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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 27, 1999
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
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EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 51-0300558
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
</TABLE>
3535 Harbor Boulevard Costa Mesa, California 92626
(Address of principal executive offices) (Zip Code)
(714) 662-5600
(Registrant's telephone number, including area code)
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing price of the Nasdaq National Market on
September 7, 1999 of $88.75, was $1,487,026,130.
As of September 7, 1999, the registrant had 17,426,505 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 1999 Annual Meeting of Stockholders which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
fiscal year ended June 27, 1999.
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PART I
Item I. Business.
All references to years refer to the Company's fiscal years ended June 27,
1999, June 28, 1998 and June 29, 1997, as applicable, unless the calendar year
is specified. References to dollar amounts are in thousands, except share
data, unless otherwise specified. On August 30, 1999, the Company completed a
two-for-one stock split, effected in the form of a stock dividend of one share
of Emulex Common Stock for each share of common stock outstanding to
stockholders of record on August 16, 1999. All share, per share and related
data has been retroactively adjusted to reflect this two-for-one stock split.
Introduction
Emulex is a leading designer, developer and supplier of a broad line of
fibre channel host adapters, hubs, ASICs and software products that enhance
access to and storage of electronic data and applications. Our products are
based on internally developed ASIC technology, are deployable across a variety
of heterogeneous network configurations and operating systems, and support
increasing volumes of stored data. We believe that we are the only company
that designs, develops and markets both fibre channel host adapters and hubs,
two of the core components of a complete fibre channel solution.
Our fibre channel development efforts began in 1992, we shipped our first
fibre channel product in volume in 1996 and we believe today we are the
leading independent manufacturer of fibre channel host adapters. Over the
course of our history, we have also designed, developed and marketed
traditional networking products such as printer servers and network access
products. As an early entrant into the fibre channel market, we have leveraged
our expertise to achieve over 90 design wins and secure significant customer
relationships with over 20 key original equipment manufacturers, or OEMs,
including Compaq, Data General, EMC, Hitachi, IBM, Sequent and Siemens.
Industry background
In recent years, the volume of stored electronic data in enterprises has
expanded significantly, due largely to the growth of data intensive
applications such as online transaction processing, data mining, data
warehousing, multimedia and Internet applications. As a result, both the
capacity and number of storage devices in the enterprise have increased.
Furthermore, with the increased use of and reliance on mission-critical
applications such as e-commerce and distributed enterprise software
applications, the real-time availability of electronic data has become more
important to the daily operations of enterprises. As a result, enterprises
face heightened requirements for data storage solutions that enable improved
access to and management of shared data, including solutions that offer
increased connectivity capabilities, higher performance and greater
reliability.
Enterprises currently access, share and manage the rapidly expanding volume
of data utilizing two major data communications technologies: local area
network, or LAN, and input/output, or I/O. LAN technologies enable
communications among servers and client computers, while I/O technologies
enable communications between host computers and their attached high-speed
peripherals. The emergence of LAN architectures in the mid-1980s brought
multiple benefits to client-server data communications, including faster
transmission speeds, shared access to multiple servers and greater
connectivity capabilities in terms of number of connected devices as well as
distance between devices. These benefits, and the applications that leverage
LAN technologies, have driven the rapid adoption of LAN architectures in the
corporate enterprise over the past decade. As a result, the data
communications pathway between servers and client computers has become largely
networked with LAN technologies.
Although LAN architectures have proliferated in client-server applications,
until recently I/O pathways between servers and attached peripherals, notably
storage subsystems, have failed to evolve to networking architectures.
Instead, traditional I/O architectures are server-centric, utilizing a point-
to-multipoint architecture
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which requires that each storage subsystem in the corporate enterprise be
attached to a single server through which all requested data must pass. With
this traditional server-centric storage architecture, dedicated storage is
attached to each server using I/O technologies such as SCSI. Remote storage
systems are accessed through networked attached file servers. This model
results in "islands of storage" behind each server, where data requests must
traverse the LAN and pass through the file server associated with the specific
storage device. This circuitous method of accessing data degrades network
performance, increases latency, or delays, for network users, drains server
processing power and is difficult to scale. With the dramatic increase in
information storage and retrieval requirements, system performance has become
increasingly constrained by server-centric architectures and the inability of
traditional I/O technology to overcome communications bottlenecks.
The emergence of fibre channel.
Fibre channel, an American National Standards Institute, or ANSI, standard
communications technology, was introduced in 1994 to address traditional I/O
limitations and has been widely endorsed by the majority of the leading server
and storage systems manufacturers. Fibre channel offers the connectivity,
distance and access benefits of networking architectures combined with the
high performance and low latency needed for I/O applications. According to emf
Associates, the market for fibre channel hubs and adapters is expected to
expand from approximately $355 million in calendar 1998 to $4 billion in
calendar 2003. When compared to traditional I/O technologies, such as SCSI,
fibre channel benefits can be summarized as follows:
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Attribute Fibre Channel SCSI*
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Maximum bandwidth 200 megabytes/sec 80 megabytes/sec
Topologies Point-to-point, loop and switched fabric Point-to-multipoint
Maximum number of
connections 126 per loop, 16 million per switched fabric 15
Connection distance 10 kilometers 12 meters
Data transmission Full-duplex or half-duplex Half-duplex
Functionality Networking and I/O I/O
Protocol support SCSI, Internet Protocol, others SCSI
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* As specified in the Ultra2SCSI specification, the highest performance SCSI
implementation for which both host computer and peripheral storage
solutions are commercially available.
Fibre channel has additional features that are designed to address the
emerging high-end connectivity, performance and reliability requirements of
the corporate enterprise, including the following:
. Specifications that encompass multiple classes of service that offer
different levels of guaranteed service;
. Technology that serves as a single interface for both networking and I/O
applications;
. Technology that transports a variety of traditional I/O and LAN
protocols, including SCSI and Internet Protocol, or IP, over the same
backbone; and
. The ability to support full-duplex (simultaneous bi-directional)
communications, effectively doubling the available bandwidth.
In addition to offering new levels of performance and flexibility to
traditional I/O applications, fibre channel's advanced capabilities enable new
architectures such as storage area networks, or SANs, and clustering, both of
which rely upon fibre channel's unique ability to connect multiple host
computers to multiple storage subsystems. The SAN-based architecture applies
LAN-type intelligence and management to data storage applications, allowing
data to move efficiently and reliably between multiple storage devices and
servers.
In this new SAN model, where the SAN exists as a complementary network to
the LAN, I/O-intensive traffic is offloaded from the LAN, enabling a more
fail-safe I/O channel and eliminating the bottlenecks that degrade
performance. Furthermore, like nodes on a LAN, attached storage peripherals in
a SAN can be managed and diagnosed to detect errors, and traffic can be
rerouted accordingly in the event of a failure. A SAN essentially
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transforms dedicated servers and storage devices into network resources,
greatly improving the performance and scalability of enterprise storage. By
providing shared server access, the cost of expensive enterprise storage can
be amortized across entire organizations. SANs are increasingly being deployed
to support a wide range of traditional enterprise computing applications. In
addition, SANs are being deployed as solutions in niche applications, such as
disaster recovery and remote data back-up.
Clustering is also expanding as a connectivity implementation, building on
the benefits of fibre channel technology. A cluster consists of multiple
interconnected servers that work together as a single entity to cooperatively
provide applications, systems resources and data. Clustering enables load
distribution between servers and enhances availability and reliability by
providing multiple I/O paths between servers and storage subsystems. Unlike
LAN technologies, a fibre channel clustering architecture offers a single
interface to interconnect both processors and storage devices with reduced
latency which is important to maximizing performance in clustering
applications.
The majority of fibre channel solutions installed today are delivered to end
users via integrated systems solutions offered by computer and storage systems
OEMs. As fibre channel gains market acceptance and competition intensifies,
OEMs are increasingly demanding fibre channel products that are optimized to
meet a variety of requirements, including reliability, scalability,
performance and customization. Computer and storage systems OEMs have
qualified and selected fibre channel products based on the products' ability
to satisfy end-user requirements above and beyond basic conformity with the
fibre channel standard.
Products
We are a leading designer, developer and supplier of networking products
including a broad line of fibre channel host adapters, hubs, ASICs and
software products that enhance access to and storage of electronic data and
applications. We believe that we are the only company that designs, develops
and markets both host adapters and hubs, two of the core components of a
complete fibre channel solution. We are also a supplier of some traditional
networking products that include printer servers and network access products.
Fibre Channel
Our LightPulse host adapters and hubs constitute key components for
comprehensive fibre channel SANs that typically include host adapters, hubs,
ASICs, firmware, software and switches. We believe that our ability to offer a
combination of hubs and host adapters provides a compatible single-vendor
solution and eases customers' interoperability concerns. We time our fibre
channel introductions to address the growing demands of enterprise customers
as well as the evolving speed and capacity capabilities of complementary
products. As the adoption of fibre channel has expanded, the rate of our
product introductions has accelerated.
Leveraging our expertise and experience in networking and I/O technology, we
have approached the storage problem with a networking perspective to maximize
the performance of our fibre channel solutions. We believe our products offer
the highest performance results in the industry, sustaining speeds in excess
of 150 MB/sec and 31,000 I/O transactions per second from a single host bus
adapter. Furthermore, our products support high-performance connectivity
features such as full-duplex data transfers which effectively double the
available bandwidth of a fibre channel network.
Fibre channel host adapters connect host computers to a fibre channel
network. Our fibre channel host adapter line, which has evolved from the
LP6000 to the LP8000 in the high end, also encompasses lower-priced adapters
such as the LP3000 and LP850. Our high-end host adapters target enterprise
systems, while our lower-priced entry and open systems host adapters offer
highly featured solutions for standard operating environments. All of our
adapter products share the same core ASIC architecture, software and firmware.
Our high-end adapters have always been designed to support a broad
implementation of the fibre channel specification, encompassing multiple
classes of service and all topologies, including full fabric support. In
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addition, our enterprise applications strategy has led us to offer a variety
of other features in our high-end adapters, including simultaneous
transmission of multiple protocols, full-duplex capability and data integrity
features. Our high-end host adapters also provide the widest range of physical
interface options available, including copper, short-wave optical and long-
wave optical, to enable connectivity distances up to 10 kilometers. A broad
range of operating systems, including Windows NT, UNIX and NetWare, are
supported as well. Our service level interface, or SLI, enables our OEM
customers to develop highly differentiated products, while maintaining
complete software compatibility across product generations, allowing customers
to leverage software investments.
To support I/O applications presently served by traditional techniques such
as SCSI, our product line also includes adapters that support only arbitrated
loop environments as well as adapters designed to address a standard open
systems environment based on Windows NT or NetWare. These entry level/open
systems host adapters include the LP3000 and our most recently introduced
adapter, the LP850. Based on the same hardware architecture as our high-end
adapters, the LP850 provides the same throughput and I/Os per second and many
of the same features as the LP8000 but is a cost-optimized, standard product
for the open server market. We offer the LP850 with fully certified drivers
for Windows NT and Novell, as well as BIOS and configuration utilities. The
LP3000 host adapter, directly targeted at today's SCSI market, provides
arbitrated loop connectivity for storage applications at SCSI prices for
Windows NT and NetWare environments.
Hubs provide centralized wiring connection, improved network reliability and
a monitoring point in fibre channel arbitrated loop environments. Our hub
strategy focuses on leveraging our adapter expertise and understanding of
fibre channel signaling to improve the reliability and manageability of the
loop as a whole. In 1996, we became the first company to provide fibre channel
hubs to the market when we introduced our LightPulse hub product line. In
December 1998, we introduced a new line of innovative digital fibre channel
hubs that complements our earlier line of analog fibre channel hubs. Our
LH5000 digital retiming fibre channel hub provides significant enhancements in
arbitrated loop management. While analog hubs passively amplify signals,
digital hubs capture and regenerate signals, thereby increasing loop
reliability. Our LH5000 hub can collect diagnostic information and provide
fault and performance analysis. Using the LH5000, signal jitter and invalid
transmissions are eliminated, thereby enhancing loop integrity, stability and
scalability.
Traditional Networking Products
Our traditional networking products include printer servers and network
access products. We supply both external and embedded printer servers, which
provide LAN connectivity for printers. Our embedded printer servers, which
provide ethernet, fast ethernet and token ring connectivity, have been sold to
over 20 OEM printer suppliers, including Canon, IBM, Minolta, Ricoh and Xerox.
We have been providing network printer servers since 1989, and our printer
server solution supports five network protocols and over 38 operating systems.
The external printer server product line includes the NETJet, NETQue Pocket,
NETQue, NETQue Token Ring and NETQue Pro 2.
Our network access products comprise a variety of products that provide
connectivity between computing resources across both LANs and wide area
networks, or WANs. These networking products contain a set of core
technologies that includes drivers supporting a broad array of operating
systems and network interface technologies that span many LAN and WAN
specifications. Our WAN adapter products provide wide area networking
connectivity for PC-based systems. Our communications servers provide
connectivity for terminals and PCs across a LAN. Our networking software
products link PCs on Novell NetWare LANS and DEC VAX/Alpha systems to provide
a seamless integration of the systems in which resources and information can
be shared. As we continue to focus on meeting the demands of the growing fibre
channel market, we expect that we will continue to reduce product offerings
and resources dedicated to these non-fibre channel products.
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Intellectual Property
Our ability to compete depends in part upon our ability to protect our
proprietary information through various means, including ownership of patents,
copyrights, trademarks and trade secrets as well as through contractual
provisions.
We have eight patents issued, one patent allowed and 17 patent applications
pending in the U.S. Additionally, we have numerous patent applications pending
abroad. All of our issued fibre channel patents were granted within the past
three years. Six of our issued U.S. patents, our one U.S. patent allowed and
all of our pending patent applications relate to our fibre channel technology.
All of our software products are copyrighted with our company's banners and
notices. We have been granted registration of 122 trademarks in the U.S. and
abroad. We also have eight pending trademark registrations in the U.S. and
abroad. Lastly, we rely on trade secret law and contractual provisions to
protect unique intellectual property we possess which we have determined
unnecessary or uneconomical to patent or copyright, or which is not otherwise
capable of more formal protection.
Selling and Marketing
We sell our products worldwide to OEMs and end users and through other
distribution channels including VARs, systems integrators, industrial
distributors and resellers. Early development of the fibre channel market has
been dominated by OEMs, and our focus is to use fibre channel sales
specialists to expand opportunities with our existing OEMs, as well as to
develop new OEM relationships. As the fibre channel market continues to
develop, we intend to expand our worldwide distribution channels through
technical distributors, such as VARs and systems integrators. As fibre channel
becomes more widely deployed and standardized in the future, we intend to
leverage our two-tier distribution strategy of industrial distributors and
resellers used for our traditional networking products to complement our core
OEM relationships.
Competition
The market for fibre channel technology is intensely competitive and is
characterized by frequent new product introductions, changing customer
preferences and evolving technology and industry standards.
Our competition for fibre channel host adapter products consists primarily
of Hewlett-Packard, Interphase, JNI, LSI Logic and QLogic. Our principal
competitors in the fibre channel hub market are Gadzoox and Vixel. We also
face the threat of potential competition from new entrants into the fibre
channel market, including large technology companies who may develop or
acquire differentiating technology and then apply their resources including
established distribution channels and brand recognition to obtain significant
market share.
We believe that the principal basis of fibre channel product competition
presently include reliability, scalability, connectivity performance and
customization. We believe that other competitive factors include pricing and
technical support. We believe that we compete favorably with respect to each
of these factors. We also believe that we have a competitive strength in the
alliances we have built with customers, particularly our close relationships
with OEM customers. We believe that our experience with distribution channels
will provide competitive benefits as the fibre channel market matures. Some of
our other competitive advantages include our early entry into fibre channel
technology, our workforce of highly experienced researchers and designers and
our intellectual property.
Our fibre channel products may also compete at the end-user level with other
technology alternatives, such as SCSI, which are available from companies such
as Adaptec, LSI Logic and QLogic as well as a number of smaller companies. In
the future, other technologies may evolve to address the applications served
by fibre channel today.
The printer server and network access industries are also extremely
competitive and price sensitive. Our primary competitors for printer server
products are Hewlett-Packard, Intel and Lexmark. Our network access products
compete with a number of companies, including Compaq and IBM.
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Manufacturing and Suppliers
In 1998, we implemented a strategy to outsource the manufacturing of all of
our products to K*TEC Electronics. Our 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, some component parts can only be
obtained from single sources. For example, Intel is currently our sole
supplier for microprocessors used in our fibre channel products. Hewlett-
Packard and IBM are currently our sole suppliers for components that enable
our fibre channel products to connect to networks. Motorola is currently our
sole supplier of memory devices incorporated into our fibre channel products.
In addition, we design our own semiconductors which are embedded in our
traditional networking and fibre channel products, and these are manufactured
by third party semiconductor foundries such as Chip Express, LSI Logic and
VLSI. In addition to hardware, we design software to provide functionality to
our hardware products. We also license software from third party providers for
use with our traditional networking 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 us, or our contract manufacturer, with the
quality and quantity of products, parts or software that we need in a timely
fashion could have a material impact on our ability to supply products in
accordance with customer requirements. Both our 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 our products.
The assembly operations required by our 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, we also maintain an
internal test engineering group for continuing support of test operations. At
June 27, 1999, we had 16 permanent manufacturing employees at our facility in
Costa Mesa.
Employees
At June 27, 1999, we employed 132 employees, as follows: 69 in engineering
and development, 26 in general and administrative, 21 in selling and marketing
and 16 in manufacturing. None of our employees is represented by a labor
union, and we believe our employee relations are good.
Risk Factors
We have experienced losses in our history.
We incurred a net loss of $10,838 for the fiscal year ended June 28, 1998.
This net loss in 1998 included $5,314 of inventory charges related to
consolidation and $7,231 of consolidation charges in conjunction with the
closure of our Puerto Rico manufacturing operations and selected sales
offices. Additionally, in fiscal year 1999, we had $1,304 of additional
inventory charges related to this consolidation. While we have generated net
income for 10 of the last 11 quarters through the quarter ended June 27, 1999,
we cannot be certain that revenues will remain at current levels or improve or
that we will be profitable at such revenue levels.
Our operating results are difficult to forecast and may be adversely affected
by many factors.
Our revenues and results of operations have varied on a quarterly basis in
the past and potentially may vary significantly in the future. Accordingly, we
believe that period-to-period comparisons of our results of operations are not
necessarily meaningful, and you should not rely on such comparisons as
indications of our future performance. Our revenues and results of operations
are difficult to forecast and could be adversely affected by many factors,
including, among others:
. The size, timing and terms of customer orders;
. The relatively long sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
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. Changes in our operating expenses;
. Our ability to develop and market new products;
. The ability of our contract manufacturer to produce and distribute our
products in a timely fashion;
. The market acceptance of our new fibre channel products;
. The timing of the introduction or enhancement of products by us, our OEM
customers and our competitors;
. The level of product and price competition;
. Our ability to expand our relationships with OEMs and distributors;
. Activities of and acquisitions by our competitors;
. Changes in technology, industry standards or consumer preferences;
. Changes in the mix of products sold, as our fibre channel products
typically have higher margins than our traditional networking products;
. Changes in the mix of sales channels;
. The level of international sales;
. Seasonality;
. Personnel changes;
. Changes in customer budgeting cycles;
. Foreign currency exchange rates; and
. General economic conditions.
As a result of these and other factors, our business, results of operations
and financial condition could be materially adversely affected.
There are other factors which contribute to the variability of our sales as
well. We generally ship products quickly after we receive orders, meaning that
we do not typically have a significant backlog of unfilled orders. As a
result, our revenues in a given quarter depend substantially on orders booked
in that quarter. Also, we typically generate a large percentage of our
quarterly revenues in the last month of the quarter. Additionally, OEM
customers purchases can vary significantly from quarter to quarter.
A decrease in the number of orders we receive is likely to adversely and
disproportionately affect our quarterly results of operations. This is because
our expense levels are partially based on our expectations of future sales and
our expenses may be disproportionately large as compared to sales in a quarter
with reduced orders. Hence, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any shortfall in
sales in relation to our quarterly expectations or any delay of customer
orders would likely have an immediate and adverse impact on our business,
quarterly results of operations and financial condition.
