mature
products, primarily in the network access product lines, and close selected
domestic sales offices. In addition to the $1,899 of incremental excess and
obsolete inventory reserves discussed above, the Company has recorded
consolidation charges of $10,646 in 1998 related to the planned closure of its
manufacturing plant and the associated streamlining of its product lines. These
charges include approximately $3,010 for severance and related costs, $1,022 for
impairment of certain property, plant and equipment, $4,775 for reductions in
inventory and prepaid expenses related to the streamlining of the Company's
product offerings, $225 for equipment and office leases and $1,614 for other
costs related primarily to the closure of the Company's Puerto Rican
manufacturing facility. In addition, the Company plans to sell other property,
plant and equipment in 1999 (see note 11 to the Consolidated Financial
Statements). The Company anticipates a total worldwide reduction of
approximately 130 full-time employees, or 48% of the workforce, and 45 temporary
workers in Puerto Rico. The majority of the headcount reduction is in the
manufacturing area; however, selected reductions will also be made in other
areas related to the streamlining of product offerings.
In 1998, operating expenses, including the above mentioned consolidation
charges, were $33,866, an increase of $10,019, or 42.0 percent, from the level
recorded in 1997. Excluding consolidation charges of $10,646 and $1,280 for 1998
and 1997, respectively (see note 1 to the Consolidated Financial Statements),
operating expenses increased by $653, or 2.9 percent, to $23,220 in 1998 from
$22,567 in 1997. This increase in operating expenses was primarily the result of
an increase of $1,065, or 10.6 percent, to $11,071 for engineering and
development expenses as the Company continued to expand its fibre channel
development efforts. This increase in engineering and development expenses was
partially offset
17
<PAGE> 19
by decreases in selling and marketing expenses, as well as general and
administrative expenses, even though they increased as a percent of net
revenues. Compared to the prior year, selling and marketing expenses decreased
by $175, or 2.2 percent, to $7,743 in 1998. General and administrative expenses
decreased by $237, or 5.1 percent, to $4,406 in 1998 compared to 1997.
Fiscal 1997 versus Fiscal 1996
In 1997, operating expenses decreased by $3,861, or 13.9 percent, to $23,847
compared to the prior year. Due to higher revenue levels and lower operating
expenses, operating expenses as a percent of revenue improved to 36.9 percent
compared to 53.9 percent in the prior year. Included in the current year were
consolidation charges (see note 1 to the Consolidated Financial Statements) of
$1,280 recognized during the first quarter of 1997. Excluding these charges,
operating expenses in the current year would have been 34.9 percent of revenues,
or $22,567. This represents a decrease of $5,141, or 18.6 percent, compared to
operating expenses of $27,708 in 1996. Engineering and development expenses
decreased by $1,381, or 12.1 percent, to $10,006 during 1997. Selling and
marketing expenses decreased by $3,463, or 30.4 percent, to $7,918 for the
current year. These reductions were 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 decreased by $297, or 6.0 percent, to $4,643 in 1997
primarily due to reduced staffing levels.
NONOPERATING INCOME
Fiscal 1998 versus Fiscal 1997
Nonoperating income increased by $42 in 1998 to $113 compared to $71 for the
prior fiscal year. Fiscal 1997 included $238 of interest income associated with
prior years' tax returns. Excluding this nonrecurring interest income,
nonoperating income increased by $280 from 1997 to 1998. This increase was
principally due to gains on the sale of certain assets, as well as a higher
level of interest income and a lower level of interest expense associated with
the Company's improved cash position during the current fiscal year compared to
the prior fiscal year.
Fiscal 1997 versus Fiscal 1996
Nonoperating income, which consists primarily of interest income, interest
expense and foreign exchange translation, decreased by $412 to $71 in 1997,
compared to $483 in 1996. Fiscal 1997 included $238 of interest income
associated with prior years' tax returns and 1996 included a $312 gain on the
sale of a building at the Company's production facility in Puerto Rico.
Excluding these nonrecurring items, nonoperating income decreased by $338,
primarily from reduced interest income and an increase in interest expense due
to the Company's financing activities during the current year.
INCOME TAXES
The Company recorded a tax benefit of $88 in 1998 compared to a benefit of $506
in 1997. The benefit in 1998 included a $188 tax recovery from a tax sharing
agreement with QLogic Corporation, a former subsidiary of the Company, compared
to a $612 tax recovery, also related to the tax sharing agreement with QLogic
Corporation, in the prior year. Because the Company's deferred tax assets were
offset 100% by a valuation allowance (see note 3 to the Consolidated Financial
Statements), the benefit from the current year loss and related valuation
allowance net on the Company's Consolidated Statement of Operations. The Company
had $36,021 and $4,271 of net operating loss carryforwards for federal and state
income tax purposes, respectively, as of June 28, 1998, which are available to
offset future federal and state taxable income through 2013 and 2003,
respectively. Additionally, the Company had $2,402 of business credit
carryforwards, available through 2013, and $1,185 of alternative minimum tax
credit carryforwards available over an indefinite period to further reduce
future federal income taxes. The Company also had $1,634 of research and
experimentation credit carryforwards as of June 28, 1998 for state purposes
available through 2013.
As a result of Emulex Caribe, the Company's Puerto Rican subsidiary, entering
into a tax-free plan of liquidation for U.S. income tax purposes on May 28, 1998
and the subsequent assignment of Caribe's assets to, and assumption of Caribe's
liabilities by, Emulex Corporation, the Company has submitted a Ruling Request
to Puerto Rico's Secretary of the Treasury. The Company is requesting that the
Puerto Rican Treasury rule in the Company's favor as to the tax-free treatment
of the liquidation for Puerto Rico income tax purposes. Additionally, the
Company has submitted a Closing Agreement to the Secretary of the Treasury of
Puerto Rico in order to obtain the Puerto Rican Treasury's agreement as to the
amount of tollgate tax resulting from the deemed distribution from Emulex Caribe
to its parent company as a result of the liquidation. Although it is not
assured, the Company believes it will be able to obtain Treasury approval on
both documents. However, if the Company
18
<PAGE> 20
is unable to obtain approval on these documents, the Company's results of
operations, financial condition and/or liquidity would be materially adversely
affected.
The Company is currently undergoing an examination by the California Franchise
Tax Board of the Company's California income tax returns for years 1989, 1990
and 1991. In the opinion of management, this examination will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
YEAR 2000
The Company has considered the impact of Year 2000 issues on its products,
computer systems and applications. The Company believes that all of its current
products are Year 2000 compliant; however, some products previously sold by the
Company may not be Year 2000 compliant. The Company believes it is prepared to
update these older products as required for all Year 2000 issues that the
Company has been able to identify. Furthermore, the Company believes that the
related financial exposure for any required updates to these older products is
not material. Additionally, the Company has reviewed and tested its internal
computer systems and applications. The Company believes it has identified all of
the related Year 2000 compliance issues in this area. The majority of these
issues have already been corrected. The Company anticipates that the remaining
remediation related to its computer systems and applications will be completed
by the end of June 1999. These reviews, tests and corrections have been
completed by the Company as a part of normal operating expenses and have not
caused any substantial expenditures to date. Furthermore, the Company does not
anticipate any material expenditures in the future related to these issues. The
Company has not yet conducted any formal surveys of third parties, such as the
Company's suppliers, customers or financial institutions. As the Company has not
yet completed its full Year 2000 assessment, the Company has not developed a
contingency plan. The Company anticipates that its full Year 2000 review,
necessary remediation actions and contingency plan will be substantially
complete by the end of June 1999. For an additional discussion of Year 2000
issues, please review the "Risk Factors" set forth elsewhere herein.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income."
The new statement is effective for both interim and annual periods for fiscal
years beginning after December 15, 1997. The Company believes the impact of
adopting this new standard on the consolidated financial statements will not be
material.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments of an
Enterprise and Related Information." The new statement is effective for fiscal
years beginning after December 15, 1997. The Company believes the impact of
adopting this new standard on the consolidated financial statements will not be
material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $1,292 during 1998 to
$1,776. Operating activities, which include changes in working capital balances,
provided $3,116 of cash and cash equivalents in 1998 compared to providing $532
of cash and cash equivalents in the prior year. Investing activities, which were
limited to the acquisition and disposition of property, plant and equipment and
the acquisition of intangibles, used $1,871 of cash and cash equivalents in the
current year compared to using $2,099 in 1997. Net financing activities, which
were limited to payments under capital lease obligations and proceeds from the
exercise of employee stock options, provided $47 of cash and cash equivalents
during 1998 compared to providing $416 of cash and cash equivalents in 1997. The
Company anticipates a total of approximately $3,100 in cash will be used over
the next six months in conjunction with the transfer of manufacturing to K*TEC
Electronics. This includes $1,518 for severance and related costs, $155 for
equipment and office leases and $1,427 for other miscellaneous costs which
primarily relate to the plant closure.
In addition to its cash balances, the Company had a line of credit of up to
$10,000 with Silicon Valley Bank. The Company last utilized the line of credit
in the first quarter of 1998. Furthermore, there were no borrowings outstanding
under this line at June 28, 1998 or June 29, 1997. 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 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, 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 June
28, 1998, the Company was in compliance with all the 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 anticipates that borrowings under the line
of credit may be required periodically during the next twelve months.
19
<PAGE> 21
The Company's line of credit with Silicon Valley Bank, which is renewed
periodically in the normal course of business, was scheduled to expire in
September 1998. The Company recently completed negotiations with Silicon Valley
Bank to extend its existing line of credit to September 1999. A failure to renew
this line of credit in the future could adversely affect the Company's ability
to meet its financial obligations and liquidity requirements.
The Company believes that its existing cash 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 the next twelve months.
However, the Company has experienced reductions in revenue levels, significant
losses from operations and large fluctuations in the timing of significant
customer orders on a quarterly basis. 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/or to arrange
additional financing. If the Company were to continue to experience losses at
the rate experienced in the current fiscal year, additional debt or equity
financing may be required within the next twelve months. There can be no
assurances that revenues will remain at current levels or improve or that the
Company would be profitable at such revenue levels. In addition, there can be no
assurances that the Company may not be required to utilize its line of credit
even during profitable periods for various reasons including, but not limited
to, the timing of inventory purchases, customer orders and shipments and/or
expenditures related to the transition to outsourcing manufacturing as the
Company closes its Puerto Rican manufacturing operations. Furthermore, there can
be no assurances that future requirements to fund operations will not require
the Company to draw on its line of credit again or 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.
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is included herein as part of Item 14(a)
of Part IV of this annual report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 28, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive and certain other officers of the Company or its principal
operating subsidiary are as follows:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Paul F. Folino President and Chief Executive Officer and Director 53
Kirk D. Roller(1) Vice President, Worldwide Sales 36
Charles N. Goff(1) Vice President, Manufacturing 64
Teresa W. Blackledge(1) Vice President, Marketing 43
Sadie A. Herrera(1) Vice President, Human Resources 49
Ronald P. Quagliara(1) Vice President, Research and Development 49
Michael J. Rockenbach Vice President, Finance, Chief Financial Officer 37
and Secretary
</TABLE>
- -----------
(1) These persons serve in the indicated capacities as officers of the
Registrant's principal operating subsidiary; they are not officers of
the Registrant.
20
<PAGE> 22
Mr. Folino joined the Company in May 1993 as president and chief executive
officer and as a director. From January 1991 to May 1993, Mr. Folino was
president and chief operating officer of Thomas-Conrad Corporation, a
manufacturer of local area networking products.
Mr. Roller joined the Company in April 1998 as vice president, worldwide sales.
Prior to joining the Company, Mr. Roller spent three years with Compaq Computer
Corporation's Networking Product Division, most recently as director and general
manager of their NIC Business Unit. Prior to that, Mr. Roller spent two years as
director of sales and marketing for InterConnections, Inc., a subsidiary of the
Company.
Ms. Blackledge joined the Company in May 1991 as marketing manager and was
promoted to vice president, marketing in September, 1994. From July 1982 to
April 1991, Ms. Blackledge held a variety of marketing, planning and research
positions with the Digital Communications Division of Rockwell International.
Mr. Goff joined the Company in 1985 as manager, warehouse operations and after
holding several operations management positions was promoted to vice president,
manufacturing in September 1994. Mr. Goff worked for Printronix, a manufacturer
of high speed dot-matrix printers, for over 10 years prior to joining the
Company.
Ms. Herrera joined the Company in 1988 as benefits administrator and was
promoted to vice president, human resources in May 1995. At the time of her
promotion, Ms. Herrera was senior director, human resources. Ms. Herrera had
over 15 years of human resource management experience with the Remex Division of
Ex-Cell-O/Textron Corporation and other companies prior to joining the Company.
Mr. Quagliara joined the Company in March 1995 as vice president, research and
development. Prior to joining the Company, Mr. Quagliara spent five years with
Ascom Timeplex, Inc., a manufacturer of router bridges and other networking
equipment. Most recently he was vice president and general manager of Acsom's
LAN Interworking Business Unit.
Mr. Rockenbach joined the Company in 1991 and has served as the Company's vice
president, finance and acting chief financial officer since late 1996. From 1991
to 1996, Mr. Rockenbach served in senior finance and accounting positions with
the Company. From 1987 until joining the Company, Mr. Rockenbach served in
various manufacturing finance and financial planning positions at Western
Digital Corporation. Most recently he was manager of financial planning for the
microcomputer products division.
None of the executive officers of the parent Company or officers of its
principal operating subsidiary has any family relationship with any other
executive officer of the Company, other officer of its principal operating
subsidiary or director of the Company.