Our business depends upon the development of the fibre channel market, and our
revenues will be limited if such development does not occur or occurs more
slowly than we anticipate.
The size of our potential market is dependent upon the broad acceptance of
fibre channel technology as an alternative to other technologies traditionally
utilized for network and storage communications. The fibre channel market,
while rapidly evolving and attracting an increasing number of market
participants, is still at an early stage of development. We believe the fibre
channel market will continue to expand and that our investment in the fibre
channel market represents our greatest opportunity for revenue growth and
profitability in the future.
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However, we cannot be certain that fibre channel products will gain broader
market acceptance or that customers will choose our technology and products.
Fibre channel products accounted for 56 percent of our net revenues for the
fiscal year ended June 27, 1999. If the fibre channel market fails to develop,
develops more slowly than anticipated or attracts more competitors than we
expect (as discussed below), our business, results of operations and financial
condition would be materially adversely affected. A similar result would occur
if our products do not achieve market acceptance.
Alternative technologies such as SCSI compete with fibre channel technology
for customers. Some SCSI technology companies already have well-established
relationships with our current and potential customers, have extensive
knowledge of the markets we serve and have better name recognition and more
extensive development, sales and marketing resources than we have. Our success
also depends both on our own ability and on the ability of our OEM customers
to develop fibre channel solutions that are competitive with other
technologies. Ultimately, our business depends upon our ability, along with
the ability of our OEM customers, to convince end users to adopt fibre channel
technology.
While we have secured numerous design wins for our fibre channel products
from OEM customers, nearly all of these customers are still at the very early
stages of initial commercial shipments or at the developmental stage of
incorporating fibre channel into their systems. Only a limited number of OEM
customers are in full commercial production of products that incorporate our
fibre channel products. If our developmental and early stage customers are
unable to or otherwise do not ship systems that incorporate our products, or
if their shipped systems are not commercially successful, our business,
results of operations and financial condition would be materially adversely
affected.
The loss of one or more customers could harm our revenues.
For the fiscal year ended June 27, 1999, sales to our top customer, IBM,
represented 19 percent of our net revenues. Additionally, sales to Compaq in
1999 represented 14 percent of our net revenues. For the fiscal year ended
June 28, 1998, sales to Sequent Computer Systems represented 12 percent of net
revenues and IBM represented 11 percent of net revenues. Sales to our top five
customers accounted for 54 percent of net revenues for the fiscal year ended
June 27, 1999 and for 41 percent of net revenues for the fiscal year ended
June 28, 1998. Although we have attempted to expand our base of customers, our
revenues in the future may nonetheless be similarly derived from a limited
number of customers.
The failure of one or more of our significant customers to timely make
payments could adversely affect our business.
We are also subject to credit risk associated with the concentration of our
accounts receivable from our customers. If we were to lose one of our current
significant customers or did not receive their payments due to us, we could
experience a material adverse effect on our business, results of operations
and financial condition.
The loss of one or more of our OEM or distributor customers could adversely
affect our business.
We rely almost exclusively on OEMs and distributors for our sales. For the
fiscal year ended June 27, 1999, we derived approximately 74 percent of our
net revenues from OEMs and 24 percent from distributors. In fiscal 1998, we
derived approximately 71 percent of our net revenues from OEMs and 25 percent
from distributors. We cannot be certain that we will retain our current OEM
and distributor customers or that we will be able to recruit additional or
replacement customers. As is common in an emerging technology industry, our
agreements with OEMs and distributors are typically non-exclusive and often
may be terminated by either party without cause. Indeed, many of our OEM and
distributor customers carry or utilize competing product lines. If we were to
suddenly lose one or more important OEM or distributor customers to a
competitor, our business, results of operations and financial condition could
be materially adversely affected.
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Some of our OEM customers could become competitors.
Some of our OEM customers could develop products internally that would
replace our products. The resulting reduction in sales of our products to our
OEM customers could have a material adverse effect on our business, results of
operations and financial condition.
Our industry is subject to rapid technological change, and we must keep pace
with the changes to successfully compete.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and the frequent introduction of new
products and enhancements. Our future success depends in a large part on our
ability to enhance our existing products and to introduce new products on a
timely basis to meet changes in customer preferences and evolving industry
standards. We cannot be certain that we will be successful in developing,
manufacturing and marketing new products or product enhancements that respond
to such changes in a timely manner and achieve market acceptance. We also
cannot be certain that we will be able to develop the underlying core
technologies necessary to create new products and enhancements, or that we
will be able to license the core technologies from third parties.
A key element of our business strategy is to develop multiple ASICs in order
to increase system performance and reduce manufacturing costs, thereby
enhancing the price/performance of our fibre channel products. We cannot be
certain that we will be successful at developing and incorporating ASICs
effectively and in a timely manner. Additionally, changes in technology and
consumer preference could potentially render our current products
uncompetitive or obsolete. If we are unable, for technological or other
reasons, to develop new products or enhance existing products in a timely
manner in response to technological and market changes, our business, results
of operations and financial condition would be materially adversely affected.
The failure of our OEM customers to keep up with rapid technological change
could adversely affect our business.
Our revenues depend significantly upon the ability and willingness of our
OEM customers to develop and promote products on a timely basis that
incorporate our technology. The ability and willingness of OEM customers to
develop and promote such products is based upon a number of factors, such as:
. The timely development by us and our OEM customers of new products with
new functionality, increased speed and enhanced performance at acceptable
prices;
. The development costs facing our OEM customers;
. The compatibility of new products with both existing and emerging
industry standards;
. Technological advances;
. Intellectual property issues; and
. Competition in general.
We cannot be certain of the ability or willingness of our OEM customers to
continue developing, marketing and selling products that incorporate our
technology. Our business is dependent on our relationships with our OEM and
distributor customers, so the inability or unwillingness of any of our
significant customers to develop or promote products which use our technology
would have a material adverse effect on our business, results of operations
and financial condition.
A significant percentage of our revenues are from product lines which are
being phased out.
We have shifted the focus of our business to fibre channel technology.
However, our revenues still depend significantly on sales of our traditional
networking products. These traditional networking products accounted
10
<PAGE>
for 44 percent of our net revenues for the fiscal year ended June 27, 1999. If
the maturation of these products were to occur faster than we anticipate, our
business, results of operations and financial condition would be materially
adversely affected.
Our markets are highly competitive.
The markets for our products are highly competitive and are characterized by
rapid technological advances, price erosion, frequent new product
introductions and evolving industry standards. Our current and potential
competition consists of major domestic and international companies, many of
which have substantially greater financial, technical, marketing and
distribution resources than we have. We expect that an increasing number of
companies will enter the markets for our products, particularly the new and
evolving fibre channel market. Furthermore, larger companies in other related
industries may develop or acquire technologies and apply their significant
resources, such as distribution channels and brand recognition, to acquire
significant market share. Emerging companies attempting to obtain a share of
the existing markets act as potential competition as well. Our competitors
continue to introduce products with improved price/performance
characteristics, and we will have to do the same to remain competitive.
Increased competition could result in significant price competition, reduced
revenues, lower profit margins or loss of market share, any of which would
have a material adverse effect on our business, results of operations and
financial condition. We cannot be certain that we will be able to compete
successfully against either current or potential competitors in the future.
In the fibre channel market, we compete primarily against Gadzoox, Hewlett-
Packard, Interphase, JNI, LSI Logic, QLogic, Vixel and several smaller
companies to a lesser extent. In the printer server market, we compete
directly against a number of smaller companies and indirectly against Hewlett-
Packard, Intel and Lexmark, the two largest printer vendors, both of which
primarily use their own internally-developed printer servers. In the network
access market, we compete against numerous networking companies who offer
network access solutions.
As is common in an emerging technology industry with non-exclusive
development arrangements, many of our OEM customers arrange second source
agreements to meet their requirements. Furthermore, in the future our OEM
customers may develop products that compete with ours or purchase from our
competitors and may terminate their relationships with us as a result.
A decrease in the average unit selling prices of our fibre channel products
could adversely affect our business.
As the market for fibre channel products matures, it is likely that we will
experience downward pressure on the average unit selling prices of our fibre
channel products. To the extent that average unit selling prices of our fibre
channel products decrease without a corresponding decrease in the costs of
such products, our gross margins and financial performance could be materially
adversely affected.
Delays in product development could adversely affect our business.
We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles
in the markets for our products, any delay or unanticipated difficulty
associated with new product introductions or product enhancements could have a
material adverse effect on our business, results of operations and financial
condition. Prior delays have resulted from numerous factors, such as:
. Changing OEM product specifications;
. Difficulties in hiring and retaining necessary personnel;
. Difficulties in reallocating engineering resources and other resource
limitations;
. Difficulties with independent contractors;
11
<PAGE>
. Changing market or competitive product requirements;
. Unanticipated engineering complexity;
. Undetected errors or failures in software and hardware; and
. Delays in the acceptance or shipment of products by OEM customers.
Our joint development activities may result in products that are not
commercially successful or that are not available in a timely fashion.
We have engaged in joint development projects with third parties in the past
and we expect to continue doing so in the future. Joint development creates
several risks for us, including the loss of control over development of
aspects of the jointly-developed products and over the timing of product
availability. Accordingly, we face the risk that joint development activities
will result in products that are not commercially successful or that are not
available in a timely fashion.
The loss of third-party suppliers or our contract manufacturer could adversely
affect our business.
We rely on third-party suppliers for components which are used in our
products, and we have experienced delays or difficulty in securing components
in the past. Key components that we use in our products may only be available
from single sources with which we do not have long-term contracts. In
particular, Intel is currently our sole supplier for microprocessors used in
our fibre channel products. IBM and Hewlett-Packard are currently our sole
suppliers for components that enable our fibre channel products to connect to
networks. Motorola is currently our sole supplier of memory devices
incorporated into our fibre channel products. In addition, we rely on LSI
Logic, Chip Express and VLSI to manufacture ASICs for our products. The
components we use for our fibre channel products are based on an emerging
technology and may not be available with the performance characteristics or in
the quantities that we require. Our future inability to supply products due to
a lack of components or our inability to redesign products to accept
alternatives in a timely manner would materially adversely affect our
business, results of operations and financial condition.
Because we transitioned the production of our products to a contract
manufacturer, K*TEC Electronics, a division of Kent Electronics Corporation,
we plan to maintain only a minimal supply of product components. We now rely
on K*TEC Electronics to complete the majority of the component purchases for
our products. Consequently, we cannot be certain that the necessary components
will be available to meet our future requirements at favorable prices, if at
all. Moreover, because we rely on K*TEC Electronics to manufacture, store and
ship our products, if K*TEC Electronics is unable or unwilling to complete
production runs for us in the future, or experiences any significant delays in
completing production runs or shipping product, the manufacturing and sale of
our products would be temporarily suspended. An interruption in supply of our
products and the cost of qualifying and shifting production to an alternative
manufacturing facility would have a material adverse effect on our business,
results of operations and financial condition.
A decrease in the demand for high performance computer and storage systems
could adversely affect our business.
A significant portion of our products are currently used in high-performance
computer and storage systems. Our fibre channel growth has been supported by
increasing demands for sophisticated networking and data storage solutions
which support enterprise computing requirements, including on-line transaction
processing, data mining, data warehousing, multimedia and Internet
applications. Should there be a slowing in the growth of demand for such
systems, our business, results of operations and financial condition could be
materially adversely affected.
12
<PAGE>
The inadequacy of our intellectual property protections could adversely affect
our business.
We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of
product support and customer relations. At the same time, our success is
partially dependent on the proprietary technology contained in our products.
We currently rely on a combination of patents, copyrights, trademarks, trade
secret laws and contractual provisions to establish and protect our
intellectual property rights in our products. For a more complete description
of our intellectual property, you should read "Business--Intellectual
Property." We cannot be certain that the steps we take to protect our
intellectual property will adequately protect our proprietary rights, that
others will not independently develop or otherwise acquire equivalent or
superior technology or that we can maintain such technology as trade secrets.
In addition, the laws of some of the countries in which our products are or
may be developed, manufactured or sold may not protect our products and
intellectual property rights to the same extent as the laws of the United
States or at all. Our failure to protect our intellectual property rights
could have a material adverse effect on our business, results of operations
and financial condition.
Third-party claims of infringement of their intellectual property could
adversely affect our business.
We believe that our products and technology do not infringe on the
intellectual property rights of others or upon intellectual property rights
that may be granted in the future pursuant to pending applications. We also
believe that we will not be required to obtain licenses of technology owned by
other parties. However, we occasionally receive communications from third
parties alleging patent infringement, and there is always the chance that
third parties may assert infringement claims against us. Any such claims, with
or without merit, could result in costly litigation, cause product shipment
delays or require us to enter into royalty or licensing agreements. We cannot
be certain that the necessary licenses will be available or that they can be
obtained on commercially reasonable terms. If we were to fail to obtain such
royalty or licensing agreements in a timely manner and on reasonable terms,
our business, results of operations and financial condition would be
materially adversely affected.
The loss of key technical personnel could adversely affect our business.
Our success depends to a significant degree upon the performance and
continued service of engineers involved in the development of our fibre
channel technology and technical support of fibre channel products and
customers. Our future success depends upon our ability to attract, train and
retain such personnel. We will need to increase the number of technical staff
members with experience in high-speed networking applications as we further
develop the fibre channel product line. Competition for such highly skilled
employees in our industry is intense, and we cannot be certain that we will be
successful in recruiting and retaining such personnel. In addition, employees
may leave our company and subsequently compete against us. The loss of these
key technical employees could have a material adverse effect on our business,
results of operations and financial condition.
Our international business activities subject us to risks that could adversely
affect our business.
During the fiscal year ended June 27, 1999, sales in the United States
accounted for 68 percent of our net revenues, sales in Europe accounted for 27
percent of our net revenues, and sales in the Pacific Rim countries accounted
for 5 percent of our net revenues. During the fiscal year ended June 28, 1998,
sales in the United States accounted for 65 percent of net revenues, sales in
Europe accounted for 26 percent of our net revenues, and sales in the Pacific
Rim countries accounted for 9 percent of our net revenues. We expect that
sales in the United States and Europe will continue to account for the
substantial majority of our revenues for the foreseeable future.
13
<PAGE>
We encounter risks inherent in international operations. All of our sales
are currently denominated in U.S. dollars. As a result, if the value of the
U.S. dollar increases relative to foreign currencies, our products could
become less competitive in international markets. Our international business
activities could be limited or disrupted by any of the following factors:
. The imposition of governmental controls and regulatory requirements;
. The costs and risks of localizing products for foreign countries;
. Restrictions on the export of technology;
. Financial and stock market dislocations;
. Longer accounts receivable payment cycles;
. Potentially adverse tax consequences;
. The repatriation of earnings;
. The burden of complying with a wide variety of foreign laws;
. Trade restrictions; and
. Changes in tariffs.
In addition, the revenues we earn in various countries in which we do
business may be subject to taxation by more than one jurisdiction, thereby
adversely affecting our earnings. These factors could harm future sales of our
products to international customers and have a material adverse effect on our
business, results of operations and financial condition.
Export restrictions may adversely affect our business.
Our fibre channel products are subject to U.S. Department of Commerce export
control restrictions. Neither we nor our customers may export such products
without obtaining an export license. These U.S. export laws also prohibit the
export of our fibre channel products to a number of countries deemed by the
United States to be hostile. These restrictions may make foreign competitors
facing less stringent controls on their products more competitive in the
global market than we or our fibre channel customers are. The U.S. government
may not approve any pending or future export license requests. In addition,
the list of products and countries for which export approval is required, and
the regulatory policies with respect thereto, could be revised. The sale of
our fibre channel products could be harmed by our failure or the failure of
our customers to obtain the required licenses or by the costs of compliance.
Our business may be harmed by Year 2000 issues.
Many existing computer systems and applications use two digits rather than
four to define the applicable year. These programs were designed without
considering the impact of the upcoming change in the century. If such programs
are not corrected, many computer systems could fail or create erroneous
results at or beyond the year 2000. We consider a product to be "Year 2000
compliant" if the product's performance and functionality are unaffected by
the processing of dates prior to, during and after the year 2000. Our current
products are Year 2000 compliant. However, products which we previously sold
and which may still be covered under warranties may not be Year 2000
compliant. We are prepared to update these non-compliant products as required
under Company warranties and as required by law for all Year 2000 issues.
However, we cannot be certain that all potential Year 2000 issues have been
identified or that the issues will be successfully resolved to the customers'
satisfaction. Consequently, customers may bring litigation against vendors,
including us. Any such claims, with or without merit, could result in a
material adverse effect on our business, results of operations, and financial
condition.
We committed resources to identify and correct potential Year 2000 issues,
both in our products and in our review and tests of our internal computer
systems and applications. We have identified and corrected all of the
14
<PAGE>
Year 2000 compliance issues according to vendor specifications. These reviews,
tests, and corrections have not resulted in substantial expenditures to date.
Furthermore, we do not anticipate any material expenditures in the future
related to these issues. We have completed a survey of our suppliers, contract
manufacturer, significant customers, and financial institutions to evaluate
their Year 2000 compliance plans and state of readiness and to determine
whether any Year 2000 issues will impede the ability of such third parties to
continue providing goods and services to us. We have received satisfactory
responses to these surveys and will continue to monitor the Year 2000 plans of
our suppliers and customers through the coming event. We believe that the most
likely worst-case scenarios related to the Year 2000 issue that we may
experience would be either an inability to obtain inventory components from
suppliers or delays in receiving orders or payments from customers due to Year
2000 problems experienced by these third parties. These events, if
experienced, could have a material adverse effect on our business, results of
operations, and financial condition. Therefore, as a contingency plan to
ensure our ability to provide products and services to our customers, we will
take the additional precaution of maintaining a finished goods inventory at
calendar year end sufficient to cover shipments for 30 to 45 days, and will
maintain an additional store of key raw materials for the manufacture of our
products. We have also asked key suppliers to increase their inventory levels
of critical materials and components to act as a further safeguard.
Although our Year 2000 assessment and remediation processes have not
generated any material expenditures to date, and we do not currently foresee
any in the future, the costs related to this issue would continue to evolve if
we identify and address any additional issues. The Company believes it has
fully addressed all areas of this issue, including internal systems, products
and third parties; however, the Company will continue to monitor these areas.
Although we do not believe that the Year 2000 issue will pose any significant
operational problems, there could be delays in our efforts to address the Year
2000 issue or we could fail to fully identify all Year 2000 issues in our
systems, equipment, or processes, or those of third parties which affect us.
Such delays or failures could have a material adverse effect on our business,
results of operations, and financial condition.
We may need additional capital in the future and such additional financing may
not be available.
We currently anticipate that our available cash resources and financing
available through our credit facility, will be sufficient to meet our expected
working capital and capital expenditure requirements for at least the next 12
months. However, we cannot assure you that such resources will be sufficient
for anticipated or unanticipated working capital and capital expenditure
requirements. We may need to raise additional funds through public or private
debt or equity financings in order to:
. Take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
. Develop new products or services; or
. Respond to unanticipated competitive pressures.
We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms. We cannot
assure you that any additional financing we may need will be available on
terms favorable to us, or at all. If adequate funds are not available or are
not available on acceptable terms, we may not be able to take advantage of
unanticipated opportunities, develop new products or services or otherwise
respond to unanticipated competitive pressures. In any such case, our
business, results of operations and financial condition could be materially
adversely affected.
Potential acquisitions may be more costly or less profitable than anticipated.
We may pursue acquisitions that could provide new technologies, products or
service offerings. Future acquisitions may involve the use of significant
amounts of cash, potentially dilutive issuances of equity or equity-linked
securities, incurrence of debt, or amortization expenses related to goodwill
and other intangible assets. In addition, acquisitions involve numerous risks,
including:
. Difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
15
<PAGE>
. The diversion of management's attention from other business concerns;
. Risks of entering markets in which we have no or limited prior
experience; and
. The potential loss of key employees of the acquired company.
We currently have no commitments or agreements with respect to any such
acquisition. In the event that such an acquisition does occur and we are
unable to successfully integrate businesses, products, technologies or
personnel that we acquire, our business, results of operations and financial
condition could be materially adversely affected.
Our stock price is volatile.
The stock market in general, and the stock prices in technology-based
companies in particular, have experienced extreme volatility that often has
been unrelated to the operating performance of any specific public companies.
The market price of our common stock has fluctuated in the past and is likely
to fluctuate in the future as well. Any of the following factors could have a
significant impact on the market price of our common stock:
. Quarterly variations in operating results;
. Announcements of new products by us or our competitors;
. The gain or loss of significant customers;
. Changes in analysts' earnings estimates;
. Pricing pressures;
. Short-selling of our common stock;
. General conditions in the computer, storage or communications markets; or
. Events affecting other companies that investors deem to be comparable to
us.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If
we were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
We do not plan to pay cash dividends on our common stock.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain
future earnings, if any, to finance the growth and expansion of our business
and for general corporate purposes. In addition, the terms of our credit
facility prohibit us from paying dividends on our capital stock.
Our stockholder rights plan, certificate of incorporation and Delaware law
could adversely affect the performance of our stock.
Our stockholder rights plan and provisions of our certificate of
incorporation and of the Delaware General Corporation Law could make it more
difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. The stockholder rights plan and these
provisions of our certificate of incorporation and Delaware law are intended
to encourage potential acquirers to negotiate with us and allow our board of
directors the opportunity to consider alternative proposals in the interest of
maximizing stockholder value. However, such provisions may also discourage
acquisition proposals or delay or prevent a change in control, which could
harm our stock price. You should read Note 9 to the Consolidated Financial
Statements contained elsewhere herein, our certificate of incorporation and
Delaware law for more information on the anti-takeover effects of provisions
of our stockholder rights plan.
16
<PAGE>
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 August 2001.
On October 29, 1998, the Company sold its production facility located in two
adjacent buildings in Dorado, Puerto Rico, as part of the Company's transition
to a contract manufacturer.
The Company leases approximately nine remote offices, primarily for sales,
throughout the world.
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 1999.
17
<PAGE>
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 per share closing sales prices for the Company's common stock, as
reported on the Nasdaq National Market.
Share prices have been retroactively adjusted to reflect a two-for-one stock
split, effected in the form of a stock dividend of one share of Emulex Common
Stock for each share of common stock outstanding, which was completed on
August 30, 1999.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1999
Fourth Quarter............................................. $46.000 $15.938
Third Quarter.............................................. 20.219 13.688
Second Quarter............................................. 17.125 5.531
First Quarter.............................................. 6.938 2.875
1998
Fourth Quarter............................................. 4.750 2.813
Third Quarter.............................................. 7.500 4.438
Second Quarter............................................. 9.875 6.875
First Quarter.............................................. 9.625 7.063
</TABLE>
Number of Common Stockholders
The approximate number of holders of record of the Company's common stock as
of September 7, 1999 was 311.
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.
On August 30, 1999, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common Stock
for each share of common stock outstanding, to stockholders of record on
August 16, 1999.
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.
18
<PAGE>
Item 6. Selected Consolidated Financial Data.
The following table summarizes certain selected consolidated financial data.
Certain reclassifications have been made to the 1998, 1997, 1996 and 1995 data
to conform to the 1999 presentation. The amounts for net income (loss) per
share, and the related numbers of shares, contained in the following
consolidated statement of operations data have been retroactively restated to
give effect to a two-for-one stock split, effected in the form of a stock
dividend of one share of Emulex Common Stock for each share of common stock
outstanding, which was completed on August 30, 1999.
Selected Consolidated Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
June June
27, June 28, 29, June 30, July 2,
1999 1998 1997 1996 1995
------- -------- ------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues:
Fibre Channel................. $38,693 $ 18,944 $11,521 $ 1,138 $ 71
Traditional networking and
other........................ 29,792 40,541 53,242 50,200 75,404
------- -------- ------- -------- -------
Total net revenues.......... 68,485 59,485 64,763 51,338 75,475
------- -------- ------- -------- -------
Cost of sales................. 40,138 34,913 40,205 34,848 44,655
Cost of sales--inventory
charges related to
consolidation................ 1,304 5,314 -- -- --
------- -------- ------- -------- -------
Total cost of sales......... 41,442 40,227 40,205 34,848 44,655
------- -------- ------- -------- -------
Gross profit.............. 27,043 19,258 24,558 16,490 30,820
------- -------- ------- -------- -------
Operating expenses:
Engineering and development... 11,766 11,270 10,063 11,415 10,681
Selling and marketing......... 6,953 7,589 7,637 11,071 11,927
General and administrative.... 4,279 4,207 4,586 4,912 5,428
Amortization of goodwill...... -- -- -- -- 337
Impairment of goodwill........ -- -- -- -- 785
Consolidation charges, net.... (987) 7,231 1,280 -- --
------- -------- ------- -------- -------
Total operating expenses.... 22,011 30,297 23,566 27,398 29,158
------- -------- ------- -------- -------
Operating income (loss)......... 5,032 (11,039) 992 (10,908) 1,662
Nonoperating income............. 480 113 71 483 1,120
------- -------- ------- -------- -------
Income (loss) before income
taxes.......................... 5,512 (10,926) 1,063 (10,425) 2,782
Income tax provision (benefit).. 247 (88) (506) (1,137) (1,156)
------- -------- ------- -------- -------
Net income (loss)............... $ 5,265 $(10,838) $ 1,569 $ (9,288) $ 3,938
======= ======== ======= ======== =======
Net income (loss) per share:
Basic......................... $ 0.42 $ (0.89) $ 0.13 $ (0.78) $ 0.34
======= ======== ======= ======== =======
Diluted....................... $ 0.37 $ (0.89) $ 0.12 $ (0.78) $ 0.32
======= ======== ======= ======== =======
Number of shares used in per
share computations:
Basic......................... 12,685 12,243 12,088 11,873 11,428
======= ======== ======= ======== =======
Diluted....................... 14,131 12,243 12,588 11,873 12,344
======= ======== ======= ======== =======
</TABLE>
Selected Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
June June June
June 27, 28, 29, 30, July 2,
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total current assets................. $134,338 $24,384 $29,328 $31,579 $39,014
Total current liabilities............ 16,044 14,399 10,859 15,494 13,970
-------- ------- ------- ------- -------
Working capital...................... 118,294 9,985 18,469 16,085 25,044
Total assets......................... 169,991 30,157 37,175 39,300 47,550
Long-term capitalized lease
obligations......................... -- 7 79 204 253
Retained earnings.................... 10,200 4,935 15,773 14,204 23,492
Total stockholders' equity........... 151,893 13,606 24,276 22,030 30,678
</TABLE>
19
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
Stock Split
On August 30, 1999, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common Stock
for each share of common stock outstanding, to stockholders of record on
August 16, 1999. All share, per share and related data has been retroactively
adjusted to reflect this stock split.
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 27,
1999, June 28, 1998 and June 29, 1997, as applicable, unless the calendar year
is specified. References to dollar amounts are in thousands unless otherwise
specified.
<TABLE>
<CAPTION>
Percentage of Net
Revenues
--------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Fibre channel.................................. 56.5% 31.8% 17.8%
Traditional networking and other............... 43.5 68.2 82.2
----- ----- -----
Total net revenues........................... 100.0 100.0 100.0
----- ----- -----
Cost of sales.................................. 58.6 58.7 62.1
Cost of sales--inventory charges related to
consolidation................................. 1.9 8.9 --
----- ----- -----
Total cost of sales.......................... 60.5 67.6 62.1
----- ----- -----
Gross profit............................... 39.5 32.4 37.9
----- ----- -----
Operating expenses:
Engineering and development.................... 17.2 18.9 15.5
Selling and marketing.......................... 10.2 12.8 11.8
General and administrative..................... 6.2 7.1 7.1
Consolidation charges, net..................... (1.4) 12.2 2.0
----- ----- -----
Total operating expenses..................... 32.2 51.0 36.4
----- ----- -----
Operating income (loss).......................... 7.3 (18.6) 1.5
Nonoperating income.............................. 0.7 0.2 0.1
----- ----- -----
Income (loss) before income taxes................ 8.0 (18.4) 1.6
Income tax provision (benefit)................... 0.3 (0.2) (0.8)
----- ----- -----
Net income (loss)................................ 7.7% (18.2)% 2.4%
===== ===== =====
</TABLE>
20
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
Fiscal 1999 versus Fiscal 1998
Net Revenues. Net revenues for 1999 were $68,485, an increase of $9,000, or
15 percent, from 1998. Net revenues from the Company's fibre channel product
line in 1999 were $38,693, or 56 percent of net revenues, compared to $18,944,
or 32 percent of net revenues, for 1998. This increase in revenue from the
Company's fibre channel product line of $19,749, or 104 percent, is primarily
the result of continued fibre channel market development and increased market
acceptance of the Company's fibre channel products.
Net revenues generated from the Company's traditional networking products,
which include printer servers and network access products, decreased by
$10,749, or 27 percent, to $29,792 in 1999 versus $40,541 in 1998. This
decrease in net revenues from the Company's traditional networking products
was principally due to ongoing maturation of these products that resulted in
lower average unit selling prices. Consequently, the Company has decreased its
focus on these products.
As the market for the Company's traditional networking products matures and
as the Company focuses more of its resources on the fibre channel market,
management expects that fibre channel product sales will represent a larger
percentage of revenues and total sales of the Company's traditional networking
products will continue to decrease. Management anticipates that future
revenues from the Company's fibre channel product line will be a function of
continued demand from original equipment manufacturers, or OEMs, which are
currently shipping fibre channel products, launches of new fibre channel-based
systems by the Company's current OEMs, additional design wins with new OEM
customers and increased sales through other distribution channels as the fibre
channel market continues to develop. Although fibre channel represented 56
percent of the Company's net revenues for 1999, fibre channel is an emerging
technology, and there can be no assurance given that the Company's products
will adequately meet the requirements of the market or achieve market
acceptance. Additionally, because the Company's fibre channel products are
part of an integrated system, the Company's success in the fibre channel
market will depend in part upon the development and availability of other
interoperable fibre channel products by third parties. Furthermore, the
Company's fibre channel products are dependent upon components supplied by
third parties. Management cannot assure you that these components will be
available at a competitive price and in the quantities desired or, if
available, will function as needed.
In 1999, sales to OEMs increased $8,396, or 20 percent, to $50,832 compared
to $42,436 in 1998. Additionally, distribution net revenues improved by
$1,321, or nine percent, to $16,178 in 1999 compared to $14,857 in 1998. These
increases in net revenues from sales to OEMs and through distribution were
partially offset by a decrease in sales to end users of $717, or 33 percent,
to $1,475 in 1999 compared to $2,192 in 1998.
In 1999, sales to IBM and Compaq accounted for 19 percent and 14 percent,
respectively, of the Company's net revenues, and no other customer accounted
for more than 10 percent of its net revenues during this period. In 1998,
sales to Sequent Computer Systems and IBM accounted for 12 percent and 11
percent, respectively, of the Company's net revenues, and no other customer
accounted for more than 10 percent of its net revenues during this period.
Furthermore, sales to the Company's top five customers accounted for 54
percent of net revenues in 1999 and 41 percent in 1998.
Domestic net revenues were $46,751 and $38,773 for 1999 and 1998,
representing 68 percent and 65 percent of total net revenues, respectively.
This increase in domestic revenues of $7,978, or 21 percent, is principally
due to the higher level of fibre channel shipments in 1999 compared to 1998.
International net revenues were $21,734 and $20,712 for 1999 and 1998,
respectively. International revenues increased by $1,022, or five percent,
from 1998 to 1999. The Company's shipments of fibre channel products have
continued to be primarily to the domestic market place; however, the Company
has begun to experience a higher level of fibre channel product shipments to
the international market place. International revenues accounted for 32
percent of net revenues in 1999, down from 35 percent in 1998. As the
Company's net revenues from shipments to the
21
<PAGE>
Pacific Rim countries were less than 10 percent of net revenues in 1999 and
1998, the Company does not believe the Asian crisis poses a significant risk
to the Company.
Gross Profit. Cost of sales includes the cost of production of finished
products, as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. Gross profit in 1999
was $27,043, an increase of $7,785, or 40 percent, compared to $19,258 in
1998. Gross margin increased to 39 percent in 1999 from 32 percent in 1998. In
conjunction with the planned closure of the Company's Puerto Rico
manufacturing operations and transition to subcontracted manufacturing
(discussed below in Consolidation Charges), during 1998, the Company recorded
$5,314 of inventory charges related to consolidation which consisted of $1,899
of incremental excess and obsolete inventory reserves related to ongoing
product life-cycle transitions and $3,415 for reductions in inventory related
to the streamlining of the Company's product lines. Excluding these
incremental cost of sales charges, gross profit would have been $24,572 and
gross margin would have been 41 percent for 1998. Also in conjunction with the
closure of the Company's Puerto Rico manufacturing operations, in 1999 the
Company recorded additional reductions in inventory related to the
streamlining of its product lines of $1,304. When the initial consolidation
charge was taken, management believed this inventory would be sold at positive
margins. However, as the Company neared the closure of the manufacturing
facility, management determined this inventory was no longer saleable and
these additional reductions in inventory were recorded. Excluding this charge,
gross profit would have been $28,347 and gross margin would have been 41
percent for 1999.
During 1998, and continuing through 1999, the Company has experienced
declining average unit selling prices and corresponding reductions in the
gross margins of its traditional networking products. Management expects this
trend to continue. Gross margins on the Company's traditional networking
products are lower than gross margins for its fibre channel products.
Management expects that average unit selling prices for the Company's fibre
channel products will also decline over time. The Company has agreed to
contracted price reductions with most of its fibre channel OEM customers.
Typically these reductions are achieved by reaching volume milestones during
the life of the contract. In 1999, some of the Company's OEM customers met
these milestones. It is likely that the Company will continue this practice in
the future. In addition, the Company's gross margins of fibre channel products
may be impacted if there is a significant shift in the mix of its products
from adapters to hubs or from high-end adapters to lower-priced adapters. The
Company's strategy is to maintain overall gross margins where possible,
despite expected future erosion in the average unit selling price, by
continuing to reduce the cost of its fibre channel products through a
combination of volume efficiencies, cost-reduced designs and diversification
of its component-supplier base.
Engineering and Development. Engineering and development expenses consist
primarily of salaries and related expenses for personnel engaged in the
design, development and technical support of the Company's products. These
expenses include third-party fees paid to consultants, prototype development
expenses and computer services costs related to supporting computer tools used
in the design process. Engineering and development expenses were $11,766 and
$11,270 for 1999 and 1998, representing 17 percent and 19 percent of net
revenues, respectively. Engineering and development expenses increased $496,
or four percent, from 1998 to 1999. Because of the technical nature of the
Company's products, engineering support is a critical part of the Company's
strategy during both the development of its products and the support of its
customers from product design through deployment into the market. Management
expects to continue to make significant investments in the technical support
and enhancement of the Company's current products, as well as the continued
development of new products in the fibre channel market. Engineering and
development expenses can fluctuate from quarter to quarter depending on
several factors, including new product introduction schedules.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of the Company's products, as well as trade shows, product
literature and promotional support costs. Selling and marketing expenses were
$6,953 and $7,589 for 1999 and 1998, representing 10 percent and 13 percent of
net revenues, respectively. Selling and marketing expenses decreased by $636,
or eight percent, from 1998 to 1999. This decrease was a result of the
streamlining
22
<PAGE>
of the Company's products which enabled the Company to reduce sales and
marketing efforts for its traditional networking products.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executives, financial
accounting support, human resources, administrative services, professional
fees and other associated corporate expenses. General and administrative
expenses were $4,279 and $4,207 for 1999 and 1998, representing six percent
and seven percent of net revenues, respectively. General and administrative
expenses increased slightly by $72, or two percent, in 1999 compared to 1998.
Consolidation Charges. 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. 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 closed its Puerto
Rico manufacturing facility and selected sales offices. In addition to the
$5,314 of inventory charges related to consolidation discussed above, the
Company recorded consolidation charges of $7,231 related to these closures in
1998.
During 1999, the Company completed the sale of the land and buildings at its
former manufacturing facility in Puerto Rico which resulted in a gain of $777.
No impairment had previously been recognized related to the land and
buildings. Also, during 1999, the Company substantially completed this
consolidation plan, including all remaining headcount reductions, and the
Company reduced its accrued consolidation charges by $210 based on
management's review of the adequacy of the remaining consolidation accrual.
Nonoperating Income. Nonoperating income consists primarily of interest
income, interest expense and foreign exchange translation. The Company's
nonoperating income was $480 and $113 in 1999 and 1998, respectively. Normal
fluctuations in nonoperating income are primarily due to changes in interest
income and expense as a result of varying cash balances. The Company completed
a secondary offering of 4,630,000 shares of its common stock during the
quarter ended June 27, 1999. The Company received proceeds of $132,838, net of
underwriter's discount and expenses. This improvement in the Company's cash
and investment balances late in the fiscal year generated the increased level
of interest income experienced in 1999.
Income Taxes. The Company's income tax expense for 1999 was $247,
representing a tax provision of approximately 4.5 percent of income before
taxes. The Company's low effective tax rate is primarily due to utilization in
1999 of net operating loss carryforwards which were held net of a substantial
valuation allowance. After these net operating loss carryforwards are
utilized, and the corresponding valuation allowance is eliminated, management
believes the Company will have an effective tax rate of approximately 35
percent assuming current enacted tax rates and current operating structure. In
addition, under current generally accepted accounting principles and in
accordance with the Company's policy, the Company could be required to reduce
some or all of its valuation allowance prior to actual utilization of the net
operating losses, which would result in the recognition of a significant
immediate tax benefit for financial statement purposes and the expected
effective tax rate of approximately 35 percent on an ongoing basis. However,
there can be no assurance that the Company will ultimately generate adequate
taxable income to utilize any or all of its existing net operating loss
carryforwards or if utilized, that the actual effective tax rate on an ongoing
basis would approximate 35 percent. The Company recorded a benefit from income
taxes of $88 in 1998. During 1999, the Company received a favorable response
to the Ruling Request submitted to the Secretary of the Treasury of Puerto
Rico. The liquidation of the Company's subsidiary, Emulex Caribe, during 1998
was structured to qualify for tax-free liquidation treatment under the
provisions of both the U.S. and Puerto Rico Internal Revenue Codes. Through
its response to the Ruling Request, the Secretary of the Treasury of Puerto
Rico has agreed that neither Emulex Corporation nor Emulex Caribe will
recognize a gain or loss as a result of the liquidation. The Company also
received approval of the Closing Agreement submitted to the Secretary of the
Treasury of Puerto Rico. The Secretary agreed to the Company's calculation of
the amount of tollgate tax resulting from the deemed distribution from Emulex
Caribe to the Company as a result of the liquidation.
23
<PAGE>
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. Additionally, Emulex Caribe, the Company's former
subsidiary, is undergoing examination by the Internal Revenue Service of its
1995 tax return. In the opinion of management, these examinations will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
Fiscal 1998 versus Fiscal 1997
Net Revenues. Net revenues for 1998 were $59,485, a decrease of $5,278, or
eight percent, from $64,763 in 1997. This decrease in net revenues was
principally the result of reductions in distribution net revenues of $5,294,
or 26 percent, and decreases in net revenues from sales to end users of $939,
or 30 percent, in 1998 compared to 1997. These decreases were partially offset
by an increase in 1998 in net revenues from sales to OEMs of $955, or two
percent, compared to 1997.
Net revenues from the Company's fibre channel product line increased by
$7,423, or 64 percent, to $18,944 for 1998 compared to $11,521 in 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 traditional networking products,
which include printer servers and network access products, decreased by
$12,701, or 24 percent, to $40,541 in 1998 versus the prior fiscal year. This
decrease in traditional networking revenues is primarily the result of lower
printer server distribution sales which the Company believes are principally
due to decreased demand for after-market solutions, as more OEMs are shipping
network-ready printers. In addition, the Company experienced a decrease in net
revenues from its maturing network access products principally as a result of
lower shipments to Reuters, as its current project with Emulex approached end
of life.