Item 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 28, 1998.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 28, 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1998 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 28, 1998.
21
<PAGE> 23
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed with Report
1. Consolidated Financial Statements
The consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements and Schedule are filed
as part of this report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying Index
to Consolidated Financial Statements and Schedule is filed as
part of this report.
3. Exhibits
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this report.
(b) Reports on Form 8-K
The Registrant has not filed any reports on Form 8-K during the
last quarter of the year for which this report is filed.
22
<PAGE> 24
EMULEX CORPORATION AND SUBSIDIARIES
Annual Report -- Form 10-K
Items 8, 14(a)(1) and 14(a)(2)
Index to Consolidated Financial Statements and Schedule June
28, 1998, June 29, 1997 and June 30, 1996
(With Independent Auditors' Report Thereon)
<TABLE>
<CAPTION>
Consolidated Financial Statements Page Number
- --------------------------------- -----------
<S> <C>
Independent Auditors' Report........................................... 24
Consolidated Balance Sheets--June 28, 1998 and June 29, 1997 ........... 25
Consolidated Statements of Operations--Years ended June 28, 1998,
June 29, 1997 and June 30, 1996...................................... 26
Consolidated Statements of Stockholders' Equity--Years ended
June 28, 1998, June 29, 1997 and June 30, 1996....................... 27
Consolidated Statements of Cash Flows--Years ended
June 28, 1998, June 29, 1997 and June 30, 1996....................... 28
Notes to Consolidated Financial Statements............................. 29
Schedule
- --------
Schedule II - Valuation and Qualifying Accounts and Reserves.......... 43
</TABLE>
All other schedules are omitted because the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto.
23
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Emulex Corporation:
We have audited the consolidated financial statements of Emulex Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emulex Corporation
and subsidiaries as of June 28, 1998 and June 29, 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 28, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Orange County, California
August 12, 1998
24
<PAGE> 26
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 28, 1998 and June 29, 1997
(in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Assets (note 4)
Current assets:
Cash and cash equivalents ............................. $ 1,776 $ 484
Accounts and notes receivable, less allowance for
doubtful accounts of $576 in 1998 and $496 in 1997 12,141 14,785
Inventories, net (note 2) ............................ 9,906 12,713
Prepaid expenses ...................................... 476 1,066
Deferred income taxes and income taxes
receivable (note 3) ................................. 85 280
------- -------
Total current assets .............................. 24,384 29,328
Property, plant and equipment, net (notes 2 and 8) ........ 5,112 6,961
Prepaid expenses and other assets (note 3) ................ 661 886
------- -------
$30,157 $37,175
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capitalized lease obligations
(note 8) ............................................ $ 76 $ 125
Accounts payable ...................................... 6,909 4,294
Accrued liabilities (note 2) .......................... 4,105 6,090
Accrued consolidation charges ......................... 3,173 30
Deferred income taxes and income taxes payable (note 3) 136 320
------- -------
Total current liabilities ......................... 14,399 10,859
Capitalized lease obligations, excluding
current installments (note 8) ......................... 7 79
Deferred revenue .......................................... -- 6
Deferred income taxes (note 3) ........................... 2,145 1,955
------- -------
16,551 12,899
------- -------
Commitments and contingencies (note 8)
Subsequent events (note 11)
Stockholders' equity (note 9):
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; 6,133,322 and 6,100,546 issued and
outstanding in 1998 and 1997, respectively .......... 1,227 1,220
Additional paid-in capital ............................ 7,444 7,283
Retained earnings ..................................... 4,935 15,773
------- -------
Total stockholders' equity ................................ 13,606 24,276
------- -------
$30,157 $37,175
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 27
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations Years Ended
June 28, 1998, June 29, 1997 and June 30, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net revenues (note 7) .................................... $ 59,485 $ 64,763 $ 51,338
Cost of sales ............................................ 36,658 39,924 34,538
-------- -------- --------
Gross profit .......................................... 22,827 24,839 16,800
-------- -------- --------
Operating expenses:
Engineering and development ........................... 11,071 10,006 11,387
Selling and marketing ................................. 7,743 7,918 11,381
General and administrative ............................ 4,406 4,643 4,940
Consolidation charges ................................. 10,646 1,280 --
-------- -------- --------
Total operating expenses ........................... 33,866 23,847 27,708
-------- -------- --------
Operating income (loss) ............................ (11,039) 992 (10,908)
Nonoperating income (note 5) ............................. 113 71 483
-------- -------- --------
Income (loss) before income taxes .................. (10,926) 1,063 (10,425)
Income tax benefit (note 3) .............................. 88 506 1,137
-------- -------- --------
Net income (loss) ..................................... $(10,838) $ 1,569 $ (9,288)
======== ======== ========
Earnings (loss) per share (note 10):
Basic ................................................ $ (1.77) $ 0.26 $ (1.56)
======== ======== ========
Diluted .............................................. $ (1.77) $ 0.25 $ (1.56)
======== ======== ========
Number of shares used in per share computations (note 10):
Basic ................................................ 6,121 6,044 5,936
======== ======== ========
Diluted .............................................. 6,121 6,294 5,936
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity Years
ended June 28, 1998, June 29, 1997 and June 30, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------ Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at July 2, 1995 ............ 5,860,923 $ 1,172 $ 6,014 $ 23,492 $ 30,678
Exercise of stock options (note 9) 132,480 27 613 -- 640
Net loss ......................... -- -- -- (9,288) (9,288)
--------- --------- --------- --------- ---------
Balance at June 30, 1996 ........... 5,993,403 1,199 6,627 14,204 22,030
Exercise of stock options (note 9) 107,143 21 656 -- 677
Net income ....................... -- -- -- 1,569 1,569
--------- --------- --------- --------- ---------
Balance at June 29, 1997 ............ 6,100,546 1,220 7,283 15,773 24,276
Exercise of stock options (note 9) 32,776 7 161 -- 168
Net loss ......................... -- -- -- (10,838) (10,838)
--------- --------- --------- --------- ---------
Balance at June 28, 1998 ............ 6,133,322 $ 1,227 $ 7,444 $ 4,935 $ 13,606
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 28, 1998, June 29, 1997 and June 30, 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,838) $ 1,569 $ (9,288)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,347 2,616 2,412
Impairment of property, plant and equipment 1,022 -- --
Loss (gain) on disposal of property, plant and equipment 51 55 (125)
Provision for doubtful accounts 190 131 125
Changes in assets and liabilities:
Accounts receivable 2,454 (1,923) (222)
Inventories 2,807 1,958 (410)
Prepaid expenses 1,278 138 (693)
Income taxes receivable 280 108 (38)
Accounts payable 2,615 (4,405) 328
Accrued liabilities (1,985) 278 735
Accrued consolidation charges 3,143 (4) (171)
Deferred revenue (6) 6 --
Income taxes payable 136 -- --
Deferred income taxes (380) 15 (389)
Other assets 2 (10) (103)
-------- -------- --------
Net cash provided by (used in) operating activities 3,116 532 (7,839)
-------- -------- --------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment 21 62 1,032
Additions to property, plant and equipment (1,592) (2,161) (2,189)
Additions to intangibles (300) -- --
-------- -------- --------
Net cash used in investing activities (1,871) (2,099) (1,157)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital leases (121) (261) (243)
Proceeds from issuance of common stock 168 677 640
-------- -------- --------
Net cash provided by financing activities 47 416 397
-------- -------- --------
Net cash provided by (used in) continuing operations 1,292 (1,151) (8,599)
Net cash used in discontinued operations -- -- (74)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,292 (1,151) (8,673)
Cash and cash equivalents at beginning of year 484 1,635 10,308
-------- -------- --------
Cash and cash equivalents at end of year $ 1,776 $ 484 $ 1,635
======== ======== ========
Supplemental disclosures:
Cash paid during the year (related to continuing and
discontinued operations) for:
Interest $ 169 $ 184 $ 33
Income taxes 64 53 141
</TABLE>
Capital lease obligations of $212 were incurred in 1996, when the Company
entered into a lease for new equipment. There were no new capital lease
obligations in 1998 or 1997.
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements June 28,
1998, June 29, 1997 and June, 30, 1996
(dollars in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Emulex
Corporation, a Delaware corporation, and its wholly-owned subsidiaries
(collectively, the "Company" or "Emulex"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal
years 1998, 1997 and 1996 each comprised 52 weeks.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996
consolidated financial statements to conform to the 1998 presentation.
Consolidation Charges
Fiscal 1998
On March 25, 1998, the Company announced plans to outsource the
manufacturing of its product lines to K*TEC Electronics which resulted,
among other things, in the decision to close the Company's manufacturing
subsidiary located in Dorado, Puerto Rico. In conjunction with this
decision, the Company has recorded consolidation charges of $10,646
during 1998. These charges include approximately $3,010 for severance
and related costs, $1,022 for impairment of certain property, plant and
equipment, $4,775 for reductions in inventory and prepaid expenses
related to the streamlining of the Company's product offerings, $225 for
equipment and office leases and $1,614 for other costs primarily related
to the closure of the Company's Puerto Rican manufacturing facility. In
addition, the Company plans to sell other property, plant and equipment
in 1999 (see note 11). The Company anticipates a worldwide reduction of
approximately 130 full-time employees, or 48% of the workforce, and 45
temporary workers in Puerto Rico. The majority of the headcount
reduction is in the manufacturing area; however, selected reductions
will also be made in other areas related to the streamlining of product
offerings.
As of June 28, 1998, actions to complete this consolidation plan were
still in process. The Company anticipates that this plan will be
substantially complete within three to six months. The remaining
consolidation accrual at June 28, 1998 of $3,173 consists of
approximately $1,518 for severance and related costs, $155 for equipment
and office leases and $1,500 for other costs primarily related to the
closure of the Company's Puerto Rican manufacturing facility. At
year-end, the Company's work force still included 45 of the 130
employees discussed above. The Company anticipates that the activities
related to the plant closure which necessitate these employees will be
completed within three to four months.
29
<PAGE> 31
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 1997
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 business,
previously headquarted out of a Bellevue, Washington facility, were
relocated to Emulex headquarters in Costa Mesa, California. In addition,
the Company 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 recognized consolidation
charges of $1,280 in fiscal 1997.
The charges related to this consolidation of operations consisted of
approximately $806 for severance and related charges, $236 for office
rent and related charges, $65 for write-off of fixed assets and $173 of
other charges relating primarily to the transition of product support to
Costa Mesa, California. Total headcount worldwide was reduced by
approximately 36 employees. As of June 29, 1997, this consolidation plan
was substantially complete.
Foreign Currency Translation
The Company has designated the U.S. dollar as its functional currency.
Accordingly, monetary assets and liabilities denominated in foreign
currencies are remeasured into the U.S. dollar at the exchange rates in
effect at the balance sheet date. Non-monetary assets and liabilities
denominated in foreign currencies are remeasured into the U.S. dollar at
the appropriate historical exchange rates. Income and expense amounts
denominated in foreign currencies are remeasured into the U.S. dollar at
the average exchange rates during the period, except for expense items
related to non-monetary accounts, which are remeasured at the
appropriate historical exchange rates. Net foreign exchange gains and
losses are included in other nonoperating income in the period incurred
(see note 5).
Cash Equivalents
All highly liquid debt instruments with original maturities of three
months or less are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, and depreciation and
amortization are provided on the straight-line method over estimated
useful lives of two to thirty years.
Long-Lived Assets
The Company applies the provisions of Statement of Financial Accounting
Standards No. ("Statement") 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under
the provisions of Statement 121, the recoverability of long-lived assets
is assessed by determining whether the carrying value of the asset can
be recovered through projected undiscounted future operating cash flows
over its remaining life. The amount of impairment, if any, is measured
based on projected discounted future operating cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Intangible Assets
Capitalized software development costs can consist of costs to purchase
software to be used within the Company's products and costs to develop
software internally. Capitalization of purchased software occurs only if
technological feasibility has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability
of capitalized software development costs require judgment by management
with respect to certain external factors, including but not limited to,
anticipated future gross revenue, estimated economic life and changes in
software and hardware technologies. Purchased software costs of $300
were capitalized in 1998. No purchased software costs were capitalized
in 1997 or 1996. No internally-developed software costs were capitalized
in 1998, 1997 or 1996. These intangible assets will be amortized over
their estimated useful lives.
30
<PAGE> 32
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Further, Statement 86, "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed," requires that at each balance
sheet date the unamortized costs of a computer software product be
compared to the net realizable value of that product. The amount by
which the unamortized costs exceed the net realizable value of a product
is to be written off.
Revenue Recognition
The Company recognizes revenue at the time of shipment. The Company has
agreements with certain of its distributors and Master Value Added
Resellers ("VARs") to provide price protection and stock rotation
privileges with respect to inventories which the distributors may have
on hand when the Company's published list prices are reduced and/or when
items are slow moving. These agreements may be terminated upon written
notice by either party. Pursuant to the Company's contractual
obligations under these agreements, or in the event of termination, the
Company may be obligated to issue credits to provide price protection
and/or to repurchase a certain portion of a distributor's or VAR's
inventory. The Company records a reserve for estimated price protection
and inventory repurchase.
Earnings (Loss) per Share
Effective December 28, 1997, the Company adopted Statement 128,
"Earnings per Share." All prior periods have been restated accordingly
(see note 10). Statement 128 specifies new standards designed to improve
the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability of
EPS data on an international basis. Some of the changes made to simplify
the EPS computations include: (a) eliminating the presentation of
primary EPS and replacing it with basic EPS, with the principal
difference being that the common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock method
and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements.