In 1998, sales to Sequent Computer Systems and IBM accounted for 12 and 11
percent, respectively, of the Company's net revenues, and no other customer
accounted for more than 10 percent of its net revenues during this period. In
1997, sales to Reuters and Sequent Computer Systems accounted for 13 percent
and 10 percent, respectively, of the Company's net revenues, and no other
customer accounted for more than 10 percent of its net revenues during this
period. Furthermore, sales to the Company's top five customers accounted for
41 percent of net revenues in 1998 and 44 percent in 1997.
Domestic revenue increased by $3,340, or nine percent, to $38,773 in 1998
compared to $35,433 in 1997. This increase in domestic revenues is principally
due to the higher level of fibre channel shipments in 1998 which have been
primarily to the domestic market place to date. International revenues
decreased by $8,618, or 29 percent, from $29,330 in 1997 to $20,712 in 1998
principally due to the decreased shipments to Reuters as discussed above.
International revenues accounted for 35 percent of net revenues in 1998, down
from 45 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 Asian crisis poses a significant risk
to the Company.
Gross Profit. Cost of sales includes the cost of production of finished
products, as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. Gross profit
decreased by $5,300, or 22 percent, to $19,258 in 1998 compared to 1997. Gross
margin also decreased from the prior year at 32 percent in 1998 from 38
percent in 1997. In conjunction with the planned closure of the Company's
Puerto Rico manufacturing operations and transition to subcontracted
manufacturing (discussed below in Consolidation Charges), during 1998, the
Company recorded $5,314 of inventory charges related to consolidation,
including $1,899 of incremental excess and obsolete inventory reserves related
to ongoing product life-cycle transitions and $3,415 for reductions in
inventory related to the streamlining of the Company's product lines.
Excluding these inventory charges related to consolidation, gross profit for
1998 would have been $24,572,
24
<PAGE>
an increase of $14 compared to 1997. Gross margin in 1998, excluding these
inventory charges related to consolidation, improved to 41 percent. The
improvement in gross margin is principally due to a product mix that contained
a greater percentage of higher margin products.
Engineering and Development. Engineering and development expenses consist
primarily of salaries and related expenses for personnel engaged in the
design, development and technical support of the Company's products. These
expenses include third-party fees paid to consultants, prototype development
expenses and computer services costs related to supporting computer tools used
in the design process. Engineering and development expenses were $11,270 and
$10,063 for 1998 and 1997, representing 19 percent and 16 percent of net
revenues, respectively. This increase in engineering and development expenses
of $1,207, or 12 percent, from 1997 to 1998 reflected the Company's increasing
investment in fibre channel development that was partially offset by declining
expenditures related to its traditional networking product development.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sales of the Company's products, as well as trade shows, product
literature and promotional support costs. Selling and marketing expenses were
$7,589 and $7,637 for 1998 and 1997, representing 13 percent and 12 percent of
net revenues, respectively. Selling and marketing expenses remained relatively
unchanged from 1997 to 1998.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executives, financial
accounting support, human resources, administrative services, professional
fees and other associated corporate expenses. General and administrative
expenses were $4,207 and $4,586 for 1998 and 1997, respectively, representing
seven percent of net revenues for both years. This decrease in general and
administrative expenses of $379, or eight percent, resulted from the Company's
ongoing streamlining of its general and administrative activities.
Consolidation Charges. 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 planned to close
its Puerto Rico manufacturing facility and selected domestic sales offices. In
addition to the $5,314 of inventory charges related to consolidation discussed
above, the Company has recorded consolidation charges of $7,231 related to
these closures in 1998. These charges include approximately $3,010 for
severance and related costs, $1,022 for impairment of certain property, plant
and equipment, $1,360 for reductions in prepaid royalties and other expenses,
$631 for payroll and related costs for Puerto Rico employees and other
directly-related costs to complete the closure of the facility after
operations had ceased, $325 for legal, tax and accounting advice directly
related to the closure of the Puerto Rico facility, $658 of directly-related
costs incurred primarily at the corporate level to facilitate the closure of
the Puerto Rico facility (travel, labor, and other outside services), and $225
for equipment and offices leases. In addition, the Company planned to sell
other property, plant and equipment in 1999. The Company anticipated a total
worldwide reduction of approximately 130 full-time employees, or 48 percent of
the workforce, and 45 temporary workers in Puerto Rico. The majority of the
headcount reductions were in the manufacturing area; however, selected
reductions were also made in other areas related to the streamlining of
product offerings. During 1999, the Company substantially completed this
consolidation plan.
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 on the Company's fibre channel and traditional networking
markets, which include printer server and wide area networking products.
Emulex's remote access and host software business, previously headquartered
out of a Bellevue, Washington facility, was relocated to Emulex's 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 it corporate
25
<PAGE>
headquarters. The Company recognized consolidation charges of $1,280 in 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.
Nonoperating Income. Nonoperating income consists primarily of interest
income, interest expense and foreign exchange translation. The Company's
nonoperating income was $113 and $71 in 1998 and 1997, respectively. Normal
fluctuations in nonoperating income are primarily due to changes in interest
income and expense as a result of varying cash balances. Additionally,
nonoperating income in 1997 included nonrecurring interest income of $238
associated with prior years' tax returns.
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, in 1997.
Year 2000
Many existing computer systems and applications use two digits rather than
four to define the applicable year. These programs were designed without
considering the impact of the upcoming change in the century. If such programs
are not corrected, many computer systems could fail or create erroneous
results at or beyond the year 2000. We consider a product to be "Year 2000
compliant" if the product's performance and functionality are unaffected by
the processing of dates prior to, during and after the year 2000. The Company
has considered the impact of Year 2000 issues on our products, computer
systems, and applications. All of our current products are Year 2000
compliant; however, some products previously sold by the Company may not be
Year 2000 compliant. The Company is prepared to update these non-compliant
products as required under Company warranties and as required by law for all
Year 2000 issues. Furthermore, the Company believes that the related financial
exposure for any required updates to non-compliant products is not material.
Additionally, the Company has reviewed and tested its internal computer
systems and applications. The Company has identified and corrected all of the
Year 2000 compliance issues according to vendor specifications. These reviews,
tests, and corrections have not resulted in substantial expenditures to date.
Furthermore, the Company does not anticipate any material expenditures in the
future related to these issues; however, if any additional Year 2000 issues
are identified, the related costs would continue to evolve. The Company has
completed a survey of its suppliers, contract manufacturer, significant
customers, and financial institutions to evaluate their Year 2000 compliance
plans and state of readiness and to determine whether any Year 2000 issues
will impede the ability of such third parties to continue conducting business
with the Company. The Company has received satisfactory responses to these
surveys and will continue to monitor the Year 2000 plans of our suppliers and
customers through the coming event. The Company believes that the most likely
worst-case scenarios related to the Year 2000 issue that it may experience
would be either an inability to obtain inventory components from suppliers or
delays in receiving orders or payments from customers due to Year 2000
problems experienced by these third parties. These events, if experienced,
could have a material adverse effect on the Company's business, results of
operations, and financial condition. Therefore, as a contingency plan to
ensure the Company's ability to provide products and services to its
customers, the Company will take the additional precaution of maintaining a
finished goods inventory at calendar year end sufficient to cover shipments
for 30 to 45 days, and will maintain an additional store of key raw materials
for the manufacture of its products. The Company has also asked key suppliers
to increase their inventory levels of critical materials and components to act
as a further safeguard. The Company believes it has fully addressed all areas
of this issue, including internal systems, products and third parties;
however, the Company will continue to monitor these areas.
26
<PAGE>
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("Statement") 133, "Accounting
for Derivative Instruments and Hedging Activities." This new statement
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. It further provides criteria for derivative
instruments to be designated as fair value, cash flow and foreign currency
hedges, and establishes respective accounting standards for reporting changes
in the fair value of the instruments. This statement, as amended, is effective
for both interim and annual periods for fiscal years beginning after June 15,
2000. The Company does not expect the adoption of Statement 133 to have a
material impact on its results of operations.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased by $20,508 during 1999 to
$22,284. Operating activities, which include changes in working capital
balances, provided $1,896 of cash and cash equivalents in 1999 compared to
providing $3,116 of cash and cash equivalents in the prior year. Investing
activities, which included purchases of investments of $115,380, as well as
the acquisition and disposition of property, plant and equipment, used
$114,334 of cash and cash equivalents in the current year compared to using
$1,871 in 1998. Net financing activities, which included net proceeds from a
secondary offering of common stock of $132,838, as well as payments under
capital lease obligations and proceeds from the exercise of employee stock
options, provided $132,946 of cash and cash equivalents during 1999 compared
to providing $47 of cash and cash equivalents in 1998.
In addition to its cash, cash equivalent and investment balances, the
Company has a line of credit of up to $10,000 with Silicon Valley Bank. The
agreement allows the Company to borrow at the bank's prime rate (7.75 percent
at June 27, 1999) plus one half percent. 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 27, 1999 or June 28, 1998. 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 lender.
As of June 27, 1999, 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 the
Company. The Company's line of credit with Silicon Valley Bank, which is
renewed periodically in the normal course of business, is scheduled to expire
in January 2000.
In the quarter ended June 27, 1999, the Company completed a secondary
offering of 4,630,000 shares of the Company's common stock of a price of
$30.50 per share. The Company received proceeds of $132,838 net of
underwriter's discounts and expenses. As of June 27, 1999, the Company had
investments of $115,380 resulting primarily from the net proceeds of this
offering. The remaining proceeds are included in the Company's cash and cash
equivalents.
The Company believes that its existing cash and investment balances,
facilities and equipment leases, anticipated cash flows from operating
activities and available borrowings under its line of credit will be
sufficient to support its working capital needs and capital expenditure
requirements for the next twelve months.
27
<PAGE>
Item 7a. Qualitative and Quantitative Disclosures about Market Risk.
Interest Rate Sensitivity
At June 27, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $115,380
(see Note 2 of the Consolidated Financial Statements). The Company has the
positive intent and ability to hold these securities to maturity. Currently,
the carrying amount of these securities approximates fair market value.
However, the fair market value of these securities is subject to interest rate
risk and would decline in value if market interest rates increased. If market
interest rates were to increase immediately and uniformly by 10 percent from
the levels existing as of June 27, 1999, the decline in the fair value of the
portfolio would not be material to the Company's financial position, results
of operations and cash flows.
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 1999 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 27,
1999.
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 54
Ronald P. Quagliara
(1).................... Sr. Vice President, Research and Development 50
Teresa W. Blackledge (1)
(2).................... Vice President, Marketing 44
Sadie A. Herrera (1).... Vice President, Human Resources 50
Michael J. Rockenbach... Vice President, Finance, Chief Financial Officer and Secretary 38
Kirk D. Roller (1)...... Vice President, Worldwide Sales 37
Michael E. Smith (1).... Vice President, Worldwide Marketing 37
</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.
(2) Effective October 1, 1999, Ms. Blackledge has resigned her position as
Vice President, Marketing.
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. 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.
28
<PAGE>
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.
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. 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.
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.
Mr. Smith joined the Company in October 1998 as senior director of fibre
channel marketing and was promoted to vice president, fibre channel marketing
in June 1999 and subsequently to vice president, worldwide marketing in August
1999. Prior to joining the company, Mr. Smith spent 2 years with Adaptec, Inc.
as marketing manager of peripheral technologies solutions and most recently as
marketing manager, fibre channel products. From 1986 to 1996, Mr. Smith held
various engineering and marketing positions with Western Digital Corporation,
most recently as director of marketing, I/O products.
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 1999 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 27,
1999.
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 1999 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 27,
1999.
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 1999 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 27,
1999.
29
<PAGE>
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.
30
<PAGE>
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 27, 1999, June 28, 1998 and June 29, 1997
(With Independent Auditors' Report Thereon)
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Consolidated Financial Statements
Independent Auditors' Report........................................... 32
Consolidated Balance Sheets--June 27, 1999 and June 28, 1998........... 33
Consolidated Statements of Operations--Years ended June 27, 1999, June
28, 1998 and June 29, 1997............................................ 34
Consolidated Statements of Stockholders' Equity--Years ended June 27,
1999, June 28, 1998 and June 29, 1997................................. 35
Consolidated Statements of Cash Flows--Years ended June 27, 1999, June
28, 1998 and June 29, 1997............................................ 36
Notes to Consolidated Financial Statements............................. 37
Schedule
Schedule II -- Valuation and Qualifying Accounts and Reserves.......... 55
</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.
31
<PAGE>
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 27, 1999 and June 28, 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 27, 1999, 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 LLP
Orange County, California
August 4, 1999, except for the
fourth paragraph of note 1
and the first paragraph of
note 9, which are as of
August 30, 1999
32
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 27, 1999 and June 28, 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
ASSETS (note 7)
Current assets:
Cash and cash equivalents (note 2).......................... $ 22,284 $ 1,776
Investments (note 2)........................................ 83,164 --
Accounts and notes receivable, less allowance for doubtful
accounts of $550 in 1999 and $576 in 1998.................. 17,088 12,141
Inventories, net (note 3)................................... 11,083 9,906
Prepaid expenses............................................ 475 476
Deferred income taxes (note 10)............................. 244 85
-------- -------
Total current assets...................................... 134,338 24,384
Property, plant and equipment, net (note 4)................... 3,168 5,112
Long term investments (note 2)................................ 32,216 --
Other assets (note 10)........................................ 269 661
-------- -------
$169,991 $30,157
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable............................................ $ 11,395 $ 6,909
Accrued liabilities (note 5)................................ 4,096 4,105
Accrued consolidation charges............................... 195 3,173
Income taxes payable and other current liabilities (note
10)........................................................ 358 212
-------- -------
Total current liabilities................................. 16,044 14,399
Deferred income taxes and other liabilities (note 10)......... 2,054 2,152
-------- -------
18,098 16,551
-------- -------
Commitments and contingencies (note 8)
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;
16,966,944 and 12,266,644 issued and outstanding in 1999
and 1998, respectively 3,393 2,453
Additional paid-in capital.................................. 138,300 6,218
Retained earnings........................................... 10,200 4,935
-------- -------
Total stockholders' equity................................ 151,893 13,606
-------- -------
$169,991 $30,157
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 27, 1999, June 28, 1998 and June 29, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------- --------- -------
<S> <C> <C> <C>
Net revenues (note 11)........................... $68,485 $ 59,485 $64,763
------- --------- -------
Cost of sales.................................... 40,138 34,913 40,205
Cost of sales--inventory charges related to
consolidation................................... 1,304 5,314 --
------- --------- -------
Total cost of sales............................ 41,442 40,227 40,205
------- --------- -------
Gross profit................................. 27,043 19,258 24,558
------- --------- -------
Operating expenses:
Engineering and development.................... 11,766 11,270 10,063
Selling and marketing.......................... 6,953 7,589 7,637
General and administrative..................... 4,279 4,207 4,586
Consolidation charges, net..................... (987) 7,231 1,280
------- --------- -------
Total operating expenses..................... 22,011 30,297 23,566
------- --------- -------
Operating income (loss).......................... 5,032 (11,039) 992
Nonoperating income (note 12).................... 480 113 71
------- --------- -------
Income (loss) before income taxes................ 5,512 (10,926) 1,063
Income tax provision (benefit) (note 10)......... 247 (88) (506)
------- --------- -------
Net income (loss)................................ $ 5,265 $ (10,838) $ 1,569
======= ========= =======
Net income (loss) per share (note 13):
Basic.......................................... $ 0.42 $ (0.89) $ 0.13
======= ========= =======
Diluted........................................ $ 0.37 $ (0.89) $ 0.12
======= ========= =======
Number of shares used in per share computations
(note 13):
Basic.......................................... 12,685 12,243 12,088
======= ========= =======
Diluted........................................ 14,131 12,243 12,588
======= ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 27, 1999, June 28, 1998, and June 29, 1997
(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 June 30, 1996... 11,986,806 $2,397 $ 5,429 $14,204 $ 22,030
Exercise of stock options
(note 9)................ 214,286 43 634 -- 677
Net income............... -- -- -- 1,569 1,569
---------- ------ -------- ------- --------
Balance at June 29, 1997... 12,201,092 2,440 6,063 15,773 24,276
Exercise of stock options
(note 9)................ 65,552 13 155 -- 168
Net loss................. -- -- -- (10,838) (10,838)
---------- ------ -------- ------- --------
Balance at June 28, 1998... 12,266,644 2,453 6,218 4,935 13,606
Stock offering (note 9).. 4,630,000 926 131,912 -- 132,838
Exercise of stock
options, net of 422
shares retired (note
9)...................... 70,300 14 170 -- 184
Net income............... -- -- -- 5,265 5,265
---------- ------ -------- ------- --------
Balance at June 27, 1999... 16,966,944 $3,393 $138,300 $10,200 $151,893
========== ====== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 27, 1999, June 28, 1998 and June 29, 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 5,265 $(10,838) $ 1,569
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................. 1,648 2,347 2,616
Impairment of property, plant and equipment.... -- 1,022 --
Impairment of intangibles...................... 125 -- --
Loss (gain) on disposal of property, plant and
equipment..................................... (750) 51 55
Provision for doubtful accounts................ 86 190 131
Changes in assets and liabilities:
Accounts receivable............................ (5,033) 2,454 (1,923)
Inventories.................................... (1,177) 2,807 1,958
Prepaid expenses............................... 1 1,278 138
Income taxes receivable........................ -- 280 108
Accounts payable............................... 4,486 2,615 (4,405)
Accrued liabilities............................ (9) (1,985) 278
Accrued consolidation charges.................. (2,978) 3,143 (4)
Deferred revenue............................... -- (6) 6
Income taxes payable........................... 215 136 --
Deferred income taxes.......................... -- (380) 15
Other assets................................... 17 2 (10)
--------- -------- -------
Net cash provided by operating activities..... 1,896 3,116 532
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property, plant and
equipment...................................... 2,999 21 62
Additions to property, plant and equipment...... (1,953) (1,592) (2,161)
Purchases of investments........................ (115,380) -- --
Additions to intangibles........................ -- (300) --
--------- -------- -------
Net cash used in investing activities......... (114,334) (1,871) (2,099)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases......... (76) (121) (261)
Net proceeds from issuance of common stock under
stock option plans............................. 184 168 677
Net proceeds from stock offering................ 132,838 -- --
--------- -------- -------
Net cash provided by financing activities..... 132,946 47 416
--------- -------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 20,508 1,292 (1,151)
Cash and cash equivalents at beginning of year... 1,776 484 1,635
--------- -------- -------
Cash and cash equivalents at end of year......... $ 22,284 $ 1,776 $ 484
========= ======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest....................................... $ 60 $ 169 $ 184
Income taxes................................... 53 64 53
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 2, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per 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
1999, 1998 and 1997 each comprised 52 weeks.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
Common Stock Split
On August 30, 1999, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common Stock
for each share of common stock outstanding to stockholders of record on August
16, 1999. All share, per share and related data presented in the consolidated
financial statements and footnotes has been retroactively adjusted to reflect
this stock split. As the par value of the Company's common stock remained at
$0.20 per share, all periods presented reflect a reclass from additional paid-
in capital to common stock.
Consolidation Charges
Fiscal 1998 and 1999
On March 25, 1998, the Company announced plans to outsource the
manufacturing of its product lines to K*TEC Electronics, a division of Kent
Electronics Corporation. The Company made this strategic decision in an
attempt to reduce required future capital expenditures and production costs,
as well as to take advantage of K*TEC Electronics' consolidated purchasing
power and materials management capabilities. This decision resulted in, among
other things, the closing of the Company's Puerto Rico manufacturing
subsidiary, streamlining the Company's product offerings of some of its more
mature, lower volume products (primarily in the Company's network access
products), and closing selected sales offices. In conjunction with this
decision, during fiscal year 1998, the Company recorded consolidation charges
of $7,231 and inventory charges related to consolidation of $5,314 for
incremental inventory reserves related to ongoing product life-cycle
transitions and the streamlining of the Company's product offerings. The
$7,231 of consolidation charges included approximately $3,010 for severance
and related costs, $1,022 for impairment of certain property, plant and
equipment, $1,360 primarily due to reductions in prepaid royalties and other
expenses, $225 for equipment and office leases, $631 for payroll and related
costs for Puerto Rico employees and other directly-related costs to complete
the closure of the facility after operations had ceased, $325 for legal, tax
and accounting advice directly related to the closure of the Puerto Rico
facility and $658 of directly-related costs incurred primarily at the
corporate level to facilitate the closure of the Puerto Rico facility (travel,
labor, and other outside services). The Company anticipated a worldwide
reduction of approximately 130 full-time employees, or 48 percent of the
workforce, and 45 temporary workers in Puerto Rico. The majority of the
headcount reduction were in the manufacturing area; however, selected
reductions were also made in other areas related to the streamlining of
product offerings.