Statement 128 also makes a number of changes to existing disclosure
requirements.
The adoption of Statement 128 did not have a material impact on the
Company's consolidated financial statements.
Accounting for Stock Options
Prior to July 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On July 1, 1996, the Company adopted
Statement 123, "Accounting for Stock-Based Compensation", which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma net income
per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of Statement 123 (see note 9).
Fair Value of Financial Instruments
The Company applies the provisions of Statement 107, "Disclosures about
Fair Value of Financial Instruments." Statement 107 requires all
entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance
sheet, for which it is practicable to estimate fair value. Statement 107
defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. As of June 28, 1998, and June 29, 1997, management believes the
fair value of all financial instruments approximated carrying value.
Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
31
<PAGE> 33
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes pursuant to Statement 109,
"Accounting for Income Taxes." Statement 109 uses the asset and
liability method of accounting for income taxes, which recognizes
deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement 130, "Reporting Comprehensive Income." The new statement is
effective for both interim and annual periods for fiscal years beginning
after December 15, 1997. The Company believes the impact of adopting
this new standard on the consolidated financial statements will not be
material.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments
of an Enterprise and Related Information." The new statement is
effective for fiscal years beginning after December 15, 1997. The
Company believes the impact of adopting this new standard on the
consolidated financial statements will not be material.
NOTE 2 BALANCE SHEET DETAIL
Components of inventories are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials ................................ $ 3,926 $ 7,932
Work-in-process .............................. 273 2,012
Finished goods ............................... 5,707 2,769
-------- --------
$ 9,906 $ 12,713
======== ========
</TABLE>
Components of property, plant and equipment, net, are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land ......................................... $ 531 $ 531
Buildings .................................... 2,036 2,123
Production and test equipment ................ 14,004 13,461
Furniture and fixtures ....................... 4,601 4,079
Leasehold improvements ....................... 336 405
Other equipment .............................. 80 492
-------- --------
21,588 21,091
Less accumulated depreciation and amortization (16,476) (14,130)
-------- --------
$ 5,112 $ 6,961
======== ========
</TABLE>
Components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Payroll and related costs .................... $ 1,795 $ 2,082
Warranty and related reserves ................ 1,051 797
Royalties .................................... 147 312
Deferred revenue ............................. 31 1,155
Other ........................................ 1,081 1,744
-------- --------
$ 4,105 $ 6,090
======== ========
</TABLE>
32
<PAGE> 34
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal:
Current .............. $ 291 $ (506) $ (753)
Deferred ............. (380) -- (387)
State:
Current .............. -- -- --
Deferred ............. -- -- --
Foreign and Puerto Rico:
Current .............. 1 -- 3
Deferred ............. -- -- --
------- ------- -------
$ (88) $ (506) $(1,137)
======= ======= =======
</TABLE>
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
*Domestic ..... $(10,991) $ 713 $(10,010)
Foreign ...... 65 350 (415)
-------- -------- --------
Total .... $(10,926) $ 1,063 $(10,425)
======== ======== ========
</TABLE>
*Domestic income (loss) includes the Company's Puerto Rico and
Virgin Islands operations.
33
<PAGE> 35
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Capitalization of inventory costs .......... $ 44 $ --
Accelerated depreciation ................... 123 214
Reserves not currently deductible .......... 830 690
Provisions for discontinued operations and
consolidation charges .................... 1,249 48
Net operating loss carryforwards ........... 12,504 13,398
Business credit carryforwards .............. 4,036 3,240
Alternative minimum tax credit carryforwards 1,185 1,865
-------- --------
Total gross deferred tax assets .......... 19,971 19,455
Less valuation allowance ................. (18,150) (17,397)
-------- --------
Net deferred tax assets .................. 1,821 2,058
-------- --------
Deferred tax liabilities:
Capitalization of inventory costs .......... -- 258
Various state taxes ........................ 783 591
Taxes provided on Emulex Caribe, Inc. ......
undistributed income .................... -- 1,286
Other ...................................... 2,933 2,198
-------- --------
Total gross deferred tax liabilities ..... 3,716 4,333
-------- --------
Net deferred tax liabilities ............. $ 1,895 $ 2,275
======== ========
</TABLE>
Based on the Company's historical and anticipated future pre-tax results
of operations, management believes it is more likely than not that the
Company will realize the benefit of the net deferred tax assets existing
as of June 28, 1998. Management believes the existing net deductible
temporary differences will reverse during periods in which the Company
generates net taxable income; however, there can be no assurance that
the Company will generate any earnings or any specific level of
continuing earnings in future years. Certain tax planning or other
strategies could be implemented, if necessary, to supplement earnings
from operations to fully realize recorded tax benefits.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of June 28, 1998 will be allocated as
follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the
consolidated statements of operations ........... $14,649
Additional paid-in capital ........................ 3,501
-------
$18,150
=======
</TABLE>
34
<PAGE> 36
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective income tax benefit on pretax income (loss) differs from
expected federal income tax for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected income tax at 34 percent .................. $(3,715) $ 361 $(3,545)
State income tax, net of federal tax benefit ....... (20) 38 (285)
Net increase (decrease) in tax as a result of Emulex
Caribe, Inc. and foreign income taxed at
a rate different from U.S. statutory rate ........ 2,586 (175) 1,216
Change in beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income taxes ........................ 753 267 2,554
Recovery from QLogic Corporation pursuant
to tax sharing agreement ......................... (188) (612) (750)
Other, net ......................................... 496 (385) (327)
------- ------- -------
$ (88) $ (506) $(1,137)
======= ======= =======
</TABLE>
During 1998, 1997 and 1996, respectively, the Company received an income
tax benefit in the amount of $188, $612 and $750 related to recoveries
under a tax sharing agreement with QLogic Corporation, a former
subsidiary of the Company.
At June 28, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of $36,021 which are available to offset
future federal taxable income through 2013 and $4,271 for state purposes
available through 2003. The Company has business credit carryforwards
for federal purposes of approximately $2,402 which are available to
reduce federal income taxes through 2013. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $1,185
which are available to reduce future federal regular income taxes over
an indefinite period. Additionally, the Company has approximately $1,634
of research and experimentation credit carryforwards for state purposes
available through 2013.
As a result of Emulex Caribe entering into a tax-free plan of
liquidation for U.S. income tax purposes on May 28, 1998 and the
subsequent assignment of Caribe's assets to, and assumption of Caribe's
liabilities by, Emulex Corporation, the Company has submitted a Ruling
Request to Puerto Rico's Secretary of the Treasury. The Company is
requesting that the Puerto Rican Treasury rule in the Company's favor as
to the tax-free treatment of the liquidation for Puerto Rico income tax
purposes. Additionally, the Company has submitted a Closing Agreement to
the Secretary of the Treasury of Puerto Rico in order to obtain the
Puerto Rican Treasury's agreement as to the amount of tollgate tax
resulting from the deemed distribution from Emulex Caribe to Emulex
Costa Mesa as a result of the liquidation. Although it is not assured,
the Company believes it will be able to obtain Treasury approval on both
documents. However, if the Company is unable to obtain approval on these
documents, the Company's results of operations, financial condition
and/or liquidity would be materially adversely affected.
The Company is currently undergoing an examination by the California
Franchise Tax Board of the Company's California income tax returns for
years 1991, 1990 and 1989. In the opinion of management, this
examination will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
NOTE 4 LINE OF CREDIT
The Company has a $10,000 bank line of credit with Silicon Valley Bank
that expires in September 1999. The agreement allows the Company to
borrow at the bank's prime rate (8.5 percent at June 28, 1998) plus one
half percent. During 1998 and 1997, the Company utilized this line of
credit. However, there were no borrowings outstanding under this line at
June 28, 1998 or June 29, 1997. The bank line of credit is secured by
substantially all assets and requires the Company to satisfy certain
financial and other covenants and conditions, including prescribed
levels of tangible net worth, profitability and liquidity, and
prohibits, among other things, the payment of cash dividends. At June
28, 1998, the Company was in compliance with all such covenants.
35
<PAGE> 37
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 NONOPERATING INCOME
Nonoperating income, net, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Interest income ............ $ 97 $ 267 $ 248
Interest expense ........... (94) (185) (43)
Foreign exchange ........... (8) -- (34)
Gain on sale of building ... -- -- 312
Other ...................... 118 (11) --
----- ----- -----
$ 113 $ 71 $ 483
===== ===== =====
</TABLE>
NOTE 6 EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has a pretax savings and profit sharing plan under Section
401(k) of the Internal Revenue Code for substantially all domestic
employees. Under the plan, eligible employees are able to contribute up
to 12 percent of their compensation not to exceed the maximum IRS
deferral amount. Company discretionary contributions match up to 3
percent of a participant's compensation. The Company's contributions
under this plan were $270, $271 and $287 in 1998, 1997 and 1996,
respectively.
The Company has a similar plan for all employees in the Company's Puerto
Rico facility under Section 165(e) of the Internal Revenue Code. Under
the plan, eligible employees are able to contribute up to 10 percent of
their compensation not to exceed the maximum IRS deferral amount.
Company discretionary contributions match up to 3 percent of a
participant's compensation. The Company's contributions under this plan
were $116, $86 and $88 for 1998, 1997 and 1996, respectively.
NOTE 7 EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
The Company designs and markets three major distinct product families
within one industry segment: high-speed fibre channel products, printer
servers and network access products. The Company markets these products
through distributors, resellers and to OEMs. The Company's export
revenues were approximately $20,712, $29,330 and $20,700 representing
35, 45 and 40 percent of net revenues for 1998, 1997 and 1996,
respectively. The majority of export shipments are to the European
marketplace.
In 1998, Sequent Computer Systems and IBM Corporation represented 12 and
11 percent of net revenues, respectively. In 1997, Reuters and Sequent
Computer Systems represented 13 and 10 percent of net revenues,
respectively. In 1996, IBM Corporation represented 15 percent of net
revenues. Furthermore, the Company's top five customers accounted for 41
percent and 44 percent of net revenues in 1998 and 1997, respectively.
The Company derived approximately 71, 64 and 39 percent of its net
revenues from sales to OEMs in 1998, 1997 and 1996, respectively.
Emulex's operating results could be adversely affected if sales to one
or more such customers significantly decline, or if any one of these
customers develop alternative sources for the Company's products.
NOTE 8 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under long-term
noncancelable operating lease agreements which expire at various dates
through 2003. Rent expense for the Company under operating leases,
including month-to-month rentals, totaled $1,038, $1,200 and $1,178 in
1998, 1997 and 1996, respectively.
36
<PAGE> 38
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum noncancelable lease commitments are as follows:
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
<S> <C> <C>
Fiscal year:
1999 ...................................... $ 84 $ 818
2000 ...................................... 7 257
2001 ...................................... -- 94
2002 ...................................... -- 89
2003 ...................................... -- 30
------ ------
Total minimum lease payments .............. 91 $1,288
======
Less amounts representing interest ........ 8
------
Present value of future minimum capitalized
lease obligations ....................... 83
Less current installments of capitalized
lease obligations ....................... 76
------
Capitalized lease obligations, excluding
current installments .................... $ 7
======
</TABLE>
Litigation
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
NOTE 9 STOCKHOLDERS' EQUITY
Stock Option Plans
Under the Company's Employee Stock Option Plan (the "Plan"), the
exercise price of options granted will not be less than the fair market
value at the date of grant. The total number of shares of common stock
available for grant under the Plan is 2,780,000. Unless otherwise
provided by the Board of Directors or a committee of the Board
administering the Plan, each option granted under the Plan becomes
exercisable at the rate of 25 percent one year after the date of grant
with an additional 6.25 percent becoming exercisable each three-month
interval thereafter.
On October 9, 1997, the Company's Board of Directors adopted the Emulex
Corporation 1997 Stock Option Plan for Non-Employee Directors (the
"Director Plan") which allows for a maximum of 100,000 shares of common
stock. The Director Plan provides that an option to purchase 15,000
shares of common stock of the Company will be granted to each
non-employee director of the Company upon the first date that such
director becomes eligible to participate. These options shall be
exercisable as to one-third of the shares on each anniversary of the
grant if the director is still a director of the Company. In addition,
on each yearly anniversary of the date of the initial grant, each
eligible director shall automatically be granted an additional option to
purchase 5,000 shares of common stock. These options shall be
excerisable as to one-half of the shares on the six month anniversary,
one quarter on the nine month anniversary and one quarter on the year
anniversary of the grant date. Options granted under the Director Plan
are non-qualified stock options. The exercise price per option granted
will not be less than the fair market value at the date of grant. No
option granted under the Director Plan shall be exercisable after the
expiration of the earlier of (i) ten years following the date the option
is granted or (ii) one year following the date the optionee ceases to be
a director of the Company for any reason. In 1998, options to purchase
60,000 shares were granted under the Director Plan.
37
<PAGE> 39
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of stock option transactions for 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Weighted
Number average exercise
of Shares price per share
--------- ----------------
<S> <C> <C>
Options outstanding at July 2, 1995 . 733,944 $ 7.46
Granted ........................... 284,800 18.53
Exercised ......................... (132,480) 4.82
Canceled .......................... (85,066) 10.46
--------
Options outstanding at June 30, 1996 801,198 11.51
Granted ........................... 205,750 15.85
Exercised ......................... (107,143) 6.33
Canceled .......................... (161,329) 13.96
--------
Options outstanding at June 29, 1997 738,476 12.94
Granted ........................... 304,691 14.47
Exercised ......................... (32,776) 5.12
Canceled .......................... (51,350) 17.52
--------
Options outstanding at June 28, 1998 959,041 13.44
========
</TABLE>
As of June 28, 1998, June 29, 1997 and June 30, 1996, the number of
options exercisable was 476,961, 351,058 and 262,564, respectively, and
the weighted average exercise price of those options was $11.62, $9.66
and $6.67, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted Weighted Weighted
average average average
Outstanding exercise remaining Exercisable exercise
Range of as of price per contractual as of price per
Exercise Prices June 28, 1998 option life (years) June 28, 1998 option
- --------------- ------------- --------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 3.20 to $ 7.88 214,485 $ 4.95 5.38 185,734 $ 4.50
8.00 to 14.75 248,991 12.43 7.80 116,934 11.28
15.00 to 16.13 221,700 15.58 9.00 22,333 15.34
16.25 to 23.75 273,865 19.29 7.67 151,960 20.02
------- -------
$ 3.20 to $23.75 959,041 $13.44 7.50 476,961 $11.62
======= =======
</TABLE>
The Company applies APB Opinon No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under Statement 123, the Company's
net income (loss) would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported ................ $(10,838) $ 1,569 $ (9,288)
Assumed stock compensation cost .............. 1,417 882 778
-------- -------- --------
Pro forma net income (loss) ............... $(12,255) $ 687 $(10,066)
======== ======== ========
Diluted earnings (loss) per share as reported $ (1.77) $ 0.25 $ (1.56)
Pro forma diluted earnings (loss) per share $ (2.00) $ 0.11 $ (1.70)
======== ======== ========
</TABLE>
Pro forma net income (loss) reflects only options granted in 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost
for stock options under Statement 123 is not reflected in the pro forma
net income (loss)
38
<PAGE> 40
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amounts presented above because compensation cost is reflected over the
options' vesting period of up to four years and compensation cost for
options granted prior to July 3, 1995 is not considered.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions for 1998, 1997 and 1996: risk-free interest rates of 5.7,
6.3 and 5.9 percent, respectively; dividend yield of 0.0 percent;
average expected lives of 3.2, 3.6 and 3.4 years, respectively; and
volatility of 64.4, 66.1 and 66.1 percent, respectively. The
weighted-average fair value per option granted in 1998, 1997 and 1996
was $7.04, $8.19 and $9.24, respectively. The Black-Scholes model, as
well as other currently accepted option valuation models, was developed
to estimate the fair value of freely-tradable, fully-transferable
options without vesting restrictions, which significantly differ from
the Company's stock option plans. These models also require highly
subjective assumptions, including future stock price volatility and
expected time until exercise, which greatly affect the calculated fair
value on the grant date.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan that provides for Preferred
Stock Purchase Rights ("Rights") that attach to and transfer with each
share of common stock. When the Rights become exercisable, each Right
entitles the holder to purchase from the Company one unit consisting of
1/100 of a share of Series A Junior Participating Preferred Stock for
$50 per unit, subject to adjustment. The Rights become exercisable if
(i) a person or group ("Acquiring Person") has acquired, or obtained the
right to acquire, 20 percent or more of the outstanding shares of common
stock, (ii) a person becomes the beneficial owner of 30 percent or more
of the outstanding shares of common stock, (iii) an Acquiring Person
engages in one or more "self-dealing" transactions with the Company or
(iv) an event occurs which results in an Acquiring Person's ownership
interest being increased by more than 1 percent. Upon exercise and
payment of the purchase price for the Rights, the Rights holder (other
than an Acquiring Person) will have the right to receive Company common
stock (or, in certain circumstances, cash, property or other securities
of the Company) equal to two times the purchase price. The Company is
entitled to redeem the Rights at any time prior to the expiration of the
Rights in January 1999, or 10 days following the time that a person has
acquired beneficial ownership of 20 percent or more of the shares of
common stock then outstanding. The Company is entitled to redeem the
Rights in whole, but not in part, at a price of $0.01 per Right, subject
to adjustment.
NOTE 10 EARNINGS (LOSS) PER SHARE
Effective December 28, 1997, the Company adopted Statement 128,
"Earnings per Share." In accordance with Statement 128, primary earnings
per share have been replaced with basic earnings per share and fully
diluted earnings per share have been replaced with diluted earnings per
share which includes potentially dilutive securities such as outstanding
stock options. Prior periods have been restated to conform to Statement
128.
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per
share is computed by dividing income (loss) 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 earnings per share by
application of the treasury stock method. The following table sets forth
the computation of basic and diluted earnings (loss) per share:
39
<PAGE> 41
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss) $(10,838) $ 1,569 $(9,288)
======== ======= =======
Denominator:
Denominator for basic earnings (loss) per
share - weighted average shares outstanding 6,121 6,044 5,936
Effect of dilutive securities:
Dilutive options outstanding -- 250 --
-------- ------- -------
Denominator for diluted earnings (loss) per
share - adjusted weighted average shares 6,121 6,294 5,936
======== ======= =======
Basic earnings (loss) per share $ (1.77) $ 0.26 $ (1.56)
======== ======= =======
Diluted earnings (loss) per share $ (1.77) $ 0.25 $ (1.56)
======== ======= =======
</TABLE>
As the Company had a net loss for the year ended June 28, 1998, all
959,041 outstanding stock options were excluded from the calculation of
diluted loss per share, because the effect would have been antidilutive.
Options to purchase 301,450 shares of common stock outstanding at June
29, 1997, were not included in the computation of diluted earnings per
share for the year then ended. These options were excluded from the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares of
$16.21 during the period, and therefore the effect would be
antidilutive. Furthermore, as the Company recorded a net loss for the
year ended June 30, 1996, all 801,198 outstanding stock options were
excluded from the calculation of diluted loss per share, because the
effect would have been antidilutive.
NOTE 11 SUBSEQUENT EVENTS
On July 22, 1998, and August 5, 1998, respectively, the Company entered
into agreements to sell the production assets and manufacturing facility
located in Puerto Rico. The purchase price of the equipment and facility
is expected to approximate $3,200 (unaudited) and the Company
anticipates a gain on the sale of the manufacturing facility of
approximately $600 (unaudited) when both transactions close in the first
half of fiscal 1999.
Additionally, on July 6, 1998, the Company's Board of Directors approved
a repricing of outstanding stock options granted under the Emulex
Corporation Employee Stock Option Plan. Employees were able, at their
discretion, to reprice outstanding options with a current option price
per share in excess of $6.00 to an exercise price of $6.00 per share
which was the market value of July 6, 1998. Stock options totaling
542,874 shares were repriced. The vesting schedule of the options which
were repriced remains unchanged; however, no options which have been
repriced may be exercised for a period of 12 months, or until July 6,
1999, regardless of prior vesting. This repricing specifically excluded
all options held by Paul F. Folino, the Company's chief executive
officer. Furthermore, this repricing did not apply to any shares issued
under the Director Plan.
40
<PAGE> 42
NOTE 12 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Net Net Diluted earnings
revenues Gross profit income (loss) (loss) per share
-------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
1998:
Fourth quarter $ 13,966 $ 5,578 $ 200 $ 0.03
Third quarter 15,019 4,203 (12,755) (2.08)
Second quarter 15,493 6,875 1,108 0.18
First quarter 15,007 6,171 609 0.10
-------- -------- --------
Total $ 59,485 $ 22,827 $(10,838)
======== ======== ========
1997:
Fourth quarter $ 15,742 $ 6,424 $ 920 $ 0.15
Third quarter 17,011 6,999 1,103 0.18
Second quarter 16,058 5,946 487 0.08
First quarter 15,952 5,470 (941) (0.16)
-------- -------- --------
Total $ 64,763 $ 24,839 $ 1,569
======== ======== ========
</TABLE>
41
<PAGE> 43
CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES
42
<PAGE> 44
Schedule II
EMULEX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended June 28, 1998, June 29, 1997 and June 30, 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Amounts Balance
Beginning Costs and Written at End
Classification of Period Expenses Off of Period
- -------------- --------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Year ended June 28, 1998:
Allowance for doubtful accounts $ 496 $ 190 $ 110 $ 576
====== ====== ======= ======
Inventory valuation reserves $1,196 $2,865 $ 3,824 $ 237
====== ====== ======= ======
Year ended June 29, 1997:
Allowance for doubtful accounts $ 482 $ 131 $ 117 $ 496
====== ====== ======= ======
Inventory valuation reserves $1,709 $1,249 $ 1,762 $1,196
====== ====== ======= ======
Year ended June 30, 1996:
Allowance for doubtful accounts $ 492 $ 125 $ 135 $ 482
====== ====== ======= ======
Inventory valuation reserves $1,740 $ 840 $ 871 $1,709
====== ====== ======= ======
</TABLE>
43
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
EMULEX CORPORATION
Date: September 23, 1998 By: /s/ Paul F. Folino
-------------------------------------
Paul F. Folino,
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on September 23, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
Principal Executive Officer:
/s/ Paul F. Folino President, Chief Executive Officer
- ---------------------------------- and Director
(Paul F. Folino)
Principal Financial and Accounting Officer:
/s/ Michael J. Rockenbach Vice President, Chief Financial
- ---------------------------------- Officer and Secretary
(Michael J. Rockenbach)
/s/ Fred B. Cox Director and Chairman of the Board
- ----------------------------------
(Fred B. Cox)
/s/ Robert H. Goon Director
- ----------------------------------
(Robert H. Goon)
/s/ Don M. Lyle Director
- ----------------------------------
(Don M. Lyle)
/s/ Michael P. Downey Director
- ----------------------------------
(Michael P. Downey)
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
- ----------- ---------------------- --------------------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended.
3.2 By-laws, as amended.
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).
4.1 Rights Agreement dated as of January 19, 1989 between Emulex
Corporation and First Interstate Bank, Ltd. (incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form
8-K filed February 2, 1989).
10.1 Emulex Corporation Non-Employee Director Stock Option Plan
(incorporated by reference to Annex E and F to the Registrant's
Proxy Statement dated January 24, 1994 for the Special Meeting of
Stockholders Held on February 24, 1994).
10.2 Standard Industrial Lease--Net dated April 6, 1982 between C.J.
Segerstrom & Sons and the Registrant and amendments thereto
(incorporated by reference to Exhibit 10.15 to Registration
Statement on Form S-1 [File No. 2-79466] filed on September 23,
1982, Exhibit 10.8 to the Registrant's 1983 Annual Report on Form
10-K, and Exhibit 10.6 to the Registrant's 1986 Annual Report on
Form 10-K).
10.3 Amendment #9 to Standard Industrial Lease--Net dated April 6,
1982 between C.J. Segerstrom & Sons and the Registrant
(incorporated by reference to Exhibit 10.9 to the Registrant's
1990 Annual Report on Form 10-K).
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
- ----------- ---------------------- --------------------
<S> <C> <C>
10.4 Second Amendment of Amendment #9 to Standard Industrial
Lease--Net dated March 29, 1990 between C.J. Segerstrom & Sons
and the Registrant (incorporated by reference to Exhibit 10.10 to
the Registrant's 1990 Annual Report on Form 10-K).
10.5 1993 Amendment to Standard Industrial Lease - Net dated April 29,
1993 between C.J. Segerstrom & Sons and the Registrant
(incorporated by reference to Exhibit 10.9 to the Registrant's
1993 Annual Report of Form 10-K).
10.6 Distribution Agreement dated as of January 24, 1994 among Emulex
Corporation, a Delaware corporation, Emulex Corporation, a
California corporation, and QLogic Corporation (incorporated by
reference to Exhibit 10.10 to the Registrant's 1994 Annual Report
of Form 10-K).
10.7 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation (incorporated by reference to
Exhibit 10.11 to the Registrant's 1994 Annual Report of Form
10-K).
10.8 Administrative Services Agreement, dated as of February 21, 1993,
among Emulex Corporation, a California corporation, Emulex
Corporation, a Delaware corporation, and QLogic Corporation
(incorporated by reference to Exhibit 10.12 to the Registrant's
1994 Annual Report of Form 10-K).
10.9 Employee Benefits Allocation Agreement, dated as of January 24,
1994, among Emulex Corporation, a Delaware corporation, Emulex
Corporation, a California corporation, and QLogic Corporation
(incorporated by reference to Exhibit 10.13 to the Registrant's
1994 Annual Report of Form 10-K).
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
- ----------- ---------------------- --------------------
<S> <C> <C>
10.10 Form of Assignment, Assumption and Consent Re: Lease among Emulex
Corporation, a California corporation, QLogic Corporation and
C.J. Segerstrom & Sons, a general partnership (incorporated by
reference to Exhibit 10.14 to the Registrant's 1994 Annual Report
of Form 10-K).
10.11 Intellectual Property Assignment and Licensing Agreement, dated
as of January 24, 1994, between Emulex Corporation, a California
corporation, and QLogic Corporation (incorporated by reference to
Exhibit 10.15 to the Registrant's 1994 Annual Report of Form
10-K).
10.12 Form of Supplement to Tax Sharing Agreement among Emulex
Corporation, a Delaware corporation, Emulex Corporation, a
California corporation, and QLogic Corporation. (incorporated by
reference to Exhibit 10.12 to the Registrant's 1995 Annual Report
of Form 10-K).
10.13 Emulex Corporation Employee Stock Option Plan as amended November
21, 1996 (incorporated by reference to Appendix A to the
Registrant's Proxy Statement dated October 21, 1996 for the
Annual Meeting of Stockholders Held on November 21, 1996.)