37
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
The $1,022 impairment to property, plant and equipment reflected the assets
to be disposed of at fair value less costs to sell, based on a combination of
management judgement and outside appraisal. Included in property, plant and
equipment at March 29, 1998 was $2,347 of assets to be disposed of. At June
28, 1998, the Company had ceased operations at the Puerto Rico facility.
Through that time, these assets continued to be depreciated. At June 28, 1998,
the remaining assets related to the restructuring consisted of land, buildings
and improvements of $1,683, production and test equipment of $588 and
furniture and fixtures of $55. After these assets were taken from use, the
assets were promptly disposed of, except for the production equipment and the
building and land which were held for sale. During the limited time these
assets were held for sale, no depreciation was recognized because their
carrying value was at fair value less costs to sell. The production equipment
was sold in September 1998. The land and buildings were sold in October 1998.
As of June 28, 1998, actions to complete this consolidation plan were still
in process. The remaining consolidation accrual as of June 28, 1998 of $3,173
consisted of approximately $1,661 for severance and related costs, $155 for
equipment and office leases, $631 for payroll and related costs for Puerto
Rico employees and other directly-related costs to complete the closure of the
facility after operations had ceased, and other costs substantially incurred
by June 28, 1998 including $249 for legal, tax and accounting advice directly
related to the closure of Puerto Rico facility, and $477 for directly-related
costs incurred primarily at the corporate level to facilitate the closure of
the Puerto Rico facility (travel, labor, and other outside services). At June
28, 1998, the Company's work force still included 45 of the 130 employees
discussed above.
During the quarter ended December 27, 1998, the Company sold the land and
buildings at its former manufacturing facility in Puerto Rico for net proceeds
of $2,447, which resulted in a gain of $777. No impairment had previously been
recognized related to the land and buildings. Additionally, as the Company
essentially completed this consolidation plan including all remaining
headcount reductions, the Company recognized additional inventory charges
related to consolidation of $1,304 related to the streamlining of the
Company's products and a reduction in other accrued consolidation charges of
$210 recorded in operating expenses in 1999. When the initial consolidation
charge was taken, management of the Company believed this inventory would be
sold at positive margins. However, as the Company neared the closure of the
manufacturing facility, it determined this inventory was no longer saleable
and these additional reductions in inventory were recorded. As of June 27,
1999, this consolidation plan was substantially complete, and the remaining
consolidation accrual of $195 is primarily for remaining severance and related
payments to be made over the next four months.
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 on the Company's fibre channel and traditional networking
markets, which include printer server and wide area networking products.
Emulex's remote access and host software business, previously headquarted out
of a Bellevue, Washington facility, was 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.
38
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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 12).
Cash Equivalents
All highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents.
Investments
The Company determines the appropriate balance sheet classification of its
investments in debt securities based on maturity date at the time of purchase
and evaluates the classifications at each balance sheet date. Debt securities
are classified as held to maturity as the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost. The amortized cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity value.
Such amortization and interest are included in interest income. The Company's
investments in debt securities are diversified among high credit quality
securities in accordance with the Company's investment policy.
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 ten 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
39
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
if technological feasibility has been established through completion of
product design, working model and testing. 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 1999 or 1997. No internally-
developed software costs were capitalized in 1999, 1998 or 1997. As a result
of an announcement made by a competitor during the quarter ended June 17,
1999, the Company has altered some developmental plans which rendered $125 of
capitalized purchase software costs unusable. Consequently, the Company
recognized impairment of $125 in cost of sales during the quarter ended June
27, 1999. As of June 27, 1999, the unamortized cost of capitalized purchased
software included in other assets was $175. These intangible assets will be
amortized over their estimated useful lives.
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 when the related revenue is
recognized. The Company provides a warranty of between two and five years on
all products and provides a reserve for warranty costs at the time of shipment
based on actual historic experience.
Net Income (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
40
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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 27, 1999, and
June 28, 1998, management believes the fair value of all financial instruments
approximated carrying value.
Concentration of Credit Risk
The Company sells its products to original equipment manufactures and
distributors throughout the world; however, sales in the United States and
Europe currently account for 95 percent of the Company's net revenues, and the
Company expects for the foreseeable future will account for the substantial
majority of the Company's revenues. Sales to customers are denominated in U.S.
dollars. Consequently, the Company believes its foreign currency risk in
minimal. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally requires no collateral from its customers.
The Company maintains an allowance for doubtful accounts. Historically, the
Company has not experienced significant losses on accounts receivable.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make a number of
estimates and assumptions relating to the reporting of assets and liabilities.
Actual results could differ from these estimates.
Research and Development
Research and development costs, including costs related to the development
of new products and process technology, are expensed as incurred.
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.
41
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
Comprehensive Income
As of June 29, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for reporting and
displaying of comprehensive income and its components; however, the adoption
of Statement 130 had no impact on the Company's consolidated financial
statements as of the Company had no transactions that would be considered
other comprehensive income.
Segment Information
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement 131, "Disclosures about Segments of an Enterprise and Related
Information." Statement 131 supersedes Statement 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach is based on the method
by which management organizes its operating segments within the enterprise.
Operating segments, as defined by Statement 131, are components of an
enterprise for which separate financial information is available and is
evaluated regularly by the Chief Operating Decision Maker in deciding how to
allocate resources and in assessing performance. Statement 131 also requires
disclosures about products and services, geographic areas, and major
customers. The Company operates in one operating segment, networking products,
for purposes of Statement 131.
Note 2 Investments
The Company's portfolio of investments consists of the following:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Money market funds................................................. $ 22,284
Commercial paper................................................... 83,164
U.S. Government and Agencies securities............................ 32,216
--------
$137,664
========
</TABLE>
At June 27, 1999, the net unrealized holding gains and losses on investments
were immaterial. Investments at June 27, 1999 were classified as shown below:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Cash equivalents................................................... $ 22,284
Short-term investments............................................. 83,164
Long-term investments (with maturities from 1 to 2 years).......... 32,216
--------
$137,664
========
</TABLE>
Note 3 Inventories
Components of property, plant and equipment, net, are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials................................................ $ 805 $ 3,926
Work-in-process.............................................. -- 273
Finished goods............................................... 10,278 5,707
------- -------
$11,083 $ 9,906
======= =======
</TABLE>
42
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
Note 4 Property, Plant and Equipment
Components of property, plant and equipment, net, are as follows:
<TABLE>
<CAPTION>
1999 1998
------- --------
<S> <C> <C>
Land...................................................... $ -- $ 531
Buildings................................................. -- 2,036
Production and test equipment............................. 8,137 14,004
Furniture and fixtures.................................... 4,180 4,601
Leasehold improvements.................................... 396 336
Other equipment........................................... 22 80
------- --------
12,735 21,588
Less accumulated depreciation and amortization............ (9,567) (16,476)
======= ========
$ 3,168 $ 5,112
======= ========
</TABLE>
Note 5 Accrued Liabilities
Components of accrued liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Payroll and related costs..................................... $1,849 $1,904
Warranty and related reserves................................. 868 1,051
Unearned revenue.............................................. 951 291
Other......................................................... 428 859
------ ------
$4,096 $4,105
====== ======
</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 15 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 $287, $270 and
$271 in 1999, 1998 and 1997, respectively.
The Company had a similar plan for all employees in the Company's Puerto
Rico facility under Section 165(e) of the Internal Revenue Code. This plan was
terminated as a part of the Company's closure of its Puerto Rico manufacturing
subsidiary completed during 1999. Under this plan, eligible employees were
able to contribute up to 10 percent of their compensation not to exceed the
maximum IRS deferral amount. Company discretionary contributions matched up to
3 percent of a participant's compensation. The Company's contributions under
this plan were $25, $116 and $86 for 1999, 1998 and 1997, respectively.
Note 7 Line of Credit
The Company has a $10,000 bank line of credit with Silicon Valley Bank which
expires in January 2000. The agreement allows the Company to borrow at the
bank's prime rate (7.75 percent at June 27, 1999) plus one half percent.
During 1998, but not 1999, the Company utilized this line of credit. However,
there were no borrowings outstanding under this line at June 28, 1998. The
bank line of credit requires the Company to satisfy certain financial and
other covenants and conditions, including prescribed levels of tangible net
worth, profitability and liquidity, and prohibits, among other things, the
payment of cash dividends. At June 27, 1999, the Company was in compliance
with all such covenants.
43
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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 $840, $1,038 and $1,200 in 1999, 1998 and 1997,
respectively.
Future minimum noncancelable lease commitments are as follows:
<TABLE>
<CAPTION>
Operating
Leases
---------
<S> <C>
Fiscal year:
2000............................................................. $ 682
2001............................................................. 635
2002............................................................. 136
2003............................................................. 23
------
Total minimum lease payments....................................... $1,476
======
</TABLE>
44
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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
Common Stock Split
On August 30, 1999, the Company completed a two-for-one stock split,
effected in the form of a stock dividend of one share of Emulex Common Stock
for each share of common stock outstanding to stockholders of record on August
16, 1999. All share, per share and related data presented in the consolidated
financial statements and footnotes has been retroactively adjusted to reflect
this stock split. As the par value of the Company's common stock remained at
$0.20 per share, all periods presented reflect a reclass from additional paid-
in capital to common stock.
Stock Offering
In the quarter ended June 27, 1999, the Company completed a secondary
offering of 4,630,000 shares of the Company's common stock at a price of
$30.50 per share. The Company received proceeds of $132,838, net of
underwriter's discount and expenses of $8,377.
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 5,560,000. 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 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 $3.00 to an
exercise price of $3.00 per share which was the market value on July 6, 1998.
Stock options totaling 1,085,748 shares were repriced. These shares are
included in the amounts granted and canceled during 1999 in the table below.
The vesting schedule of the options which were repriced remained 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.
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 200,000 shares of common stock. The
Director Plan provides that an option to purchase 30,000 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
45
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
of the date of the initial grant, each eligible director shall automatically
be granted an additional option to purchase 10,000 shares of common stock.
These options shall be exercisable 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. Options to purchase 40,000 shares and 120,000 shares
were granted under the Director Plan in 1999 and 1998, respectively.
Following is a summary of stock option transactions for 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Weighted
Number of average exercise
Shares price per share
---------- ----------------
<S> <C> <C>
Options outstanding at June 30, 1996............ 1,602,396 $5.75
Granted....................................... 411,500 7.93
Exercised..................................... (214,286) 3.16
Canceled...................................... (322,658) 6.98
----------
Options outstanding at June 29, 1997............ 1,476,952 6.47
Granted....................................... 609,382 7.23
Exercised..................................... (65,552) 2.56
Canceled...................................... (102,700) 8.76
----------
Options outstanding at June 28, 1998............ 1,918,082 6.72
Granted....................................... 1,492,748 5.99
Exercised..................................... (70,722) 2.81
Canceled...................................... (1,243,918) 7.55
----------
Options outstanding at June 27, 1999............ 2,096,190 5.84
==========
</TABLE>
As of June 27, 1999, June 28, 1998 and June 29, 1997, the number of options
exercisable was 559,000, 953,922 and 702,116, respectively, and the weighted
average exercise price of those options was $4.85, $5.81 and $4.83,
respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted Weighted Weighted
average average average
Outstanding exercise remaining Exercisable exercise
as of price contractual as of price
June 27, per life June 27, per
Range of Exercise Prices 1999 option (years) 1999 option
------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.60 to $ 2.81........ 280,162 $ 2.12 3.58 280,162 $ 2.12
$ 3.00 to $ 3.00........ 1,013,750 $ 3.00 7.25 -- $ --
$ 3.31 to $ 8.13........ 528,978 $ 6.43 7.85 202,590 $ 6.07
$10.88 to $18.50........ 216,900 $13.65 8.55 76,248 $11.65
$39.75 to $39.75........ 56,400 $39.75 9.93 -- $ --
--------- -------
$ 1.60 to $39.75........ 2,096,190 $ 5.84 7.12 559,000 $ 4.85
========= =======
</TABLE>
46
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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 consolidated 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>
1999 1998 1997
------ -------- ------
<S> <C> <C> <C>
Net income (loss) as reported....................... $5,265 $(10,838) $1,569
Assumed stock compensation cost..................... 2,399 1,417 882
------ -------- ------
Pro forma net income (loss)....................... $2,866 $(12,255) $ 687
====== ======== ======
Diluted net income (loss) per share as reported..... $ 0.37 $ (0.89) $ 0.12
Pro forma diluted net income (loss) per share..... $ 0.20 $ (1.00) $ 0.05
====== ======== ======
</TABLE>
Pro forma net income (loss) reflects options granted in 1999, 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) amounts presented above for all periods presented 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:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate................................. 5.1% 5.7% 6.3%
Stock volatility........................................ 70.8% 64.4% 66.1%
Dividend yield.......................................... 0.0% 0.0% 0.0%
Average expected lives (years).......................... 2.3 3.2 3.6
Weighted-average fair value per option granted.......... $2.77 $3.52 $4.09
</TABLE>
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 $300 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
47
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
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 2009, 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 Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Federal:
Current.................................................. $187 $291 $(506)
Deferred................................................. -- (380) --
State:
Current.................................................. 59 -- --
Deferred................................................. -- -- --
Foreign and Puerto Rico:
Current.................................................. 1 1 --
Deferred................................................. -- -- --
---- ---- -----
$247 $(88) $(506)
==== ==== =====
</TABLE>
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ -------- -------
<S> <C> <C> <C>
*Domestic.......................................... $5,647 $(10,991) $ 713
Foreign........................................... (135) 65 350
------ -------- -------
Total.......................................... $5,512 $(10,926) $ 1,063
====== ======== =======
</TABLE>
- --------
* Domestic income (loss) includes the Company's Puerto Rico and Barbados
operations.
48
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Capitalization of inventory costs.................... $ -- $ 44
Accelerated depreciation............................. 160 123
Reserves not currently deductible.................... 839 830
Provisions for discontinued operations and
consolidation charges............................... 351 1,249
Net operating loss carryforwards..................... 11,647 12,504
Business credit carryforwards........................ 4,154 4,036
Alternative minimum tax credit carryforwards......... 1,185 1,185
-------- --------
Total gross deferred tax assets.................... 18,336 19,971
Less valuation allowance........................... (16,566) (18,150)
-------- --------
Net deferred tax assets............................ 1,770 1,821
-------- --------
Deferred tax liabilities:
Capitalization of inventory costs.................... 21 --
Various state taxes.................................. 689 783
Other................................................ 2,870 2,933
-------- --------
Total gross deferred tax liabilities............... 3,580 3,716
-------- --------
Net deferred tax liabilities....................... $ 1,810 $ 1,895
======== ========
</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
27, 1999. 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 27, 1999 will be allocated as follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the consolidated
statements of operations......................................... $15,389
Additional paid-in capital........................................ 1,177
-------
$16,566
=======
</TABLE>
49
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
The effective income tax expense (benefit) on pretax income (loss) differs
from expected federal income tax for the following reasons:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Expected income tax (benefit) at 34 percent......... $1,874 $(3,715) $ 361
State income tax, net of federal tax benefit........ 91 (20) 38
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................. 33 2,586 (175)
Change in beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense (benefit).......... (1,584) 753 267
(Recovery) expense pursuant to tax sharing agreement
with QLogic Corporation............................ 50 (188) (612)
Other, net.......................................... (217) 496 (385)
------ ------- ------
$ 247 $ (88) $ (506)
====== ======= ======
</TABLE>
During 1999, the Company made a tax payment of $50 related to a tax sharing
agreement with QLogic Corporation, a former subsidiary of the Company. In 1998
and 1997, the Company received an income tax benefit in the amount of $188 and
$612, respectively, related to recoveries under the tax sharing agreement.
At June 27, 1999, the Company had net operating loss carryforwards for
federal income tax purposes of $34,493 which are available to offset future
federal taxable income through 2014 and $3,334 for state purposes available
through 2004. The Company has business credit carryforwards for federal
purposes of approximately $2,500 which are available to reduce federal income
taxes through 2014. 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. The Company
also has approximately $1,654 of research and experimentation credit
carryforwards for state purposes available through 2014.
During fiscal year 1999, the Company received a favorable response to the
Ruling Request submitted to the Secretary of the Treasury of Puerto Rico. The
liquidation of the Company's subsidiary, Emulex Caribe, during 1998 was
structured to qualify for tax-free liquidation treatment under the provisions
of both the U.S. and Puerto Rico Internal Revenue Codes. Through its response
to the Ruling Request, the Secretary of the Treasury of Puerto Rico has agreed
that neither Emulex Corporation nor Emulex Caribe will recognize a gain or
loss as a result of the liquidation.
The Company also received approval of the Closing Agreement submitted to the
Secretary of the Treasury of Puerto Rico. The Secretary agreed to the
Company's calculation of the amount of tollgate tax resulting from the deemed
distribution from Emulex Caribe to the Company as a result of the liquidation.
The Company is currently undergoing an examination by the California
Franchise Tax Board of the Company's California income tax returns for years
1989, 1990 and 1991. Additionally, Emulex Caribe, the Company's former
subsidiary, is undergoing examination by the Internal Revenue Service of its
1995 tax return. In the opinion of management, these examinations will not
have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
50
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
Note 11 Revenue by Product Families, Geographic Area and Significant Customers
Revenues by Product Families:
The Company designs and markets two major distinct product families within
one industry segment: high-speed fibre channel products and the Company's
traditional networking and other products which consist primarily of printer
servers and network access products.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net revenues:
Fibre channel........................................ $38,693 $18,944 $11,521
Traditional networking and other:
Printer servers..................................... 17,003 23,963 28,428
Network access...................................... 12,125 15,506 22,479
Other............................................... 664 1,072 2,335
------- ------- -------
Total traditional networking and other............. 29,792 40,541 53,242
------- ------- -------
Total net revenues................................. $68,485 $59,485 $64,763
======= ======= =======
</TABLE>
Revenues by Geographic Area:
The Company's net revenues by geographic area based on bill-to location are:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States......................... $46,751 68% $38,773 65% $35,433 55%
Europe................................ 18,378 27% 15,627 26% 25,075 39%
Pacific Rim Countries................. 3,356 5% 5,085 9% 4,255 6%
------- --- ------- --- ------- ---
$68,485 100% $59,485 100% $64,763 100%
======= === ======= === ======= ===
</TABLE>
Significant Customers:
The following table represents sales to customers accounting for greater
than 10 percent of the Company's net revenues or customer accounts receivable
accounting for greater than 10 percent of the Company's trade accounts
receivable. Amounts not presented were less than 10 percent.
<TABLE>
<CAPTION>
Accounts
Net Revenues Receivable
---------------- -------------
1999 1998 1997 1999 1998
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
IBM Corporation............................... 19% 11% -- 20% 11%
Compaq........................................ 14% -- -- 26% --
Sequent Computers Systems..................... -- 12% 10% -- --
Reuters....................................... -- -- 13% -- --
Data General.................................. -- -- -- -- 14%
</TABLE>
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.
51
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
Note 12 Nonoperating Income
Nonoperating income, net, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income............................................ $670 $ 97 $267
Interest expense........................................... (72) (94) (185)
Foreign exchange........................................... (17) (8) --
Other...................................................... (101) 118 (11)
---- ---- ----
$480 $113 $ 71
==== ==== ====
</TABLE>
Note 13 Net Income (Loss) per Share
Effective December 28, 1997, the Company adopted Statement 128, "Earnings
per Share." In accordance with Statement 128, primary net income per share has
been replaced with basic net income per share and fully diluted net income per
share has been replaced with diluted net income per share which includes
potentially dilutive securities such as outstanding stock options. Prior
periods have been restated to conform to Statement 128.