10.14 Amended and Restated Loan and Security Agreement dated as of
September 18, 1996 between Silicon Valley Bank and Emulex
Corporation, InterConnections, Inc., and Emulex Europe Limited.
10.15 Collateral Assignment, Patent Mortgage and Security Agreement
dated as of September 18, 1996 between Digital House, Ltd. and
Silicon Valley Bank.
10.16 Supplement to Collateral Assignment dated September 18, 1996 by
Emulex Corporation, InterConnections, Inc. and Emulex Europe
Limited in favor of Silicon Valley Bank.
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
- ----------- ---------------------- --------------------
<S> <C> <C>
10.17 Amendment to Loan Agreement dated September 18, 1997 between
Silicon Valley Bank and Emulex Corporation, InterConnections,
Inc., and Emulex Europe Limited.
10.18 Supplement to Collateral Assignment dated as of September 18,
1997 by Emulex Corporation, InterConnections, Inc. and Emulex
Europe Limited in favor of Silicon Valley Bank.
10.19 Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors.
10.20 Emulex Corporation Employee Stock Option Plan as amended November
20, 1997.
10.21 Amendment to Loan Agreement dated September 18, 1998 between
Silicon Valley Bank and Emulex Corporation, InterConnections,
Inc., and Emulex Europe Limited.
21 List of the Registrant's subsidiaries.
23 Independent Auditors' Consent.
27.1 Financial Data Schedule
</TABLE>
48
<PAGE> 1
EXHIBIT 10.19
EMULEX CORPORATION
1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE.
(a) The purpose of the Emulex Corporation 1997 Stock Option Plan for
Non-Employee Directors (the "Plan") is to provide a means by which each director
of Emulex Corporation, a Delaware corporation (the "Company"), who is not an
employee of the Company or any of its subsidiaries (each such person being
hereafter referred to as a "Non-Employee Director") will be given an opportunity
to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the Company
(the "Board") unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. The Committee shall act pursuant to a majority vote
or the written consent of a majority of its members, and minutes shall be kept
of all of its meetings and copies thereof shall be provided to the Board.
Subject to the provisions of the Plan and the directions of the Board, the
Committee may establish and follow such rules and regulations for the conduct of
its business as it may deem advisable.
(c) No member of the Board or the Committee shall be liable for any action
or determination undertaken or made in good faith with respect to the Plan or
any agreement executed pursuant to the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to options granted under
the Plan shall not exceed in the aggregate One Hundred Thousand (100,000) shares
of the Company's common stock (the "Common Stock"). If any option granted under
the Plan shall for any reason expire or otherwise terminate without having been
exercised in full, the stock not purchased under such option shall again become
available for options under the Plan as if no option had been granted with
respect to such shares.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company who
are eligible directors at the time of grant. Each Non-Employee Director shall be
eligible to receive an option under the Plan if such director is not then an
employee of the Company or any of its subsidiaries. A director of the Company
shall not be deemed to be an employee of the Company or any of its subsidiaries
solely by reason of the existence of an agreement between such director and the
Company or any subsidiary thereof pursuant to which the director provides
services as a consultant to the Company or its subsidiaries on a regular or
occasional basis for compensation.
A-1
<PAGE> 2
5. AUTOMATIC GRANTS.
(a) Each person who is an eligible Non-Employee Director on the date this
Plan is first approved by the stockholders of the Company shall, upon such date,
automatically be granted an initial option to purchase fifteen thousand (15,000)
shares of the Company's Common Stock (subject to adjustment as provided in
paragraph 10 hereof) upon the terms and conditions set forth herein.
(b) Each person who first becomes an eligible Non-Employee Director after
the date this Plan is first approved by the stockholders of the Company shall,
upon the date of his or her initial qualification as an eligible Non-Employee
Director, automatically be granted an initial option to purchase fifteen
thousand (15,000) shares of the Company's Common Stock (subject to adjustment as
provided in paragraph 10 hereof) upon the terms and conditions set forth herein.
(c) Thereafter, on each anniversary of the date of grant of the initial
option to each eligible Non-Employee Director pursuant to subparagraph 5(a) or
5(b), each such eligible Non-Employee Director shall automatically be granted an
additional option to purchase five thousand (5,000) shares of the Company's
Common Stock (subject to adjustment as provided in paragraph 10 hereof) upon the
terms and conditions set forth herein.
6. OPTION PROVISIONS.
Each option shall contain the following terms and conditions:
(a) The term of each option commences on the date it is granted and, unless
sooner terminated as set forth herein, expires on the date ("Expiration Date")
ten years from the date of grant. The term of each option may terminate sooner
than such Expiration Date if the optionee's service as a director of the Company
terminates for any reason or for no reason. In the event of such termination of
service, the option shall terminate on the earlier of the Expiration Date or the
date one year following the date of termination of service. In any and all
circumstances, an option may be exercised following termination of the
optionee's service as a director of the Company only as to that number of shares
as to which it was exercisable on the date of termination of such service under
the provisions of subparagraph 6(e). Notwithstanding the foregoing, if exercise
within the foregoing periods is prohibited under paragraph 13 below, the term of
the option shall be extended to a date thirty (30) days following the first date
on which the condition of paragraph 13 of the Plan has been met, and the option
shall be exercisable as to that number of shares that could have been exercised
on the date of termination of service had the condition of paragraph 13 been
satisfied on that date.
(b) The exercise price of each option shall be one hundred percent (100%)
of the fair market value of the stock subject to such option on the date such
option is granted. For purposes of the Plan, the "fair market value" of any
share of Common Stock of the Company at any date shall be if the Common Stock is
listed on an established stock exchange or exchanges, the last reported sale
price per share on the last trading day immediately preceding such date on the
principal exchange on which it is traded, or if no sale was made on such day on
such principal exchange, at the closing reported bid price on such day on such
exchange, if the Common Stock is not then listed on an exchange, the last
reported sale price per share on the last trading day immediately preceding such
date reported by NASDAQ, or if sales are not reported by NASDAQ or no sale was
made on such day, the average of the closing bid and asked prices per share for
the Common Stock in the over-the-counter market as quoted on NASDAQ on such day,
or if the Common Stock is not then listed on an exchange or quoted on NASDAQ, an
amount determined in good faith by the Board or the Committee.
(c) An option that is exercisable may be exercised by the delivery to the
Company of written notice of exercise on any business day, at the Company's
principal office, addressed to the attention of the Board or the Committee. Such
notice shall specify the number of shares of Common Stock with respect to which
the option is being exercised and shall be accompanied by payment in full of the
exercise price per share of the shares of Common Stock for which the option is
being exercised. Payment of the exercise price of each option is due in full in
cash upon any exercise when the number of shares being purchased upon such
exercise is less
A-2
<PAGE> 3
than 1,000 shares; but when the number of shares being purchased upon an
exercise is 1,000 or more shares, the optionee may elect to make payment of the
exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash at the time of
exercise; or
(ii) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in The Wall Street Journal, payment
by delivery of already owned shares of Common Stock of the Company owned by
the optionee for at least six (6) months and owned free and clear of any
liens, claims, encumbrances or security interests, which Common Stock shall
be valued at fair market value on the date of exercise; or
(iii) Provided that at the time of exercise the Company's Common Stock
is publicly traded and quoted regularly in The Wall Street Journal, a copy
of instructions to a broker directing such broker to sell the Common Stock
for which such Option is exercised, and to remit to the Company the
aggregate exercise price of such Stock Option (a "cashless exercise").
Payment in full of the exercise price per share need not accompany the
written notice of exercise provided that the notice of exercise directs
that the certificate or certificates for the shares of Common Stock for
which the option is exercised be delivered to a licensed broker acceptable
to the Company as the agent for the individual exercising the option and,
at the time such certificate or certificates are delivered, the broker
tenders to the Company cash (or cash equivalents acceptable to the Company)
equal to the exercise price per share for the shares of Common Stock
purchased pursuant to the exercise of the option plus the amount (if any)
of federal and/or other taxes which the Company may, in its judgment, be
required to withhold with respect to the exercise of the option.
(iv) Payment by a combination of the methods of payment specified in
subparagraphs 6(c)(i), 6(c)(ii) and 6(c)(iii) above.
(d) An option shall not be transferable except by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Internal Revenue Code of 1986, as amended (the "Code"), or Title
I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
or the rules thereunder (a "QDRO"), and shall be exercisable during the lifetime
of the person to whom the option is granted only by such person or by his
guardian or legal representative or any transferee pursuant to a QDRO.
(e) The options shall become exercisable in installments as follows:
(i) Each of the options described in subparagraph 5(a) or 5(b) shall
become exercisable in installments as follows: one-third (1/3) of the
shares covered by the option (5,000 shares) on each of the first three
anniversaries of the date of grant, until all the shares have become
purchasable, provided that options shall become exercisable only during
periods that the optionee is a director of the Company.
(ii) Each of the options described in subparagraph 5(c) shall become
exercisable in installments as follows: one-half (1/2) of the shares
covered by the option (2,500 shares) on the date six (6) months after the
date of grant, one-fourth (1/4) of the shares covered by the option (1,250
shares) on the date nine (9) months after the date of grant, and one-fourth
(1/4) of the shares covered by the option (1,250 shares) on the first
anniversary of the date of grant, until all the shares have become
purchasable; provided that options shall become exercisable only during
periods that the optionee is a director of the Company.
(iii) Subject to the limitations contained herein, including, without
limitation, those contained in subparagraph 13(b), each option shall be
exercisable with respect to each installment on or after the date of
exercisability applicable to such installment.
(f) Each option shall contain a representation and any optionee may be
required, as a condition of the grant of the option and the issuance of shares
covered by his or her option, to represent that the option and the shares to be
acquired pursuant to exercise of the option will be acquired for investment and
without a view to distribution thereof. In addition, the Company may require any
optionee or any person to whom an option is transferred under subparagraph 6(d),
as a condition of exercising any such option: (i) to give written assurances
satisfactory to the Company as to the optionee's knowledge and experience in
financial and
A-3
<PAGE> 4
business matters; (ii) and to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. These requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (A) the issuance of the
shares upon the exercise of the option has been registered under a then
currently effective registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), or (B) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws.
(g) Notwithstanding anything to the contrary contained herein, an option
may not be exercised unless the shares issuable upon exercise of such option are
then registered under the Securities Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan or any stock issued or issuable pursuant to any such option. If the Company
is unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such options.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms,
(b) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or shall affect any right of the Company or its Board or
stockholders to terminate the service of any Non-Employee Director with or
without cause.
(c) No Non-Employee Director, individually or as a member of a group, and
no beneficiary or other person claiming under or through him or her, shall have
any right, title or interest in or to any option reserved for the purposes of
the Plan except as to such shares of Common Stock, if any, as shall have been
reserved for him or her pursuant to an option granted to him or her.
(d) In connection with each option made pursuant to the Plan, it shall be a
condition precedent to the Company's obligation to issue or transfer shares to a
Non-Employee Director or to evidence the removal of any restrictions on transfer
that such Non-Employee Director make arrangements satisfactory to the Company to
insure that the amount of any federal or other withholding tax required to be
withheld with respect to such sale or transfer, or such removal or lapse, is
made available to the Company for timely payment of such tax. The Non-Employee
Director may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by any of the following means or by a
combination of such means: (i) tendering a cash payment; (ii) authorizing the
Company to withhold from the shares of Common
A-4
<PAGE> 5
Stock otherwise issuable to the participant as a result of the exercise of the
stock option a number of shares having a fair market value less than or equal to
the amount of withholding tax obligation; (iii) or delivering to the Company
owned and unencumbered shares of Common Stock having a fair market value less
than or equal to the amount of the withholding tax obligation.
(e) In the event of the death of an optionee, any option (or unexercised
portion thereof) held by the optionee, to the extent exercisable by him or her
on the date of death, may be exercised by the optionee's personal
representatives, heirs, or legatees subject to the provisions of subparagraphs
6(a) and 6(e) hereof.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan or subject to
any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding
options will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding options.
(b) In the event of a liquidation of the Company, or a merger,
reorganization, or consolidation of the Company with any other corporation in
which the Company is not the surviving corporation or the Company becomes a
subsidiary of another corporation, any unexercised options theretofore granted
under the Plan shall be deemed cancelled unless the surviving corporation in any
such merger, reorganization, or consolidation elects to assume the options under
the Plan or to use substitute options in place thereof; provided, however, that,
notwithstanding the foregoing, if such options would otherwise be cancelled in
accordance with the foregoing, the optionee shall have the right, exercisable
during a ten-day period ending on the fifth day prior to such liquidation,
merger, or consolidation, to fully exercise the optionee's option in whole or in
part without regard to any installment exercise provisions otherwise provided by
subparagraph 6(e). In the event of a Change in Control of the Company, as
defined below, any unexercised option theretofore granted under the Plan which
is not then already exercisable as to all of the shares subject to the option
shall become exercisable upon such Change in Control in addition to the shares,
if any, as to which the option is already exercisable. To the extent that the
foregoing adjustments relate to stock or securities of the Company, such
adjustments shall be made by the Board or the Committee, the determination of
which in that respect shall be final, binding, and conclusive. A "Change in
Control" shall be deemed to have occurred if:
(i) any person, or any two or more persons acting as a group, and all
affiliates of such person or persons, shall own beneficially
one-third (1/3) or more of the common stock of the Company outstanding; or
(ii) if following:
(A) a tender or exchange offer for voting securities of the Company
(other than any such offer made by the Company), or
(B) a proxy contest for election of directors of the Company,
the persons who were directors of the Company immediately before the
initiation of such event (or directors who were appointed by such
directors) cease to constitute a majority of the Board of the Company upon
the completion of such tender or exchange offer or proxy contest or within
one year after such completion.