Basic net income (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 net income (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 net income per share by application of the treasury stock method. The
following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss).............................. $ 5,265 $(10,838) $ 1,569
======= ======== =======
Denominator:
Denominator for basic net income (loss) per
share--weighted average shares outstanding.... 12,685 12,243 12,088
Effect of dilutive securities:
Dilutive options outstanding................. 1,446 -- 500
------- -------- -------
Denominator for diluted net income (loss) per
share--adjusted weighted average shares....... 14,131 12,243 12,588
======= ======== =======
Basic net income (loss) per share................ $ 0.42 $ (0.89) $ 0.13
======= ======== =======
Diluted net income (loss) per share.............. $ 0.37 $ (0.89) $ 0.12
======= ======== =======
</TABLE>
52
<PAGE>
EMULEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 27, 1999, June 28, 1998 and June 29, 1997
(dollars in thousands, except share and per share data)
Options to purchase 103,100 shares of common stock outstanding at June 27,
1999, were not included in the computation of diluted earnings per share for
the year then ended. Options to purchase 602,900 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 $16.10
for the year ended June 27, 1999 and $8.10 for the year ended June 29, 1997,
and therefore the effect would be antidilutive. As the Company recorded a net
loss for the year ended June 28, 1998, all 1,918,082 outstanding stock options
were excluded from the calculation of diluted loss per share, because the
effect would have been antidilutive.
Note 14 Quarterly Financial Data (Unaudited)
Selected quarterly financial data for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Gross Diluted
Net profit Net earnings (loss)
revenues (1) income (loss) per share
-------- ------- ------------ --------------
<S> <C> <C> <C> <C>
1999:
Fourth quarter.............. $20,453 $ 9,087 $ 3,048 $0.20
Third quarter............... 18,235 7,409 1,355 0.10
Second quarter.............. 15,746 5,465 440 0.03
First quarter............... 14,051 5,082 422 0.03
------- ------- --------
Total..................... $68,485 $27,043 $ 5,265
======= ======= ========
1998:
Fourth quarter.............. $13,966 $ 5,545 $ 200 $0.02
Third quarter............... 15,019 756 (12,755) (1.04)
Second quarter.............. 15,493 6,830 1,108 0.09
First quarter............... 15,007 6,127 609 0.05
------- ------- --------
Total..................... $59,485 $19,258 $(10,838)
======= ======= ========
</TABLE>
- --------
(1) Certain 1998 amounts have been reclassified to conform to the 1999
presentation. .
53
<PAGE>
CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES
54
<PAGE>
Schedule II
EMULEX CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended June 27, 1999, June 28, 1998 and June 29, 1997
(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 27, 1999:
Allowance for doubtful accounts....... $ 576 $ 86 $ 112 $ 550
======= ======= ======= =======
Inventory valuation reserves.......... $ 237 $ 1,885 $ 1,537 $ 585
======= ======= ======= =======
Sales returns and allowances.......... $ 452 $ 3,349 $ 2,710 $ 1,091
======= ======= ======= =======
Year ended June 28, 1998:
Allowance for doubtful accounts....... $ 496 $ 190 $ 110 $ 576
======= ======= ======= =======
Inventory valuation reserves.......... $ 1,196 $ 2,865 $ 3,824 $ 237
======= ======= ======= =======
Sales returns and allowances.......... $ 533 $ 1,730 $ 1,811 $ 452
======= ======= ======= =======
Year ended June 29, 1997:
Allowance for doubtful accounts....... $ 482 $ 131 $ 117 $ 496
======= ======= ======= =======
Inventory valuation reserves.......... $ 1,709 $ 1,249 $ 1,762 $ 1,196
======= ======= ======= =======
Sales returns and allowances.......... $ 726 $ 3,596 $ 3,789 $ 533
======= ======= ======= =======
</TABLE>
55
<PAGE>
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 15, 1999 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 15, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
Principal Executive Officer:
<S> <C>
/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>
56
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT COPY
------- ---------------------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to Registration Statement on Form S-4
[File No. 33-9995] filed November 6, 1986, as amended
by post-effective amendment filed on June 15, 1989).
3.2 By-laws (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-8 [File No. 33-40959]
filed June 3, 1991).
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, as
amended (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).
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 on 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 on
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 on 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 on Form 10-K).
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT COPY
------- ---------------------- ------------
<C> <S> <C>
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 on Form 10-K).
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 on
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 on 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 on 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 (incorporated by reference to
Exhibit 10.14 to the Registrant's 1997 Annual Report on
Form 10-K).
10.15 Collateral Assignment, Patent Mortgage and Security
Agreement dated as of September 18, 1996 between
Digital House, Ltd. and Silicon Valley Bank
(incorporated by reference to Exhibit 10.15 to the
Registrant's 1997 Annual Report on Form 10-K).
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.
(incorporated by reference to Exhibit 10.16 to the
Registrant's 1997 Annual Report on Form 10-K).
10.17 Amendment to Loan Agreement dated September 18, 1997
between Silicon Valley Bank and Emulex Corporation,
InterConnections, Inc., and Emulex Europe Limited
(incorporated by reference to Exhibit 10.17 to the
Registrant's 1997 Annual Report on Form 10-K).
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 (incorporated by reference
to Exhibit 10.18 to the Registrant's 1997 Annual Report
on Form 10-K).
10.19 Emulex Corporation 1997 Stock Option Plan for Non-
Employee Directors (incorporated by reference to
Exhibit 10.19 to the Registrant's 1998 Annual Report on
Form 10-K).
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
PAGE IN
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT COPY
------- ---------------------- ------------
<C> <S> <C>
10.20 Emulex Corporation Employee Stock Option Plan as
amended November 20, 1997 (incorporated by reference to
Exhibit 10.20 to the Registrant's 1998 Annual Report on
Form 10-K).
10.21 Master Purchase Agreement dated March 12, 1998 between
Emulex Corporation and K*TEC Electronics Corporation.
10.22 Amendment to Master Purchase Agreement dated March 12,
1998 between Emulex Corporation and K*TEC Electronics
Corporation.
10.23 Amendment to Master Purchase Agreement effective
February 1, 1999 between Emulex Corporation and K*TEC
Electronics Corporation.
10.24 Amendment to Loan Agreement dated September 18, 1998
between Silicon Valley Bank and Emulex Corporation,
InterConnections, Inc., and Emulex Europe Limited
(incorporated by reference to Exhibit 10.21 to the
Registrant's 1998 Annual Report on Form 10-K).
10.25 Loan Agreement dated August 24, 1999 between Silicon
Valley Bank and Emulex Corporation.
21 List of the Registrant's subsidiaries.
23 Independent Auditors' Consent.
27.1 Financial Data Schedule.
</TABLE>
59
<PAGE>
EXHIBIT 10.21
MASTER PURCHASE AGREEMENT
Buyer Seller
Emulex Corporation_______ K*Tec Electronics Corporation
3535 Harbor Blvd.______ 1111 Gillingham Lane
Costa Mesa__CA______92626 Sugar Land, Texas 77478
CITY STATE ZIP
ATTENTION: Keith Knight__________ ATTENTION: Mike Thompson________________
TELECOPIER: _____________________ TELECOPIER: ____________________________
THIS MASTER PURCHASE AGREEMENT ("Agreement") is entered into by and
between Buyer and Seller. "Products" shall mean all goods purchased by Buyer
from Seller. The purposes of this Agreement is to set forth the terms and
conditions under which Seller will manufacture and sell, and Buyer shall
purchase, the Products. In consideration of the mutual promises and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller agrees to manufacture and
sell and Buyer agrees to purchase the Products on the Terms and Conditions of
this Agreement.
DATED March 12, 1998 (the Effective Date).
-------------------------
Emulex Corporation__________ K*TEC ELECTRONICS CORP
BUYER
/s/ Michael J. Rockenbach /s/ Larry D. Olson
---------------------------- ------------------------------
AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE
Michael J. Rockenbach Larry D. Olson
---------------------------- ------------------------------
PRINTED NAME PRINTED NAME
/s/ Chief Financial Officer President
---------------------------- ------------------------------
TITLE TITLE
ATTACHMENT: TERMS AND CONDITIONS
- ---------------------------------
Section 1.--Term Section 7.--Limited Warranty
Section 2.--Orders Section 8.--Limitation of Liability
Section 3.--Delivery and Shipping Section 9.-- Confidentiality
Section 4.--Payment Terms Section 10.--Buyer's Indemnity
Section 5.--Returned and Defective/
Nonconforming Products Section 11.--General Provisions
Section 6.--Termination/Order
Cancellations
<PAGE>
TERMS AND CONDITIONS
1. Term. Subject to earlier termination as provided in Section 8, the initial
---- ---------
term of this Agreement shall be for a period beginning on the Effective Date
and ending one year thereafter. This Agreement will automatically renew
thereafter for successive one-year terms unless either party tenders ninety
(90) days prior written notice of termination. As used herein, days shall
mean calendar days. All orders placed under this Agreement must be placed
prior to the expiration or termination of this Agreement.
2. Orders.
2.1 Forecasts. Buyer shall provide Seller with a requirement forecast on the
----------
first day of each month that sets forth Buyer's forecasted purchases of the
Products and delivery dates for the following twelve-month period.
2.2 Purchase Orders. Buyer agrees to provide a firm P.O. (interchangeably an
----------------
"order" or a "P.O.") for the most current 90 day period ("Order Period")
against such forecast. Each order will be subject to acceptance by Seller
and once accepted by Seller shall constitute for purposes hereof a firm
order to purchase such quantities under the pricing process defined in
Section 2.5 within the agreed upon delivery dates and shall be subject to
cancellation charges as set forth in Section 8.3 (b), and Schedule Changes
set forth in Section 2.4. Acceptance by Seller of an order in accordance
with this Agreement shall not be unreasonably withheld.
2.3 Contract Formation, Acceptance and Entire Agreement. ACCEPTANCE OF BUYER'S
----------------------------------------------------
ORDER IS EXPRESSLY LIMITED TO THE TERMS AND CONDITIONS OF THIS AGREEMENT,
NOTWITHSTANDING ANY ORAL OR WRITTEN STATEMENT MADE BY BUYER, AND DOES NOT IN
ANY WAY WHATSOEVER CONSTITUTE ACCEPTANCE OF ANY OTHER OF BUYER'S TERMS AND
CONDITIONS, AND SUCH OTHER BUYER'S TERMS AND CONDITIONS WILL NOT BECOME A
PART OF THE CONTRACT BETWEEN BUYER AND SELLER UNLESS SELLER EXPRESSLY AGREES
IN WRITING TO ACCEPT SUCH TERMS AND CONDITIONS OR ANY PORTION THEREOF.
Buyer's acceptance of or payment for Products which Buyer has not ordered
creates a contract comprised of this Agreement, the quantities of Products
accepted or paid for, and the prices then offered by Seller. This Agreement
shall constitute the entire agreement with respect to any contract formed
and shall not be altered amended, supplemented or canceled without Buyer and
Seller's express written consent.
2.4 Schedule Changes to Orders. Buyer agrees to provide a firm P.O. for the
---------------------------
most current 90 day period against the forecast. A firm P.O. will be issued
for the upcoming 30 days with the ability to reschedule up to 10% out no
more than 90 days and as much as a 25% increase in the same period. Days 31
to 60 are eligible for 25% volume increases or reschedule with reschedules
to be scheduled out within 90 days of the original scheduled delivery date.
Days 61 to 90 days are eligible for 50% increases or reschedule with
reschedules to be scheduled out within 90 days of the original delivery
date. Seller shall accept a volume change only once every thirty days.
Schedule changes shall not in any way whatsoever reduce the total firm
quantities on order or Buyer's liability for canceled orders. The
cancellation charges specified in Section 8.3 (b) will apply to schedule
---------------
changes that do not comply with the terms stated in this Section 2.4. If
Buyer requests a schedule change representing a reasonable increase to an
order, Seller agrees to use its commercially reasonable efforts to satisfy
the change order request.
Summary of Changes to Orders:
Days to Delivery % Increase in Quantity % Reschedule
---------------- ---------------------------------------------------------
5 - 30 25 less than 10 less than
31 - 60 25 less than 25 less than
61 - 90 50 less than 50 less than
2.5 Pricing. Initial pricing shall be as agreed by the parties and set forth
--------
in Seller's price quote provided to Buyer. Buyer acknowledges that the
prices set forth in Seller's price quote are based upon the minimum
quantities to be purchased as indicated in the price quote. Such price
quote(s) shall be Reasonable AND consistent with industry pricing for
similar Products in similar quantities. Pricing will be firm for the forward
90 days covering the firm P.O.'s. Buyer and Seller will conduct quarterly
cost reviews to determine actual cost adjustments based on market conditions
and volatile commodities. Increases and relief for documented Purchase Price
Variances and manufacturing volume and material variances will be agreed
upon by both parties. Buyer will share 50/50 in documented cost reductions
initiated by Seller. Reductions will be passed on as they are actually used
in product shipment.
2.6 Products Built to Buyer's Specifications. Seller warrants to manufacture
-----------------------------------------
Products to specifications provided by Buyer. Any advice given by Seller to
Buyer before or after delivery of Products built to Buyer's specifications
is based solely upon the information available to Seller, and the use of
such advice by Buyer is solely and entirely at
<PAGE>
Buyer's own risk. Buyer represents and warrants that it has independently
determined the fitness, need, usefulness and applicability of the Products
built to Buyer's specifications it has ordered and does not rely on any
representation of Seller in that regard.
2.7 Design Changes. Seller will accept design changes (i.e. Engineering
---------------
Change Orders) according to Buyer instructions. In such events, Buyer is
liable for cancellation charges as set forth in Section 8.3 (b) for any
-----------
inventory on hand or on order which becomes obsolete due to any design
change.
3. Delivery and Shipping. The agreed upon delivery dates are based on the
----------------------
Seller's acceptance of Buyer's PO. All shipments shall be F.O.B. Seller's
facility unless otherwise specified. The method and route of shipment shall
be according to the directions documented by Buyer on the purchase orders
provided to Seller by Buyer. If shipment terms have not been provided,
Seller shall contact Buyer for such direction. Shipment requirement is no
more than 2 days early and 0 days late from original schedule shipment date.
Seller will have in place a plan to achieve shipment goals, as defined in
Section 5., which will be agreed upon by both parties. In addition to the
purchase price, Buyer shall pay any and all transportation charges. Buyer
assumes risk of loss of the Products upon the Products departing Seller's
facility, regardless of whether Seller has arranged for the transportation
of the Products. Seller assumes risk of loss of Buyer's property left in
Seller's custody or care.
4. Shipment Documentation. Seller shall provide proof of product delivery for
-----------------------
all orders. This documentation must include the Emulex Purchase Order
number, the date of delivery, the method of shipment, the freight tracking
number (if applicable), and the serial numbers delivered.
5. Shipment Performance. Seller shall maintain the sufficient dedicated
---------------------
factory capacity required to satisfy 100% of the product volumes documented
in firm purchase orders and possible required increases in quantities as
cited in Section 2.4. Failure of Seller to ship timely in accordance with
accepted orders shall be addressed as follows: (a) Should the Seller fail to
meet the scheduled shipment performance to Buyer of 95% in any month - then
Seller shall immediately: (i) take all reasonable actions (e.g. use of
overtime, expedited procurement of components, and expedited shipment (such
as use of air freight) to minimize the delinquency, and (ii) inform Buyer of
the situation, the actions taken, and the actions to be taken by Seller, and
when Seller expects to be able to effect shipment of delinquent shipments
and resume timely shipments. Seller is responsible for all incremental costs
arising from actions taken to minimize late shipments, including without
limitation any incremental freight charges associated with expedited
shipments. (b) Should the Seller fail to meet the scheduled shipment
performance to Buyer of 80% in any month, Seller shall take the actions in
5.(a) above, and will provide a corrective action plan indicating root
cause, corrective and preventive action. The corrective action plan shall be
approved by Buyer and progress toward that plan reviewed with Buyer weekly
until expected performance levels are met. Failure to correct such
performance deficiency within 60 days of Seller's first reported performance
failure shall result in a breach of this Agreement by Seller.
6. Payment Terms. Buyer agrees to pay the net amount of all invoices within
--------------
thirty days of the invoice date to the address shown on the first page
hereof. Interest at the maximum interest rate permitted by law may be
charged on delinquent accounts unless Buyer has notified Seller of a
dispute. Buyer represents that all sales to Buyer under this Agreement are
sales for use in production or resale; therefore no sales, use, excise or
other taxes are due as a result of such sales.
7. Returned and Defective/Nonconforming Products. The components which are
----------------------------------------------
manufactured by third parties for assembly into Products shall be considered
conforming if they meet or exceed the third party manufacturer's published
specifications and such specifications are approved by Buyer. Products
manufactured by Seller to Buyer's specifications shall be considered
conforming if they meet or exceed Buyer's specifications. Seller shall
warrant products for 1 year for material defects and two years for
workmanship, from date of manufacture.
In the event Buyer in good faith believes that Products are defective or
nonconforming, Buyer shall give written notice to Seller specifying in
detail the defect or nonconformity of such Products. If notice of defect or
nonconformity is given timely as provided in this Section, then upon written
-------
authorization by Seller, the Products may be returned by Buyer. In order to
be eligible for a credit or replacement of such Products, Buyer must return
the Products to Seller, transportation charges prepaid by Buyer, within
fifteen days of Seller's authorization of return. Acceptance of returned
Products or authorization of return of Products shall not be deemed as
Seller's concession or acknowledgment of defect or nonconformity with
respect to any Products. In any event, Seller shall not accept returned
Products without Buyer's written statement fully describing the alleged
defects or nonconformity. If said Product return is determined to be
defective by Seller, Buyer will be reimbursed for prepaid transportation
charges for said shipment.
<PAGE>
If Seller determines that the Products are nonconforming or defective,
Seller, with the consent of the Buyer, shall either credit Buyer for the
cost thereof, rework the Products or otherwise replace the Products. If the
defect or nonconforming nature of the Product was caused by Buyer or its
agents, employees or subcontractors ( other than Seller), then Buyer shall
be liable for the cost of rework or replacement and all associated costs
therewith including, without limitation, transportation charges and
inspection fees.
Claims for shortages must be reported within ten days of receipt of the
Products by Buyer to Seller in order for an adjustment to be considered by
Seller.
8. Termination/Order Cancellations
-------------------------------
8.1 Termination Without Cause. Either party may terminate this Agreement, in
--------------------------
whole or in part, at any time without cause upon ninety days written notice.
Upon termination of this Agreement without cause, Seller shall (a) no longer
accept new orders from Buyer, (b) stop work on orders previously placed
pursuant to this Agreement to the extent specified in Buyer's notice of
termination or by written acknowledgment by Buyer of Seller's notice of
termination and terminate all subcontracts and orders that relate to the
terminated work, which stoppage will subject Buyer to cancellation charges
as set forth in Section 8.3 (b), and (c) place no further orders with
---------------
suppliers except to the extent required to complete previous orders which
are not terminated.
8.2 Termination for Cause. Either party may terminate this Agreement,
----------------------
effective upon written notice in any of the following events: (a) the other
party materially breaches this Agreement and such breach remains uncured for
thirty days following written notice of breach to the breaching party; or
(b) the other party (i) voluntarily suspends transaction of business; (ii)
becomes insolvent or unable to pay any indebtedness as it matures; (iii)
commences a voluntary case in bankruptcy or a voluntary petition seeking
reorganization or to effect a plan or other arrangement with creditors; (iv)
makes an assignment for the benefit of creditors; (v) applies for or
consents to the appointment of a receiver or trustee for it or for any
substantial portion of its property; (vi) makes an assignment to an agent
authorized to liquidate any substantial part of its assets; (vii) has an
involuntary case commenced against it with any court or other authority
seeking liquidation, reorganization or a creditor's arrangement; (viii) by
an order of any court or other authority, has appointed any receiver or
trustee for it or for any substantial portion of its property; or (ix) has a
writ or warrant of attachment or any similar process issued by any court or
other authority against any substantial portion of its property and such
involuntary petition seeking liquidation, reorganization or a creditor's
arrangement or such order appointing a receiver or trustee is not vacated or
stayed, or such writ, warrant of attachment or similar process is not
vacated, released or bonded off within thirty days after its entry or levy.