A-5
<PAGE> 6
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the vote of the
majority of the shares of the Company represented and voting at a duly held
meeting within twelve (12) months before or after the adoption of the amendment,
where the amendment will:
(i) Materially increase the number of shares which may be issued
under the Plan;
(ii) Materially modify the requirements as to eligibility for
participation in the Plan; or
(iii) Materially increase the benefits accruing to participants under
the Plan, whether by increasing the number of shares for which an option
may be granted to an optionee or otherwise.
(b) Rights and obligations under any option granted before amendment of the
Plan shall not be altered or impaired by any amendment of the Plan except with
the consent of the person to whom the option was granted.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless sooner
terminated, the Plan shall terminate on October 31, 2007. No options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the Plan
except with the consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events
described in subparagraph 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
The Plan shall become effective on November 1, 1997, subject to the
condition subsequent that the Plan is approved by the vote or written consent of
the holders of a majority of the shares of the Company represented and voting at
the next special or annual meeting of stockholders of the Company. No option
shall be granted under the Plan unless and until the stockholder approval
condition of this paragraph 13 has been satisfied.
14. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
members of the Board or the Committee, the members of the Board or the Committee
administering the Plan shall be indemnified by the Company against reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection with the defense of any action, suit, or proceeding, or in connection
with any appeal therein, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan or
any option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any action, suit, or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit, or proceeding that such member is liable
for negligence or misconduct in the performance of his or her duties, provided
that within 60 days after institution of any such action, suit, or proceeding,
the member shall in writing offer the Company the opportunity, at its own
expense, to handle and defend the same.
15. CAPTIONS.
The use of captions in this Plan or any related option agreement is for the
convenience of reference only and shall not affect the meaning of any provision
of the Plan or such option agreement.
A-6
<PAGE> 7
16. OTHER PROVISIONS.
Each option granted under the Plan may contain such other terms and
conditions not inconsistent with the Plan as may be determined by the Board or
Committee, in its sole discretion.
17. NUMBER AND GENDER.
With respect to words used in this Plan, the singular form shall include
the plural form, the masculine gender shall include the feminine gender, etc.,
as the context requires.
18. SEVERABILITY.
If any provision of the Plan or any option agreement shall be determined to
be illegal or unenforceable by any court of law in any jurisdiction, the
remaining provisions hereof and thereof shall be severable and enforceable in
accordance with their terms, and all provisions shall remain enforceable in any
other jurisdiction.
19. GOVERNING LAW.
The validity and construction of this Plan and the instruments evidencing
the options granted hereunder shall be governed by and construed in accordance
with the laws of the State of California.
A-7
<PAGE> 1
EXHIBIT 10.20
EMULEX CORPORATION
EMPLOYEE STOCK OPTION PLAN
1. PURPOSE. The purpose of this Emulex Corporation Employee Stock Option
Plan ("Plan") is to further the growth and development of Emulex Corporation
("Company") and its subsidiaries by providing, through ownership of stock of the
Company, an incentive to officers and other key employees who are in a position
to contribute materially to the prosperity of the Company, to increase such
persons' interests in the Company's welfare, to encourage them to continue their
services to the Company or its subsidiaries, and to attract individuals of
outstanding ability to enter the employment of the Company or its subsidiaries.
2. INCENTIVE AND NON-QUALIFIED STOCK OPTIONS. Two types of options
(referred to herein as "options" without distinction between such two types) may
be granted under the Plan: Options intended to qualify as incentive stock
options ("incentive stock options") under Section 422 of the Internal Revenue
Code of 1986, as amended, and any successor statutes ("Code"); and other options
not specifically authorized or qualified for favorable income tax treatment by
the Code ("non-qualified stock options").
3. ADMINISTRATION.
3.1 Administration by Board. Subject to Section 3.2, the Plan may be
administered by the Board of Directors of the Company (the "Board") during such
periods of time as all members of the Board are "disinterested persons" as
defined in Rule 16b-3(c)(2)(i) promulgated by the Securities and Exchange
Commission (a "disinterested person"). Subject to the provisions of the Plan,
the Board shall have authority to construe and interpret the Plan, to
promulgate, amend, and rescind rules and regulations relating to its
administration, from time to time to select from among the eligible employees
(as determined pursuant to Section 4) of the Company and its subsidiaries those
employees to whom options will be granted, to determine the timing and manner of
the grant of the options, to determine the exercise price, the number of shares
covered by and all of the terms of the options, to determine the duration and
purpose of leaves of absence which may be granted to optionees without
constituting termination of their employment for purposes of the Plan, and to
make all of the determinations necessary or advisable for administration of the
Plan. The interpretation and construction by the Board of any provisions of the
Plan, or of any agreement issued and executed under the Plan, shall be final and
binding upon all parties. No member of the Board shall be liable for any action
or determination undertaken or made in good faith with respect to the Plan or
any agreement executed pursuant to the Plan.
3.2 Administration by Committee. The Board may, in its sole discretion,
delegate any or all of its administrative duties, and at any time the Board
includes any person who is not a disinterested person, the Board shall delegate
all of its administrative duties during such period of time, to a committee (the
"Committee") of not fewer than two (2) members of the Board, all of the members
of which Committee shall be persons who, in the opinion of counsel to the
Company, are disinterested persons, to be appointed by and serve at the pleasure
of the Board. From time to time, the Board may increase or decrease (to not less
than two members) the size of the Committee, and add additional members to, or
remove members from, the Committee. The Committee shall act pursuant to a
majority vote, or the written consent of a majority of its members, and minutes
shall be kept of all of its meetings and copies thereof shall be provided to the
Board. Subject to the provisions of the Plan and the directors of the Board, the
Committee may establish and follow such rules and regulations for the conduct of
its business as it may deem advisable. No member of the Committee shall be
liable for any action or determination undertaken or made in good faith with
respect to the Plan or any agreement executed pursuant to the Plan.
4. ELIGIBILITY. Any employee of the Company or any of its subsidiaries who
does not own stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any of its parent or subsidiary
corporations shall be eligible to receive an option under the Plan. A director
or employee may receive more than one option under the Plan. No director who is
not also an employee shall be eligible to receive an option under the Plan.
1
<PAGE> 2
5. SHARES SUBJECT TO OPTIONS. The stock available for grant of options
under the Plan shall be shares of the Company's authorized but unissued, or
reacquired, common stock. The aggregate number of shares which may be issued
pursuant to exercise of options granted under the Plan (including shares issued
from the date of adoption of the Plan) shall not exceed 2,780,000 shares of
common stock (subject to adjustment as provided in Section 6.14). In the event
that any outstanding option under the Plan for any reason expires or is
terminated, the shares of common stock allocable to the unexercised portion of
the option shall again be available for options under the Plan as if no option
had been granted with respect to such shares.
6. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan shall
be evidenced by agreements (which need not be identical) in such form and
containing such provisions which are consistent with the Plan as the Board or
Committee shall from time to time approve. Each agreement shall specify whether
the option granted thereby is an incentive stock option or a nonqualified stock
option. Such agreements may incorporate all or any of the terms hereof by
reference and shall comply with and be subject to the following terms and
conditions:
6.1 Number of Shares Subject to Option. Each option agreement shall
specify the number of shares subject to the option.
6.2 Option Price. The purchase price for the shares subject to any
option shall not be less than 100% of the fair market value of the shares of
common stock of the Company on the date the option is granted. For purposes of
the Plan, the "fair market value" of any share of common stock of the Company at
any date shall be (a) if the common stock is listed on an established stock
exchange or exchanges, the last reported sale price per share on such date on
the principal exchange on which it is traded, or if no sale was made on such
date on such principal exchange, at the closing reported bid price on such date
on such exchange, or (b) if the common stock is not then listed on an exchange,
the last reported sale price per share on such date reported by NASDAQ, or if
sales are not reported by NASDAQ or no sale was made on such date, the average
of the closing bid and asked prices per share for the common stock in the
over-the-counter market as quoted on NASDAQ on such date, or (c) if the common
stock is not then listed on an exchange or quoted on NASDAQ, an amount
determined in good faith by the Board or the Committee.
6.3 Medium and Time of Payment. The purchase price for any shares
purchased pursuant to exercise of an option granted under the Plan shall be paid
in full upon exercise of the option in cash, or by check, or, at the discretion
of the Board or the Committee, upon such terms and conditions as the Board or
the Committee shall approve, by transferring to the Company for redemption
shares of common stock of the Company at their fair market value (determined in
the manner provided in Section 6.2 as of the date provided in Section 6.5).
Shares of common stock transferred to the Company upon exercise of an option
shall not increase the number of shares available for issuance under the Plan.
Notwithstanding the foregoing, the Company may extend and maintain, or arrange
for the extension and maintenance of, credit to any optionee to finance the
optionee's purchase of shares pursuant to exercise of any option, on such terms
as may be approved by the Board or the Committee, subject to applicable
regulations of the Federal Reserve Board and any other laws or regulations in
effect at the time such credit is extended.
6.4 Term of Option. No option granted to an employee (including a
director who is an employee) shall be exercisable after the expiration of the
earliest of (i) ten years after the date the option is granted, (ii) three
months after the date the optionee's employment with the Company and its
subsidiaries terminates if such termination is for any reason other than
permanent disability, death, or cause, (iii) the date the optionee's employment
with the Company and its subsidiaries terminates if such termination is for
cause, as determined by the Board or by the Committee, in its sole discretion,
or (iv) one year after the date the optionee's employment with the Company and
its subsidiaries terminates if such termination is a result of death or
permanent disability, or death or permanent disability results within not more
than three months of the date on which the optionee ceases to be an employee;
provided, however, that the option agreement for any option may provide for
shorter periods in each of the foregoing instances. For the purposes of this
Section 6.4(a), "permanent disability" shall mean a disability of the type
defined in Section 22(e)(3) of the Code.
6.5 Exercise of Option. No option shall be exercisable during the
lifetime of an optionee by any person other than the optionee. The Board or the
Committee shall have the power to set the time or times within which each
2
<PAGE> 3
option shall be exercisable and to accelerate the time or times of exercise.
Unless otherwise provided by the Board or the Committee, each option granted
under the Plan shall become exercisable on a cumulative basis as to 25% of the
total number of shares covered thereby at any time after one year from the date
the option is granted and an additional 6 1/4% of such total number of shares at
any time after the end of each consecutive calendar quarter thereafter until the
option has become exercisable as to all of such total number of shares. To the
extent that an optionee has the right to exercise an option and purchase shares
pursuant thereto, the option may be exercised from time to time by written
notice to the Company, stating the number of shares being purchased and
accompanied by payment in full of the purchase price for such shares. If shares
of common stock of the Company are used in part or full payment for the shares
to be acquired upon exercise of the option, such shares shall be valued for the
purpose of such exchange as of the date of exercise of the option in accordance
with the provisions of Sections 6.2 and 6.3. Any certificate(s) for shares of
outstanding common stock of the Company used to pay the purchase price shall be
accompanied by stock power(s) duly endorsed in blank by the registered holder of
the certificate(s) (with the signature thereon guaranteed). In the event the
certificate(s) tendered by the optionee in such payment cover more shares than
are required for such payment, the certificate(s) shall also be accompanied by
instructions from the optionee to the Company's transfer agent with respect to
disposition of the balance of the shares covered thereby.
6.6 No Transfer of Option. No option shall be transferable by an
optionee otherwise than by will or the laws of descent and distribution.
6.7 Prior Outstanding Incentive Stock Options. No incentive stock
option granted under the Plan prior to 1987 shall be exercisable to any extent
at any time while there is outstanding any incentive stock option which was
granted prior to the granting of such option to the optionee by the Company or
any subsidiary or parent corporation of the Company or any predecessor
corporation of the Company or any subsidiary or parent corporation of the
Company. For the purpose of this Section 6.7, an option shall be outstanding
until such time as the option is exercised in full or expires by reason of lapse
of time.
6.8 Limit on Incentive Stock Options.
(a) The aggregate fair market value (determined as of the time the
option is granted) of the stock for which any employee may be granted incentive
stock options in any calendar year commencing after December 31, 1980 and
continuing before January 1, 1987 (under all option plans of the Company and its
parent and subsidiary corporations) shall not exceed $100,000 plus any unused
limit carryover to such year allowed under Section 422(c)(4) of the Code.
(b) The aggregate fair market value (determined at the time the
option is granted) of the stock with respect to which incentive stock options
granted after December 31, 1986 are exercisable for the first time by an
optionee during any calendar year (under all incentive stock options plans of
the Company and its subsidiaries) shall not exceed $100,000.
6.9 Restriction on Issuance of Shares. The issuance of options and
shares shall be subject to compliance with all of the applicable requirements of
law with respect to the issuance and sale of securities, including, without
limitation, any required qualification under the California Corporate Securities
Law of 1968, as amended.
6.10 Investment Representation. Any optionee may be required, as a
condition of issuance of shares covered by his or her option, to represent that
the shares to be acquired pursuant to exercise of the option will be acquired
for investment and without a view to distribution thereof; and in such case, the
Company may place a legend on the certificate evidencing the shares reflecting
the fact that they were acquired for investment and cannot be sold or
transferred unless registered under the Securities Act of 1933, as amended, or
unless counsel for the Company is satisfied that the circumstances of the
proposed transfer do not require such registration.
6.11 Rights as a Stockholder or Employee. An optionee or transferee of
an option shall have no rights as a stockholder of the Company with respect to
any shares covered by any option until the date of issuance of a share
certificate for such shares. No adjustment shall be made for dividends (ordinary
or extraordinary, whether cash, securities, or other property) or distribution
or other rights for which the record date is prior to the date such share
certificate is issued, except as provided in Section 6.14. Nothing in the Plan
or in any option agreement shall confer
3
<PAGE> 4
upon any employee any right to continue in the employ of the Company or any of
its subsidiaries or interfere in any way with any right of the Company or any
subsidiary to terminate the optionee's employment at any time.
6.12 No Fractional Shares. In no event shall the Company be required to
issue fractional shares upon the exercise of an option.
6.13 Exercisability in the Event of Death. In the event of the death of
the optionee while he or she is an employee and/or director of the Company or
any of its subsidiaries or within not more than three months of the date on
which he or she ceased to be an employee and/or director, any option or
unexercised portion thereof granted to the optionee, to the extent exercisable
by him or her on the date of death, may be exercised by the optionee's personal
representatives, heirs, or legatees subject to the provisions of Section 6.4
hereof.
6.14 Recapitalization or Reorganization of Company. Except as otherwise
provided herein, appropriate and proportionate adjustments shall be made in the
number and class of shares subject to the Plan and to the option rights granted
under the Plan, and the exercise price of such option rights, in the event of a
stock dividend (but only on common stock), stock split, reverse stock split,
recapitalization, reorganization, merger, consolidation, separation, or like
change in the capital structure of the Company. In the event of a liquidation of
the Company, or a merger, reorganization, or consolidation of the Company with
any other corporation in which the Company is not the surviving corporation or
the Company becomes a wholly-owned subsidiary of another corporation, any
unexercised options theretofore granted under the Plan shall be deemed cancelled
unless the surviving corporation in any such merger, reorganization, or
consolidation elects to assume the options under the Plan or to use substitute
options in place thereof; provided, however, that, notwithstanding the
foregoing, if such options would otherwise be cancelled in accordance with the
foregoing, the optionee shall have the right, exercisable during a ten-day
period ending on the fifth day prior to such liquidation, merger, or
consolidation, to exercise the optionee's option in whole or in part without
regard to any installment exercise provisions in the optionee's option
agreement. To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Board or the
Committee, the determination of which in that respect shall be final, binding,
and conclusive, provided that each option granted pursuant to the Plan shall not
be adjusted in a manner that causes the option to fail to continue to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
6.15 Modification, Extension, and Renewal of Options. Subject to the
terms and conditions and within the limitations of the Plan, the Board or
Committee may modify, extend, or renew outstanding options granted under the
Plan, accept the surrender of outstanding options (to the extent not theretofore
exercised), and authorize the granting of new options in substitution therefor
(to the extent not theretofore exercised). The Board or Committee shall not,
however, modify any outstanding incentive stock option in any manner which would
cause the option not to qualify as an incentive stock option within the meaning
of Section 422 of the Code. Notwithstanding the foregoing, no modification of an
option shall, without the consent of the optionee, alter or impair any rights of
the optionee under the option.
6.16 Other Provisions. Each option may contain such other terms,
provisions, and conditions not inconsistent with the Plan as may be determined
by the Board or Committee.
7. TERMINATION OR AMENDMENT OF PLAN. The Board may at any time terminate
or amend the Plan; provided that, without approval of the stockholders of the
Company, there shall be, except by operation of the provisions of Section 6.14,
no increase in the total number of shares covered by the Plan, no change in the
class of persons eligible to receive options granted under the Plan or other
material modification of the requirements as to eligibility for participation in
the Plan, no material increase in the benefits accruing to participants under
the Plan, no reduction in the exercise price of options granted under the Plan,
and no extension of the latest date upon which options may be exercised; and
provided further that, without the consent of the optionee, no amendment may
adversely affect any then outstanding option or any unexercised portion thereof.
8. INDEMNIFICATION. In addition to such other rights of indemnification as
they may have as members of the Board or the Committee, the members of the Board
or the Committee administering the Plan shall be indemnified by the Company
against reasonable expenses, including attorney's fees, actually and necessarily
incurred in connection with the defense of any action, suit, or proceeding, or
in connection with any appeal therein, to which they or any of
4
<PAGE> 5
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any action, suit, or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit, or
proceeding that such member is liable for negligence or misconduct in the
performance of his duties, provided that within 60 days after institution of any
such action, suit, or proceeding, the member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same.
9. NON-QUALIFIED STOCK OPTION PLAN. The Plan as set forth herein
constitutes an amendment and restatement of the Company's Non-Qualified Stock
Option Plan which was adopted in November 1980. The Board or the Committee may,
in its discretion, authorize the conversion, to the fullest extent permitted by
law, of non-qualified stock options granted under the Non-Qualified Stock Option
Plan prior to such amendment to incentive stock options under this Plan, as so
amended. Any such options converted to incentive stock options shall be treated
as incentive stock options for all purposes under the Plan; provided, however,
that none of the terms or conditions of any such options, including, but not
limited to, the exercise price, the term of the option, and the time(s) within
which the option may be exercised, shall be altered or amended by reason of such
conversion.
10. STOCKHOLDER APPROVAL AND TERM OF PLAN. The Plan shall not take effect
until approved by the stockholders of the Company. Unless sooner terminated by
the Board in its sole discretion, the Plan will expire on September 30, 2000.
5
<PAGE> 1
EXHIBIT 10.21
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
BORROWERS: EMULEX CORPORATION
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
INTERCONNECTIONS, INC.
18606 BOTHELL WAY, N.E.
BOTHELL, WASHINGTON 98011-1929
EMULEX EUROPE LIMITED
MULBERRY BUSINESS PARK, FISHPONDS ROAD
WOKINGHAM, BERKSHIRE
UNITED KINGDOM RG11 2QY
DATED: SEPTEMBER 18, 1998
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrowers named above (jointly and severally referred
to as the "Borrower").
The Parties hereby agree to amend the Amended and Restated Loan and
Security Agreement between them, dated September 18, 1996 (as amended or
modified from time to time, the "Loan Agreement"), as follows, effective as of
the date hereof.
1. REVISED FINANCIAL COVENANTS. The section of the Schedule to Loan
Agreement entitled "Financial Covenants (Section 4.1)" is hereby amended to read
as follows:
<TABLE>
<CAPTION>
"FINANCIAL COVENANTS
<S> <C>
(Section 4.1): Borrower shall cause Parent to comply with all of the
following covenants on a consolidated basis. Compliance
shall be determined as of the end of each quarter, except as
otherwise specifically provided below:
QUICK ASSET RATIO: Parent shall maintain a ratio of "Quick Assets" to current
liabilities of not less than 1.00 to 1.
TANGIBLE NET WORTH: Parent shall maintain a tangible net worth of not less than
$13,000,000 prior to the December 27, 1998 quarter end. With
respect to the period beginning with the December 27, 1998
quarter end and ending with the March 28, 1999
</TABLE>
-1-
<PAGE> 2
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
"FINANCIAL COVENANTS
<S> <C>
quarter end, Parent shall maintain a tangible net worth of
not less than $14,300,000. With respect to the June 27, 1999
quarter end and for all periods thereafter, Parent shall
maintain a tangible net worth of not less than $17,000,000.
DEBT TO TANGIBLE Parent shall maintain a ratio of total liabilities to
NET WORTH RATIO: tangible net worth of not more than 1.50 to 1 prior to the
quarter ending December 27, 1998. With respect to the
quarter ending December 27, 1998 and thereafter, Parent
shall maintain a ratio of total liabilities to tangible net
worth of not more than 1.00 to 1.
PROFITABILITY Parent shall not incur a loss (after taxes) in any fiscal
quarter, with the understanding that any gain that the
Parent achieves arising from the sale of assets located in
Puerto Rico shall not be included in determining compliance
with the foregoing covenant.
DEFINITIONS: "Current assets," and "current liabilities" shall have the
meanings ascribed to them in accordance with generally
accepted accounting principles. "Tangible net worth" means
the excess of total assets over total liabilities,
determined in accordance with generally accepted accounting
principles, excluding however all assets which would be
classified as intangible assets under generally accepted
accounting principles, including without limitation
goodwill, licenses, patents, trademarks, trade names,
copyrights, capitalized software and organizational costs,
licenses and franchises. "Quick Assets" means cash on hand
or on deposit in banks, readily marketable securities issued
by the United States, readily marketable commercial paper
rated "A-1" by Standard & Poor's Corporation (or a similar
rating by a similar rating organization), cash equivalents,
certificates of deposit and banker's acceptances, and
accounts receivable (net of allowance for doubtful
accounts).
DEFERRED REVENUES: For purposes of the above quick asset ratio, deferred
revenues shall not be counted as current liabilities. For
purposes of the above debt to tangible net worth ratio,
deferred revenues shall not be counted in determining total
liabilities but shall be counted in determining tangible net
worth for purposes of such ratio. For all other purposes
deferred revenues shall be counted as liabilities in
accordance with generally accepted accounting principles.
</TABLE>
-2-
<PAGE> 3
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
"FINANCIAL COVENANTS
<S> <C>
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not
include indebtedness which is subordinated to the
indebtedness to Silicon under a subordination agreement in
form specified by Silicon or by language in the instrument
evidencing the indebtedness which is acceptable to Silicon."
</TABLE>
2. REVISED MATURITY DATE. The Maturity Date as set forth in section 5.1
of the Schedule to Loan Agreement is hereby amended to be "SEPTEMBER 17, 1999".
3. FEE. Borrower shall pay to Silicon a fee in the amount of $50,000 in
connection with this Amendment, which shall be in addition to all interest and
all other amounts payable hereunder and which shall not be refundable.
4. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and the same
are hereby ratified and confirmed.
BORROWER: SILICON:
EMULEX CORPORATION SILICON VALLEY BANK
BY /s/ PAUL F. FOLINO BY /s/ MARLA JOHNSON
PRESIDENT OR VICE PRESIDENT TITLE: VICE PRESIDENT
BY /s/ MICHAEL J. ROCKENBACH
SECRETARY OR ASS'T SECRETARY
BORROWER: BORROWER:
INTERCONNECTIONS, INC. EMULEX EUROPE LIMITED
BY /s/ PAUL F. FOLINO BY /s/ PAUL F. FOLINO
PRESIDENT OR VICE PRESIDENT PRESIDENT OR VICE PRESIDENT
BY /s/ MICHAEL J. ROCKENBACH BY /s/ MICHAEL J. ROCKENBACH
SECRETARY OR ASS'T SECRETARY SECRETARY OR ASS'T SECRETARY
-3-
<PAGE> 4
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
- --------------------------------------------------------------------------------
GUARANTORS' CONSENT
The undersigned, guarantors, acknowledge that their consent to the foregoing
Amendment is not required, but the undersigned nevertheless do hereby consent to
the foregoing Amendment and to the documents and agreements referred to therein
and to all future modifications and amendments thereto, and to any and all other
present and future documents and agreements between or among the foregoing
parties. Nothing herein shall in any way limit any of the terms or provisions of
the Continuing Guaranty executed by the undersigned in favor of Silicon, which
are hereby ratified and affirmed and shall continue in full force and effect.
Guarantor Signature: Emulex Corporation, a Delaware corporation
By /s/ Paul F. Folino
Title: President
Guarantor Signature: Emulex Caribe, Inc.
By /s/ Paul F. Folino
Title: President
Guarantor Signature: InterConnections, Inc., a California corporation
(formerly known as Digital House, Ltd.)
By /s/ Paul F. Folino
Title: President
Guarantor Signature: Emulex Foreign Sales Corporation
By /s/ Paul F. Folino
Title: President
-4-
<PAGE> 5
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
CERTIFIED RESOLUTION
BORROWER: EMULEX CORPORATION, A CORPORATION ORGANIZED UNDER
THE LAWS OF THE STATE OF CALIFORNIA
ADDRESS: 3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
DATE: SEPTEMBER 18, 1998
I, the undersigned, Secretary or Assistant Secretary of the above-named
borrower, a corporation organized under the laws of the state set forth above,
do hereby certify that the following is a full, true and correct copy of
resolutions duly and regularly adopted by the Board of Directors of said
corporation as required by law, and by the by-laws of said corporation, and that
said resolutions are still in full force and effect and have not been in any way
modified, repealed, rescinded, amended or revoked.
RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"),
from time to time, such sum or sums of money as, in the judgment of the
officer or officers hereinafter authorized hereby, this corporation may
require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
loan agreements, security agreements, notes, financing statements, and other
documents and instruments providing for such loans and evidencing and/or
securing such loans, with interest thereon, and said authorized officers are
authorized from time to time to execute renewals, extensions and/or
amendments of said loan agreements, security agreements, and other documents
and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all indebtedness
of this corporation to Silicon, whether arising pursuant to this resolution
or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise
hypothecate to Silicon, or deed in trust for its benefit, any property of
any and every kind, belonging to this corporation, including, but not
limited to, any and all real property, accounts, inventory, equipment,
general intangibles, instruments, documents, chattel paper, notes, money,
deposit accounts, furniture, fixtures, goods, and other property of every
kind, and to execute and deliver to Silicon any and all grants, transfers,
trust receipts, loan or credit agreements, pledge agreements, mortgages,
deeds of trust, financing statements, security agreements and other
hypothecation agreements, which said instruments and the note or notes and
other instruments referred to in the preceding paragraph may contain such
provisions, covenants, recitals and agreements as Silicon may require and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
FOREIGN EXCHANGE CONTRACTS
RESOLVED, that this corporation enter into contracts for the purchase and/or
sale of foreign exchange, on either a spot or forward basis, with Silicon,
from time to time, and in such amounts as, in the judgment of the officer or
officers hereinafter authorized hereby, this corporation may require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
documents and instruments evidencing the contracts of this corporation with
Silicon for the purchase or sale of foreign exchange, and said authorized
officers are authorized from time to time to execute renewals, extensions
and/or amendments of said documents and instruments and all other related
agreements.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all of such
obligations regarding the foreign exchange contracts of this corporation to
Silicon, whether arising pursuant to this resolution or otherwise, to grant,
transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or
deed in trust for its benefit, any property of any and every kind, belonging
to this corporation, including, but not limited to, margin, securities, any
and all real property, accounts, inventory, equipment, general intangibles,
instruments, documents, chattel paper, notes, money, deposit accounts,
furniture, fixtures, goods, and other property of every kind, and to execute
and deliver to Silicon any and all grants, transfers, trust receipts, loan
or credit agreements, pledge agreements, mortgages, deeds of trust,
financing statements,
<PAGE> 6
SILICON VALLEY BANK CERTIFIED RESOLUTION
- --------------------------------------------------------------------------------
security agreements and other hypothecation agreements, which said
instruments and the other documents and instruments referred to in the
preceding paragraph may contain such provisions, covenants, recitals and
agreements as Silicon may require and said authorized officers may approve,
and the execution thereof by said authorized officers shall be conclusive
evidence of such approval.
RESOLVED FURTHER, that Silicon may conclusively rely upon a certified copy
of these resolutions and a certificate of the Secretary or Ass't Secretary
of this corporation as to the officers of this corporation and their offices
and signatures, and continue to conclusively rely on such certified copy of
these resolutions and said certificate for all past, present and future
transactions until written notice of any change hereto or thereto is given
to Silicon by this corporation by certified mail, return receipt requested.
The undersigned further hereby certifies that the following
persons are the duly elected and acting officers of the corporation named above
as borrower and that the following are their actual signatures:
<TABLE>
<CAPTION>
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
Paul F. Folino President x /s/ Paul F. Folino
Michael J. Rockenbach Secretary x /s/ Michael J. Rockenbach
</TABLE>
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or Assistant
Secretary on the date set forth above.
/s/ Michael J. Rockenbach
Secretary or Assistant Secretary
-2-
<PAGE> 7
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
CERTIFIED RESOLUTION
BORROWER: INTERCONNECTIONS, INC., A CORPORATION ORGANIZED
UNDER THE LAWS OF THE STATE OF WASHINGTON
ADDRESS: 18606 BOTHELL WAY, N.E.
BOTHELL, WASHINGTON 98011-1929
DATE: SEPTEMBER 18, 1998
I, the undersigned, Secretary or Assistant Secretary of the above-named
borrower, a corporation organized under the laws of the state set forth above,
do hereby certify that the following is a full, true and correct copy of
resolutions duly and regularly adopted by the Board of Directors of said
corporation as required by law, and by the by-laws of said corporation, and that
said resolutions are still in full force and effect and have not been in any way
modified, repealed, rescinded, amended or revoked.
RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"),
from time to time, such sum or sums of money as, in the judgment of the
officer or officers hereinafter authorized hereby, this corporation may
require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
loan agreements, security agreements, notes, financing statements, and other
documents and instruments providing for such loans and evidencing and/or
securing such loans, with interest thereon, and said authorized officers are
authorized from time to time to execute renewals, extensions and/or
amendments of said loan agreements, security agreements, and other documents
and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all indebtedness
of this corporation to Silicon, whether arising pursuant to this resolution
or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise
hypothecate to Silicon, or deed in trust for its benefit, any property of
any and every kind, belonging to this corporation, including, but not
limited to, any and all real property, accounts, inventory, equipment,
general intangibles, instruments, documents, chattel paper, notes, money,
deposit accounts, furniture, fixtures, goods, and other property of every
kind, and to execute and deliver to Silicon any and all grants, transfers,
trust receipts, loan or credit agreements, pledge agreements, mortgages,
deeds of trust, financing statements, security agreements and other
hypothecation agreements, which said instruments and the note or notes and
other instruments referred to in the preceding paragraph may contain such
provisions, covenants, recitals and agreements as Silicon may require and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
FOREIGN EXCHANGE CONTRACTS
RESOLVED, that this corporation enter into contracts for the purchase and/or
sale of foreign exchange, on either a spot or forward basis, with Silicon,
from time to time, and in such amounts as, in the judgment of the officer or
officers hereinafter authorized hereby, this corporation may require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
documents and instruments evidencing the contracts of this corporation with
Silicon for the purchase or sale of foreign exchange, and said authorized
officers are authorized from time to time to execute renewals, extensions
and/or amendments of said documents and instruments and all other related
agreements.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all of such
obligations regarding the foreign exchange contracts of this corporation to
Silicon, whether arising pursuant to this resolution or otherwise, to grant,
transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or
deed in trust for its benefit, any property of any and every kind, belonging
to this corporation, including, but not limited to, margin, securities, any
and all real property, accounts, inventory, equipment, general intangibles,
instruments, documents, chattel paper, notes, money,
<PAGE> 8
SILICON VALLEY BANK CERTIFIED RESOLUTION
- --------------------------------------------------------------------------------
deposit accounts, furniture, fixtures, goods, and other property of every
kind, and to execute and deliver to Silicon any and all grants, transfers,
trust receipts, loan or credit agreements, pledge agreements, mortgages,
deeds of trust, financing statements, security agreements and other
hypothecation agreements, which said instruments and the other documents and
instruments referred to in the preceding paragraph may contain such
provisions, covenants, recitals and agreements as Silicon may require and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
RESOLVED FURTHER, that Silicon may conclusively rely upon a certified copy
of these resolutions and a certificate of the Secretary or Ass't Secretary
of this corporation as to the officers of this corporation and their offices
and signatures, and continue to conclusively rely on such certified copy of
these resolutions and said certificate for all past, present and future
transactions until written notice of any change hereto or thereto is given
to Silicon by this corporation by certified mail, return receipt requested.
The undersigned further hereby certifies that the following persons are the
duly elected and acting officers of the corporation named above as borrower and
that the following are their actual signatures:
<TABLE>
<CAPTION>
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
Paul F. Folino President x /s/ Paul F. Folino
Michael J. Rockenbach Secretary x /s/ Michael J. Rockenbach
</TABLE>
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or
Assistant Secretary on the date set forth above.
/s/ Michael J. Rockenbach
Secretary or Assistant Secretary
-2-
<PAGE> 9
SILICON VALLEY BANK CERTIFIED RESOLUTION
- --------------------------------------------------------------------------------
SILICON VALLEY BANK
CERTIFIED RESOLUTION
BORROWER: EMULEX EUROPE LIMITED, A CORPORATION ORGANIZED
UNDER THE LAWS OF THE UNITED KINGDOM
ADDRESS: MULBERRY BUSINESS PARK, FISHPONDS ROAD
WOKINGHAM, BERKSHIRE
UNITED KINGDOM RG11 2QY
DATE: SEPTEMBER 18, 1998
I, the undersigned, an authorized representative of the above-named
borrower, a corporation organized under the laws of the state set forth above,
do hereby certify that the following is a full, true and correct copy of
resolutions duly and regularly adopted by the Board of Directors of said
corporation as required by law, and by the by-laws of said corporation, and that
said resolutions are still in full force and effect and have not been in any way
modified, repealed, rescinded, amended or revoked.
RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"),
from time to time, such sum or sums of money as, in the judgment of the
officer or officers hereinafter authorized hereby, this corporation may
require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
loan agreements, security agreements, notes, financing statements, and other
documents and instruments providing for such loans and evidencing and/or
securing such loans, with interest thereon, and said authorized officers are
authorized from time to time to execute renewals, extensions and/or
amendments of said loan agreements, security agreements, and other documents
and instruments.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all indebtedness
of this corporation to Silicon, whether arising pursuant to this resolution
or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise
hypothecate to Silicon, or deed in trust for its benefit, any property of
any and every kind, belonging to this corporation, including, but not
limited to, any and all real property, accounts, inventory, equipment,
general intangibles, instruments, documents, chattel paper, notes, money,
deposit accounts, furniture, fixtures, goods, and other property of every
kind, and to execute and deliver to Silicon any and all grants, transfers,
trust receipts, loan or credit agreements, pledge agreements, mortgages,
deeds of trust, financing statements, security agreements and other
hypothecation agreements, which said instruments and the note or notes and
other instruments referred to in the preceding paragraph may contain such
provisions, covenants, recitals and agreements as Silicon may require and
said authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
FOREIGN EXCHANGE CONTRACTS
RESOLVED, that this corporation enter into contracts for the purchase and/or
sale of foreign exchange, on either a spot or forward basis, with Silicon,
from time to time, and in such amounts as, in the judgment of the officer or
officers hereinafter authorized hereby, this corporation may require.
RESOLVED FURTHER, that any officer of this corporation be, and he or she is
hereby authorized, directed and empowered, in the name of this corporation,
to execute and deliver to Silicon, and Silicon is requested to accept, the
documents and instruments evidencing the contracts of this corporation with
Silicon for the purchase or sale of foreign exchange, and said authorized
officers are authorized from time to time to execute renewals, extensions
and/or amendments of said documents and instruments and all other related
agreements.
RESOLVED FURTHER, that said authorized officers be and they are hereby
authorized, directed and empowered, as security for any and all of such
obligations regarding the foreign exchange contracts of this corporation to
Silicon, whether arising pursuant to this resolution or otherwise, to grant,
transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or
deed in trust for
<PAGE> 10
SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT
- --------------------------------------------------------------------------------
its benefit, any property of any and every kind, belonging to this
corporation, including, but not limited to, margin, securities, any and all
real property, accounts, inventory, equipment, general intangibles,
instruments, documents, chattel paper, notes, money, deposit accounts,
furniture, fixtures, goods, and other property of every kind, and to execute
and deliver to Silicon any and all grants, transfers, trust receipts, loan
or credit agreements, pledge agreements, mortgages, deeds of trust,
financing statements, security agreements and other hypothecation
agreements, which said instruments and the other documents and instruments
referred to in the preceding paragraph may contain such provisions,
covenants, recitals and agreements as Silicon may require and said
authorized officers may approve, and the execution thereof by said
authorized officers shall be conclusive evidence of such approval.
RESOLVED FURTHER, that Silicon may conclusively rely upon a certified copy
of these resolutions and a certificate of the Secretary or Ass't Secretary
of this corporation as to the officers of this corporation and their offices
and signatures, and continue to conclusively rely on such certified copy of
these resolutions and said certificate for all past, present and future
transactions until written notice of any change hereto or thereto is given
to Silicon by this corporation by certified mail, return receipt requested.
The undersigned further hereby certifies that the following persons are the
duly elected and acting officers of the corporation named above as borrower and
that the following are their actual signatures:
<TABLE>
<CAPTION>
NAMES OFFICE(S) ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
Paul F. Folino Director x /s/ Paul F. Folino
Michael J. Rockenbach Secretary x /s/ Michael J. Rockenbach
</TABLE>
IN WITNESS WHEREOF, I have hereunto set my hand as such authorized
representative on the date set forth above.
/s/ Michael J. Rockenbach
Secretary or Assistant Secretary
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Following is a list of the subsidiaries of the Registrant:
<TABLE>
<CAPTION>
Jurisdiction of
Name of Subsidiary Incorporation
- ------------------ ---------------
<S> <C>
InterConnections, Inc. (inactive) California
Emulex Caribe, Inc. (in process of liquidation) Delaware
Emulex Corporation California
Emulex Europe Limited United Kingdom
Emulex Foreign Sales Corporation U.S. Virgin Islands
Emulex Italia S.r.l. (in process of liquidation) Italy
InterConnections, Inc. (inactive) Washington
Emulex Australia Pty. Limited (in process of liquidation) Australia
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Emulex Corporation:
We consent to incorporation by reference in the registration statements (Nos.
2-89162, 33-40959 and 33-44484) on Form S-8 of Emulex Corporation of our report
dated August 12, 1998, relating to the consolidated balance sheets of Emulex
Corporation and subsidiaries as of June 28, 1998 and June 29, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended June 28, 1998, and
the related schedule, which report appears in the June 28, 1998 annual report on
Form 10-K of Emulex Corporation.
KPMG Peat Marwick LLP
Orange County, California
September 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMULEX
CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET, STATEMENT OF OPERATIONS
AND STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 28, 1998 AND QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-28-1998
<PERIOD-END> JUN-28-1998
<CASH> 1,776
<SECURITIES> 0
<RECEIVABLES> 12,717
<ALLOWANCES> 576
<INVENTORY> 9,906
<CURRENT-ASSETS> 24,384
<PP&E> 21,588
<DEPRECIATION> 16,476
<TOTAL-ASSETS> 30,157
<CURRENT-LIABILITIES> 14,399
<BONDS> 7
0
0
<COMMON> 1,227
<OTHER-SE> 12,379
<TOTAL-LIABILITY-AND-EQUITY> 30,157
<SALES> 59,485
<TOTAL-REVENUES> 59,485
<CGS> 36,658
<TOTAL-COSTS> 36,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 190
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> (10,926)
<INCOME-TAX> (88)
<INCOME-CONTINUING> (10,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,838)
<EPS-PRIMARY> (1.77)
<EPS-DILUTED> (1.77)
</TABLE>