8.3 Buyer's Liability Upon Termination/Order Cancellations.
-------------------------------------------------------
a) Buyer Termination for Cause. If the Buyer terminates this Agreement or
any firm order (see Sections 2.1 and 2.2) for cause, Buyer shall be liable
for cancellation charges including the costs of raw materials, noncancelable
orders with suppliers, work-in-process and finished goods purchased and
manufactured for firm orders as provided in Section 2. Seller shall make all
---------
reasonable efforts to limit this cost by attempting to return components
thereof to suppliers.
b) Buyer Termination Without Cause. If the Buyer terminates this Agreement or
any firm order (see Sections 2.1 and 2.2) without cause, Buyer shall be
liable for cancellation charges including the costs of raw materials,
noncancelable orders with suppliers, work-in-process and finished goods
purchased and manufactured for firm orders as provided in Section 2.
---------
c) Seller Termination for Cause. If the Seller terminates this Agreement or any
firm order (see Sections 2.1 and 2.2) for cause, Buyer shall be liable for
all costs of raw materials, noncancelable orders with suppliers, work-in-
process and finished goods purchased and manufactured for firm orders as
provided in Section 2 plus a prorated profit.
---------
9. Limited Warranty. BUYER ACKNOWLEDGES THAT SELLER IS NOT THE MANUFACTURER
-----------------
OF MOST, IF NOT ALL, OF THE COMPONENTS OF THE PRODUCTS NOR IS SELLER A THIRD
PARTY MANUFACTURER'S AGENT. SELLER MAKES NO REPRESENTATIONS OR WARRANTIES IN
CONNECTION WITH THE COMPONENTS THEREOF, WHICH SELLER DID NOT MANUFACTURE.
BUYER EXPRESSLY AGREES TO PURCHASE ALL PRODUCTS MANUFACTURED TO BUYER'S
SPECIFICATIONS (AS DEFINED IN RECEIVED DOCUMENTATION) AND SELLER SPECIFICALLY
DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, IN FACT OR BY OPERATION OF LAW OR
OTHERWISE, ANY ORDER, OR IN ANY OTHER MATERIALS, BROCHURES, PRESENTATIONS,
SAMPLES, MODELS OR OTHER DOCUMENTATION OR COMMUNICATIONS WHETHER ORAL OR
WRITTEN, INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE, WHICH WOULD EXTEND BEYOND THE
WARRANTIES EXPRESSLY CONTAINED HEREIN. SELLER AUTHORIZES BUYER TO ASSERT AT
BUYER'S EXPENSE FOR SELLER'S ACCOUNT, ALL OF SELLER'S RIGHTS UNDER ANY
APPLICABLE MANUFACTURER'S WARRANTY, AND SELLER AGREES TO COOPERATE WITH BUYER IN
ASSERTING SUCH RIGHTS; PROVIDED, HOWEVER, THAT BUYER WILL DEFEND, INDEMNIFY AND
HOLD SELLER HARMLESS
<PAGE>
FROM AND AGAINST ANY LOSS, LIABILITY OR EXPENSE, INCLUDING REASONABLE ATTORNEYS'
FEES, RESULTING FROM OR ARISING IN CONNECTION WITH ANY ACTION BY BUYER RELATING
TO THE ABOVE AUTHORIZATION.
1. Limitation of Liability. Buyer agrees that regardless of the claim or the
------------------------
form in which any legal or equitable action may be brought by Buyer against
Seller, Seller shall not be liable for any indirect, special, incidental,
consequential, exemplary or punitive damages, including, without limitation,
loss of profits, promotional expenses, injury to reputation, or loss of
customers. Buyer's recovery from Seller for any claim in any way arising
from or related to the Products or this Agreement shall not exceed the
amount actually paid to Seller by Buyer for the Products for the specific
order from which the claim arises irrespective of the nature of the claim,
whether in contract, tort, warranty or otherwise. Buyer's exclusive remedy
for Seller's breach hereunder shall be to return the Products for that
specific order to Seller and Seller, at its option, shall credit Buyer for
the cost thereof, rework the Products, or otherwise replace the Products.
Seller shall not be liable for any damages arising from delay in
manufacture, shipment or delivery of any Products, if such delay is due to
force majeure.
2. Confidentiality. The parties acknowledge that during the term of this
----------------
Agreement and thereafter, either party may disclose to the other party from
time to time certain business product pricing, financial, marketing,
technical and other proprietary and sensitive information of each party.
Both parties shall use commercially reasonable efforts to keep confidential
any and all information concerning customers, trade secrets, methods,
processes or procedures and any other confidential, financial and business
information of the other party (Confidential Information) with the same
standard of care as it uses for its own Confidential Information. Neither
party shall disclose Confidential Information to any third party without the
prior written consent of the other party. Confidential information of either
party hereto shall not include information which (i) is in the public
domain, (ii) is previously known or independently developed by the receiving
party by persons not having access to confidential information, (iii) is
acquired by the receiving party from any third party having a lawful right
to disclose such information or (iv) the receiving party is obligated to
produce under a court or governmental order. The parties acknowledge that a
breach by either party of this Section 11.0 will give rise to irreparable
------------
injury to the other, inadequately compensable in damages. Accordingly, the
parties hereby consent to the obtaining by the other party of injunctive
relief against the breach or threatened breach of the undertakings of the
parties contained in this Section 11.0. The parties further agree that such
------------
an order so enjoining a party may be issued pending final determination
thereof, without the requirement to post bond.
3. Buyer's Indemnity. Buyer shall indemnify, defend and hold Seller harmless
------------------
from and against any and all loss, liability or expense, including
reasonable attorneys' fees, resulting from or arising in connection with any
claim or suit by Buyer or any third party (i) alleging infringement or
dilution of any copyright, trademark, trade name, trade secret, patent or
other third party proprietary rights, relating to the design, manufacture,
sale, normal use or normal disposition of any Products built to the
specifications of Buyer, for Buyer or (ii) alleging loss, damages, bodily
injury, sickness, disease, or death, or injury to property which is caused
by the negligence or intentional acts of Buyer, its agents, employees or
subcontractors, except for Seller, or a defect in Buyer specified materials,
components or design of the Products or caused by Buyer specified suppliers.
The Seller shall have the right to participate, upon the request of the
Buyer, in the defense of any such claim or suit, without relieving Buyer of
any obligations hereunder.
4. General Provisions.
-------------------
13.1 Notice. Notice shall be deemed effective and delivered five days
-------
after mailing if sent certified mail, return receipt requested, or
when received if sent by telecopy, prepaid courier, express mail or
personal delivery to the intended recipient thereof at the address
shown on the first page hereof, or to such other address as either
party may specify in a written notice to the other party pursuant
hereto.
13.2 Force Majeure. Except as otherwise provided herein, neither party
--------------
shall be liable to the other for its failure to perform any of its
obligations hereunder during any period in which performance is
delayed by the other party or circumstances beyond its reasonable
control, including, without limitation, an act of God, war, civil
disturbance, court order, or failures, fluctuations or nonavailability
of materials, components, electrical power, heat, light, air
conditioning, computing or information systems or telecommunications
(force majeure), provided that the party experiencing such delay
promptly notifies the other party of the delay and the cause thereof.
The happening of any contingency beyond Seller's reasonable control,
including delays caused by Buyer specified suppliers, shall not
constitute cause for cancellation of Buyer's order, but shall extend
Seller's time to ship goods for a period equal to the duration of such
contingency.
13.3 Relationship of Parties. Seller, in providing Products hereunder, is
------------------------
acting as an independent contractor and does not undertake by this
Agreement or otherwise to perform any obligation of Buyer, or to
assume any liability
<PAGE>
for Buyer's business or operations. Seller has the sole right and
obligation to supervise, manage, contract, direct, procure, perform or
cause to be performed, all work to be performed by Seller hereunder.
13.4 Right of Seller to Sell Products to Others. Buyer understands and
-------------------------------------------
agrees that Seller may itself use, manufacture or sell similar
products as provided to Buyer hereunder to third parties, some of whom
may be competitors of Buyer.
13.5 No Third Party Beneficiaries. The parties agree that this Agreement is
-----------------------------
for the benefit of the parties hereto only and is not intended to
confer any legal rights or benefits on any third party, and that there
are no third party beneficiaries to this Agreement or any part or
specific provision of this Agreement.
13.6 Limitation Period and Damages. Neither party may assert any cause of
------------------------------
action against the other party arising under or in connection with
this Agreement of which the asserting party knew or should have known
more than two years prior to such assertion.
13.7 Attorneys' Fees. The prevailing party in any legal proceedings
----------------
brought by or against the other party to enforce any provision of this
Agreement shall be entitled to recover against the nonprevailing party
the reasonable attorneys' fees, court costs and other expenses
incurred by the prevailing party.
13.8 Assignment. Neither party may assign this Agreement without the prior
-----------
written approval of the other party.
13.9 Amendment. This Agreement may be amended only by written amendment
----------
duly signed by authorized representatives of both parties.
13.10 Severability. If any provision of this Agreement is held invalid or
-------------
unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement, and this Agreement shall be
construed as if such invalid or unenforceable provision were omitted,
unless the omission of such provision would deprive one of the parties
of a material benefit of its bargain hereunder.
13.11 Waiver. Any waiver of any kind by a party of a breach of this
-------
Agreement must be in writing, shall be effective only to the extent
set forth in such writing and shall not operate or be construed as a
waiver of any subsequent breach. Any delay or omission in exercising
any right, power or remedy pursuant to a breach or default by a party
shall not impair any right, power or remedy which either party may
have with respect to a future breach or default.
13.12 Applicable Law. This Agreement shall be governed under the laws of
---------------
the State of California, without regard to California principles of
conflicts of law, as to all matters, including, without limitation,
matters of validity, construction, effect, performance and remedy. Any
legal action to enforce this Agreement shall be brought in the
district courts of the state of California.
13.13 Binding Effect. This Agreement shall be binding on and inure to the
---------------
benefit of the parties and their respective successors and assigns.
13.14 Survival. The rights, obligations and duties under Sections 8.3, 9,
--------- ----------------
10, 11 and 12 shall survive the termination of this Agreement.
-------------
<PAGE>
EXHIBIT 10.22
AMENDMENT NO. 1, DATED AUGUST 18, 1998, TO THE AGREEMENT BETWEEN
K*TEC ELECTRONICS CORPORATION AND EMULEX CORPORATION
DATED MARCH 12, 1998
The parties agree that the Agreement dated March 12, 1998, referenced above is
amended as follows:
1. Section 2.2, Purchase Orders, is deleted and replaced with the following:
2.2 Purchase Orders. Buyer agrees to provide a firm P.O. (interchangeably
----------------
an "order" or a "P.O.") for the most current 90 day period ("Order
Period") against such forecast. Each order will be subject to
acceptance by Seller and once accepted by Seller shall constitute for
purposes hereof a firm order to purchase such quantities under the
pricing process defined in Section 2.5 within the agreed upon delivery
dates and shall be subject to cancellation charges as set forth in
Section 8.3(b), and Schedule Changes set forth in Section 2.4. For
orders placed during the Order Period, Seller shall automatically
increase the quantity of Products cited in the orders for fibre
channel products by 5%, and for non-fibre channel products by 2 1/2%.
Acceptance by Seller of an order in accordance with this Agreement
shall not be unreasonably withheld.
2. The following new Section 2.8, Customer Purchase Orders, is added:
2.8 Customer Purchase Orders. Seller agrees that, upon receipt of notice
from Buyer, Seller will accept orders directly from Buyer's customers,
IBM and/or DEC only, (Customer's) on the account of Buyer for a period
not to exceed eighteen (18) months from Buyer's notice, unless
mutually agreed. During this period, Seller will ship and invoice
directly to the Customer's. Such orders will be subject to the terms
and conditions in effect between Buyer and Seller at the time such
orders are received by Seller. If Buyer terminates a Customer's right
to place orders directly with Seller, Buyer will notify Seller of such
termination concurrently with Buyer's notice to Customer. In the
event that a Customer's rights under this section is terminated and
Seller is notified of such termination, Seller will ship Products for
orders accepted from that Customer prior to receipt of the notice, but
will not accept further orders from Buyer's Customer.
3. Section 9, Limited Warranty, is deleted and replaced with the following:
9. Limited Warranty. BUYER ACKNOWLEDGES THAT SELLER IS NOT THE
-----------------
MANUFACTURER OF MOST, IF NOT ALL, OF THE COMPONENTS OF THE PRODUCTS
NOR IS SELLER A THIRD PARTY MANUFACTURER'S AGENT. SELLER MAKES NO
REPRESENTATIONS OR WARRANTIES IN CONNECTION WITH THE COMPONENTS
THEREOF, WHICH SELLER DID NOT MANUFACTURE. SELLER SPECIFICALLY
DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, IN FACT OR BY OPERATION
OF LAW OR OTHERWISE, ANY ORDER, OR IN ANY OTHER MATERIALS, BROCHURES,
PRESENTATIONS, SAMPLES, MODELS OR OTHER DOCUMENTATION OR
COMMUNICATIONS WHETHER ORAL OR WRITTEN, INCLUDING, WITHOUT LIMITATION,
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR OTHERWISE, WHICH WOULD EXTEND BEYOND THE WARRANTIES
EXPRESSLY CONTAINED HEREIN. SELLER
1
<PAGE>
AUTHORIZES BUYER TO ASSERT AT BUYER'S EXPENSE FOR SELLER'S ACCOUNT,
ALL OF SELLER'S RIGHTS UNDER ANY APPLICABLE MANUFACTURER'S WARRANTY,
AND SELLER AGREES TO COOPERATE WITH BUYER IN ASSERTING SUCH RIGHTS;
PROVIDED, HOWEVER, THAT BUYER WILL DEFEND, INDEMNIFY AND HOLD SELLER
HARMLESS FROM AND AGAINST ANY LOSS, LIABILITY OR EXPENSE, INCLUDING
REASONABLE ATTORNEYS' FEES, RESULTING FROM OR ARISING IN CONNECTION
WITH ANY ACTION BY BUYER RELATING TO THE ABOVE AUTHORIZATION.
4. Except as amended above, all terms and conditions of the Agreement remain
in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
K*TEC ELECTRONICS CORPORATION EMULEX CORPORATION
By: /s/ Larry Olson By: /s/ Michael J. Rockenbach
------------------ -------------------------
(Signature) (Signature)
Name: Larry Olson Name: Michael J. Rockenbach
---------------- -----------------------
(Printed or Typed) (Printed or Typed)
Title: President & COO Title: V.P. Finance
--------------- ----------------------
Date: May 14, 1999 Date: June 22, 1999
---------------- -----------------------
2
<PAGE>
EXHIBIT 10.23
AMENDMENT NO. 2
TO THE
MASTER PURCHASE AGREEMENT
BETWEEN
K*TEC ELECTRONICS CORPORATION
AND
EMULEX CORPORATION
AMENDMENT EFFECTIVE DATE: FEBRUARY 1, 1999
The parties agree that the above referenced Agreement is amended to include the
following as a new Section 14:
14. Electronic Data Interchange
14.1 Purpose
Seller and Buyer hereby agree to establish a system of Electronic
Data Interchange ("EDI") whereby communication and/or transactions
between Seller and Buyer can be accomplished through electronic
means, rather than by writing on paper. All communications and/or
transactions between the parties effected by means of third party
public data networks, diskettes transmitted between parties, or other
electronic means shall be subject to this Amendment. All EDI between
the parties hereunder shall be transmitted and formatted in
accordance with the American National Standards Institute Business
Data Interchange (ANSI X.12) Standard identified by number, version,
and date.
14.2 EDI Operations
14.2.1 Technical operational details necessary to implement the EDI
relationship contemplated herein, such as defining
transaction standards and sets and selection of third party
networks, shall be mutually agreed upon and followed by the
parties in good faith using reasonable efforts. Such
operational details need not be signed as a supplement to
this Amendment. Each party must acquire a user identification
number ("User-ID") to transmit and receive EDI transmissions.
As soon as is practicable after execution of this Amendment,
each party shall notify the other party in writing of its
User-ID. Each party shall take commercially reasonable steps
to safeguard access to its User-ID, including, without
limitation, preventing any employee, representative, or agent
from disclosing its User-ID to unauthorized third parties.
<PAGE>
14.2.2 An EDI transmission shall be deemed received when the network
delivers such document to the receiving party's network
mailbox. If such delivery occurs on a weekend or holiday,
receipt shall be deemed to occur on the next business day.
Upon proper receipt of a transmission, the receiving party
shall promptly transmit an acknowledgment confirming that
such transmission has been received. The acknowledgment shall
also be used to notify the sender that the receiver does or
does not accept the substance of the received transmission.
14.3 EDI Transaction Enforceability
The parties agree that all rights, duties and obligations which would
accrue upon receipt of data in the form of paper documentation shall
also accrue upon receipt of the data in electronic form via EDI. A
transmission containing a User-ID or other company identifier will be
considered a "writing" or "in writing" and to have been "signed," as
such terms are used in the California Uniform Commercial Code. Any
computer printout of such EDI transmission will be considered to be
an "original" when maintained in the normal course of business and
will be legally admissible as between the parties to the same extent
and under the same conditions as other business records maintained in
documentary form, including, without limitation, with regard to the
business records exception to the hearsay rule, the best evidence
rule, or the Statute of Frauds.
14.4 Third Party Public Data Network Use; Equipment
Unless otherwise agreed, each Buyer is responsible for establishing
its own agreements with third party networks ("Network"). Unless
otherwise agreed, connect time and any other charges of such Network
shall be paid by the party initiating each communication. Each party
shall provide and maintain at its own expense the equipment,
software, services, and testing necessary to effectively and reliably
transmit and receive transmissions hereunder.
14.5 Transmission Errors
Each party shall have in place reasonable controls to assure timely
handling of EDI transmissions and to promptly contact the sending
agent for corrective action in the event of a transmission error.
14.6 Security Duties
Each party is solely responsible for the selection, implementation,
and maintenance of appropriate security products, tools, tests, and
procedures sufficient to meet its requirements for protecting its
programs and data from improper access, loss, alteration, or
destruction.
14.7 Year 2000 Compliance
14.7.1 "Year 2000 Compliance" requires that each product accurately
processes date data (including, but not limited to,
calculating, comparing,
<PAGE>
sequencing, storing, and rendering) from, into, during, and
between the 20th and 21st centuries, including leap year
calculations, and will not malfunction or produce any invalid
or incorrect results due to dates on or after January 1,
2000. Year 2000 Compliance includes, without limitation, date
data century recognition, calculations that accommodate same
century and multi-century formulas and date values, and date
data interface values that correctly reflect the century.
14.7.2 All EDI transmissions provided hereunder that specify,
involve, or include calculations using year dates from or
after the year 2000 shall meet the requirements of Year 2000
Compliance as defined above, insofar as the equipment owned
and controlled by each party is Year 2000 Compliant. Neither
party shall be liable to the other in any way for failure to
achieve Year 2000 Compliance resulting from non-compliant
equipment or software owned or controlled solely by its
selected Network. If a party's Network is found not to be
Year 2000 Compliant, that party shall take commercially
reasonable steps to resolve such non-compliance, including
but not limited to selecting a Network that is Year 2000
Compliant. During such time, the parties shall work together
in good faith to continue doing business under the Agreement
using other means of communications as agreed between the
parties.
2. Except as amended above, all terms and conditions of the Agreement remain
in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
K*TEC ELECTRONICS CORPORATION EMULEX CORPORATION
By: /s/ Larry Olson By: /s/ Paul Folino
---------------- -------------------------
(Signature) (Signature)
Name: Larry Olson Name: Paul Folino
-------------- -----------------------
(Printed or Typed) (Printed or Typed)
Title: President Title: President and CEO
------------- ----------------------
Date: March 17, 1999 Date: March 24, 1999
-------------- -----------------------
<PAGE>
EXHIBIT 10.25
________________________________________________________________________________
LOAN AGREEMENT
EMULEX CORPORATION, A DELAWARE CORPORATION
AND
EMULEX CORPORATION, A CALIFORNIA CORPORATION
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 ACCOUNTING AND OTHER TERMS................................................ 4
- - --------------------------
2 LOAN AND TERMS OF PAYMENT................................................. 4
- - -------------------------
2.1 Credit Extensions.................................................. 4
2.2 Overadvances....................................................... 5
2.3 Interest Rate, Payments............................................ 5
2.4 Fees............................................................... 5
3 CONDITIONS OF LOANS....................................................... 6
- - -------------------
3.1 Conditions Precedent to Initial Credit Extension................... 6
3.2 Conditions Precedent to all Credit Extensions...................... 6
4 REPRESENTATIONS AND WARRANTIES............................................ 6
- - ------------------------------
4.1 Due Organization and Authorization................................. 6
4.2 Litigation......................................................... 6
4.3 No Material Adverse Change in Financial Statements................. 6
4.4 Solvency........................................................... 6
4.5 Regulatory Compliance.............................................. 7
4.6 Subsidiaries....................................................... 7
4.7 Full Disclosure.................................................... 7
5 AFFIRMATIVE COVENANTS..................................................... 7
- - ---------------------
5.1 Government Compliance.............................................. 7
5.2 Financial Statements, Reports, Certificates........................ 7
5.3 Taxes.............................................................. 8
5.4 Insurance.......................................................... 8
5.5 Primary Accounts................................................... 8
5.6 Financial Covenants................................................ 8
6 NEGATIVE COVENANTS........................................................ 8
- - ------------------
6.1 Dispositions....................................................... 8
6.2 Changes in Business, Ownership, Management or Business Locations... 8
6.3 Mergers or Acquisitions............................................ 8
6.4 Indebtedness....................................................... 9
6.5 Encumbrance........................................................ 9
6.6 Distributions; Investments......................................... 9
6.7 Transactions with Affiliates....................................... 9
6.8 Subordinated Debt.................................................. 9
6.9 Compliance......................................................... 9
7 EVENTS OF DEFAULT......................................................... 9
- - -----------------
7.1 Payment Default.................................................... 9
7.2 Covenant Default................................................... 9
7.3 Material Adverse Change............................................ 10
7.4 Attachment......................................................... 10
7.5 Insolvency......................................................... 10
7.6 Other Agreements................................................... 10
7.7 Judgments.......................................................... 10
7.8 Misrepresentations................................................. 10
8 BANK'S RIGHTS AND REMEDIES................................................ 10
- - --------------------------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
8.1 Rights and Remedies................................................ 10
8.2 Remedies Cumulative................................................ 11
8.3 Demand Waiver...................................................... 11
9 NOTICES AND WAIVERS....................................................... 11
- - -------------------
9.1 Notices............................................................ 11
9.2 Subrogation and Similar Rights..................................... 11
9.3 Waivers of Notice.................................................. 12
9.4 Subrogation Defenses............................................... 12
9.5 Right to Settle, Release........................................... 12
10 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER............................... 13
- -- -------------------------------------------
11 GENERAL PROVISIONS........................................................ 13
- -- ------------------
11.1 Successors and Assigns............................................. 13
11.2 Indemnification.................................................... 13
11.3 Time of Essence.................................................... 13
11.4 Severability of Provision.......................................... 13
11.5 Amendments in Writing, Integration................................. 13
11.6 Counterparts....................................................... 13
11.7 Survival........................................................... 14
11.8 Confidentiality.................................................... 14
11.9 Attorneys' Fees, Costs and Expenses................................ 14
12 DEFINITIONS............................................................... 14
- -- -----------
12.1 Definitions........................................................ 14
</TABLE>
3
<PAGE>
This LOAN AGREEMENT dated August 24, 1999, between SILICON VALLEY BANK
("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 with
a loan production office located at 38 Technology Drive, Suite 150, Irvine,
California 92618 and EMULEX CORPORATION, A DELAWARE CORPORATION and EMULEX
CORPORATION, A CALIFORNIA CORPORATION ("Borrower") provides the terms on which
Bank will lend to Borrower and Borrower will repay Bank. The parties agree as
follows:
1 ACCOUNTING AND OTHER TERMS
--------------------------
Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 Credit Extensions.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 Revolving Advances.
(a) Bank will make Advances not exceeding (i) the Committed Revolving
Line, minus (ii) the Cash Management Services Sublimit, minus (iii) the amount
of all outstanding Letters of Credit (including drawn but unreimbursed Letters
of Credit), minus (iv) the ACH Sublimit, minus (v) the outstandings under the
outstanding SCS transactions. Amounts borrowed under this Section may be repaid
and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit A. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based
on instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.
2.1.2 Letters of Credit.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the Committed Revolving Line minus (ii) the outstanding
principal balance of the Advances minus the Cash Management Sublimit; however,
the face amount of outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed
$1,000,000. Each Letter of Credit will have an expiry date of no later than 180
days after the Revolving Maturity Date, but Borrower's reimbursement obligation
will be secured by cash on terms acceptable to Bank at any time after the
Revolving Maturity Date if the term of this Agreement is not extended by Bank.
Borrower agrees to execute any further documentation in connection with the
Letters of Credit as Bank may reasonably request.
4
<PAGE>
2.1.3 Cash Management Services Sublimit.
Borrower may use up to $50,000 for Bank's Cash Management Services, which
may include merchant services, direct deposit of payroll, business credit card,
and check cashing services identified in various cash management services
agreements related to such services (the "Cash Management Services"). All
amounts Bank pays for any Cash Management Services will be treated as Advances
under the Committed Revolving Line.
2.1.4 ACH Sublimit.
Borrower may use up to $500,000 for direct deposit of payroll, ACH
services (the "ACH Sublimit"). All amounts Bank pays for any Cash Management
Services will be treated as Advances under the Committed Revolving Line.
2.1.5 Supply Chain Sublimit.
Borrower may use up to $2,000,000 for commercial transactions with the
Supply Chain Services (SCS) Division of the Bank. The aggregate of such
transactions will reduce the availability of the Committed Revolving Line and
the Borrowing Base by an equal amount for as long as the SCS transactions remain
outstanding.
2.2 Overadvances.
If Borrower's Obligations under Section 2.1.1, 2.1.2, 2.1.3, 2.1.4 and
2.1.5 exceed the Committed Revolving Line, Borrower must immediately pay in cash
to Bank the excess.
2.3 Interest Rate, Payments.
(a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate of 0.5 percentage points above the Prime Rate.
After an Event of Default, Obligations accrue interest at 5 percent above the
rate effective immediately before the Event of Default. The interest rate
increases or decreases when the Prime Rate changes. Interest is computed on a
360 day year for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable on
the last day of each month. Bank may debit any of Borrower's deposit accounts
including Account Number 0600592670 for principal and interest payments owing or
any amounts Borrower owes Bank. Bank will promptly notify Borrower when it
debits Borrower's accounts. These debits are not a set-off. Payments received
after 12:00 noon Pacific time are considered received at the opening of business
on the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.
2.4 Fees.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of
$14,062.50 due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the date of this
Agreement, are payable when due.
5
<PAGE>
3 CONDITIONS OF LOANS
-------------------
3.1 Conditions Precedent to Initial Credit Extension.
Bank's obligation to make the initial Credit Extension is subject to the
condition precedent that it receive the agreements, documents and fees it
requires and that Bank's loan to Emulex Corporation, Emulex Europe Limited and
Interconnections, Inc. is paid and closed (loan #600592601).
3.2 Conditions Precedent to all Credit Extensions.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 4 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 4 remain true.
4 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
4.1 Due Organization and Authorization.
Borrower and each Subsidiary is duly existing and in good standing in its
state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
reasonably be expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it
is bound in which the default could reasonably be expected to cause a Material
Adverse Change.
4.2 Litigation.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers and legal
counsel, threatened by or against Borrower or any Subsidiary in which a likely
adverse decision could reasonably be expected to cause a Material Adverse
Change.
4.3 No Material Adverse Change in Financial Statements.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
4.4 Solvency.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
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4.5 Regulatory Compliance.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.
4.6 Subsidiaries.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
4.7 Full Disclosure.
No written representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. It
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.
5 AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
5.1 Government Compliance.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify would reasonably be expected to
cause a material adverse effect on Borrower's business or operations. Borrower
will comply, and have each Subsidiary comply, with all laws, ordinances and
regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations or would reasonably
be expected to cause a Material Adverse Change.
5.2 Financial Statements, Reports, Certificates.
(a) Borrower will deliver to Bank: (i) within 5 days of filing, copies of
all statements, reports and notices made available to Borrower's security
holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-
Q and 8-K filed with the Securities and Exchange Commission; (ii) a prompt
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; and (iii) budgets, sales projections, operating plans or
other financial information Bank reasonably requests.
(b) Within 50 days after the last day of each quarter, Borrower will
deliver to Bank a Compliance Certificate signed by a Responsible Officer in the
form of Exhibit B.
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5.3 Taxes.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
5.4 Insurance.
Borrower will keep, and cause each Subsidiary to keep, its business
insured for risks and in amounts, as Bank may reasonably request.
5.5 Primary Accounts.
Borrower will maintain its primary depository and operating accounts with
Bank.
5.6 Financial Covenants.
Borrower will maintain as of the last day of each quarter:
(i) Quick Ratio. A ratio of Quick Assets to Current Liabilities of
at least 2.00 to 1.00.
(ii) Tangible Net Worth. A Tangible Net Worth of at least
$120,000,000.
(iii) Profitability. Borrower will have a minimum net profit of $1
for each quarter.
6 NEGATIVE COVENANTS
------------------
Borrower will not do any of the following without Bank's prior written
consent, which will not be unreasonably withheld:
6.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
6.2 Changes in Business, Ownership, Management or Business Locations.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership or management (other than the
sale of Borrower's equity securities in a public offering or to venture capital
investors approved by Bank) of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office or add
any new offices or business locations.
6.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and (ii) result in a decrease of more than 25% of Tangible Net Worth.
A Subsidiary may merge or consolidate into another Subsidiary or into Borrower.
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6.4 Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
6.5 Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here, subject to Permitted Liens.
6.6 Distributions; Investments.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
6.7 Transactions with Affiliates.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
6.8 Subordinated Debt.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
6.9 Compliance.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Credit Extension for that purpose; fail to meet the minimum
funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could reasonable be expected to have a material adverse effect on Borrower's
business or operations or would reasonably be expected to cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
7 EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
7.1 Payment Default.
If Borrower fails to pay any of the Obligations within 3 days after their
due date. During the 3 day period the failure to cure the default is not an
Event of Default (but no Credit Extension will be made during the cure period);
7.2 Covenant Default.
If Borrower does not perform any obligation in Section 5 or violates any
covenant in Section 6 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the
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default cannot be cured within 10 days or cannot be cured after Borrower's
attempts within 10 day period, and the default may be cured within a reasonable
time, then Borrower has an additional period (of not more than 30 days) to
attempt to cure the default. During the additional time, the failure to cure the
default is not an Event of Default (but no Credit Extensions will be made during
the cure period);
7.3 Material Adverse Change.
If the Bank determines, based upon information available to it and in the
exercise of its reasonable judgment, that there is a reasonable likelihood that
Borrower will fail to comply with one or more of the financial covenants set
forth in Section 5 during the next succeeding financial reporting period.
7.4 Attachment.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
7.5 Insolvency.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
7.6 Other Agreements.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
7.7 Judgments.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
7.8 Misrepresentations.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
8 BANK'S RIGHTS AND REMEDIES
--------------------------
8.1 Rights and Remedies.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 7.5 occurs all Obligations are immediately due
and payable without any action by Bank); and
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(b) Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;
8.2 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
by law, or in equity. Bank's exercise of one right or remedy is not an election,
and Bank's waiver of any Event of Default is not a continuing waiver. Bank's
delay is not a waiver, election, or acquiescence. No waiver is effective unless
signed by Bank and then is only effective for the specific instance and purpose
for which it was given.
8.3 Demand Waiver.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
9 NOTICES AND WAIVERS
-------------------
9.1 Notices.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower Emulex Corporation, a Delaware corporation
3535 Harbor Boulevard
Costa Mesa, CA 92626
Attn: Michael J. Rockenbach
FAX: 714-641-0172
and to Emulex Corporation, a California corporation
3535 Harbor Boulevard
Costa Mesa, CA 92626
Attn: Michael J. Rockenbach
FAX: 714-641-0172
If to Bank Silicon Valley Bank
38 Technology Drive, Suite 150
Irvine, CA 92618
Attn: Marla W. Johnson
FAX: 949-789-1930
9.2 Subrogation and Similar Rights.
Notwithstanding any other provision of this Agreement or any other Loan
Document, each Borrower irrevocably waives all rights that it may have at law or
in equity (including, without limitation, any law subrogating the Borrower to
the rights of Bank under the Loan Documents) to seek contribution,
indemnification, or any other form of reimbursement from any other Borrower, or
any other Person now or hereafter primarily or secondarily liable for any of the
Obligations, for any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise and all rights
that it might have to benefit from, or to participate in, any security for the
Obligations as a result of any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or
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otherwise. Any agreement providing for indemnification, reimbursement or any
other arrangement prohibited under this Section 9.2 shall be null and void. If
any payment is made to a Borrower in contravention of this Section 9.2, such
Borrower shall hold such payment in trust for Bank and such payment shall be
promptly delivered to Bank for application to the Obligations, whether matured
or unmatured.
9.3 Waivers of Notice.
Each Borrower waives notice of acceptance hereof; notice of the
existence, creation or acquisition of any of the Obligations; notice of an Event
of Default; notice of the amount of the Obligations outstanding at any time;
notice of intent to accelerate; notice of acceleration; notice of any adverse
change in the financial condition of any other Borrower or of any other fact
that might increase the Borrower's risk; presentment for payment; demand;
protest and notice thereof as to any instrument; default; and all other notices
and demands to which the Borrower would otherwise be entitled. Each Borrower
waives any defense arising from any defense of any other Borrower, or by reason
of the cessation from any cause whatsoever of the liability of any other
Borrower. Bank's failure at any time to require strict performance by any
Borrower of any provision of the Loan Documents shall not waive, alter or
diminish any right of Bank thereafter to demand strict compliance and
performance therewith. Nothing contained herein shall prevent Bank from
foreclosing on the Lien of any deed of trust, mortgage or other security
instrument, or exercising any rights available thereunder, and the exercise of
any such rights shall not constitute a legal or equitable discharge of any
Borrower. Each Borrower also waives any defense arising from any act or omission
of Bank that changes the scope of the Borrower's risks hereunder. Each Borrower
hereby waives any right to assert against Bank any defense (legal or equitable),
setoff, counterclaim, or claims that such Borrower individually may now or
hereafter have against another Borrower or any other Person liable to Borrower
with respect to the Obligations in any manner or whatsoever.
9.4 Subrogation Defenses.
Each Borrower hereby waives any defense based on impairment or
destruction of its subrogation or other rights against any other Borrower and
waives all benefits which might otherwise be available to it under California
Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2850, 2899 and 3433 and
California Code of Civil Procedure Sections 580a, 580b, 580d and 726, as those
statutory provisions are now in effect and hereafter amended, and under any
other similar statutes now and hereafter in effect.
9.5 Right to Settle, Release.
(a) The liability of Borrowers hereunder shall not be diminished by (i)
any agreement, understanding or representation that any of the Obligations is or
was to be guaranteed by another Person or secured by other property, or (ii) any
release or unenforceability, whether partial or total, or rights, if any, which
Borrower may now or hereafter have against any other Person, including another
Borrower, or property with respect to any of the Obligations.
(b) Without notice to any Borrower and without affecting the liability of
any Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time
for payment, change the manner or terms of payment, discharge the performance
of, decline to enforce, or release all or any of the Obligations with respect to
a Borrower, (ii) grant other indulgences to a Borrower in respect of the
Obligations, (iii) modify in any manner any documents, relating to the
Obligations with respect to a Borrower, (iv) release, surrender or exchange any
deposits or other property securing the Obligations, whether pledged by a
Borrower or any other Person, or (v) compromise, settle renew, or extend the
time for payment, discharge the performance of, decline to enforce, or release
all or any obligations of any guarantor, endorser or other Person who is now or
may hereafter be liable with respect to any of the Obligations.
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10 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
-------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Orange County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
11 GENERAL PROVISIONS
------------------
11.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
11.2 Indemnification.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
11.3 Time of Essence.
Time is of the essence for the performance of all obligations in this
Agreement.
11.4 Severability of Provision.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
11.5 Amendments in Writing, Integration.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
11.6 Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
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11.7 Survival.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 11.2 to indemnify Bank will survive until all
statutes of limitations for actions that may be brought against Bank have run.
11.8 Confidentiality.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information
that either: (a) is in the public domain or in Bank's possession when disclosed
to Bank, or becomes part of the public domain after disclosure to Bank; or (b)
is disclosed to Bank by a third party, if Bank does not know that the third
party is prohibited from disclosing the information.
11.9 Attorneys' Fees, Costs and Expenses.
In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other reasonable costs and expenses incurred, in addition to
any other relief to which it may be entitled.
12 DEFINITIONS
-----------
12.1 Definitions.
In this Agreement:
"Advance" or "Advances" is a loan advance (or advances) under the
Committed Revolving Line.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"Bank Expenses" are all audit fees and expenses and reasonable costs and
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Business Day" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"Cash Management Services" are defined in Section 2.1.3.
"Closing Date" is the date of this Agreement.
"Committed Revolving Line" is an Advance of up to $10,000,000.
"Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of
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<PAGE>
business. The amount of a Contingent Obligation is the stated or determined
amount of the primary obligation for which the Contingent Obligation is made or,
if not determinable, the maximum reasonably anticipated liability for it
determined by the Person in good faith; but the amount may not exceed the
maximum of the obligations under the guarantee or other support arrangement.
"Credit Extension" is each Advance, Letter of Credit, or any other
extension of credit by Bank for Borrower's benefit.
"Current Liabilities" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceeding" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Investment" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"Letter of Credit" is defined in Section 2.1.2.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"Material Adverse Change" is defined in Section 7.3.
"Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services and
letters of credit, if any and including interest accruing after Insolvency
Proceedings begin and debts, liabilities, or obligations of Borrower assigned to
Bank.
"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
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"Permitted Investments" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 5
years from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue and (iv) marketable
obligations of United States corporations rated "A" or better from either
Standard & Poor's Corporation or Moody's Investor Service, Inc. maturing no more
than 5 years from its acquisition.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
--
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"Quick Assets" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable and investments with
maturities of fewer than 12 months determined according to GAAP.
"Responsible Officer" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" is January 31, 2000.
"Schedule" is any attached schedule of exceptions.
"SCS" is defined in Section 2.1.5.
"Subordinated Debt" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
16
<PAGE>
"Subsidiary" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
-----
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.
---
"Total Liabilities" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Emulex Corporation, a Delaware corporation
By: /s/ Paul F. Folino
_________________________________________
Title: President
______________________________________
Emulex Corporation, a California corporation
By: /s/ Paul F. Folino
_________________________________________
Title: President
______________________________________
BANK:
SILICON VALLEY BANK
By: /s/ Marla Johnson
_________________________________________
Title: Vice President
______________________________________
17
<PAGE>
EXHIBIT A
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: ____________________________
FAX#: (408) 496-2426 TIME: ____________________________
_______________________________________________________________________________
FROM: Emulex Corporation, a Delaware corporation and Emulex Corporation, a
--------------------------------------------------------------------
California corporation
- ----------------------
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________________________
PHONE NUMBER: __________________________________________________________________
FROM ACCOUNT # ________________ TO ACCOUNT # __________________________________
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
- -------------------------- -----------------------
PRINCIPAL INCREASE (ADVANCE) $___________________________________________
PRINCIPAL PAYMENT (ONLY) $___________________________________________
INTEREST PAYMENT (ONLY) $___________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $___________________________________________
OTHER INSTRUCTIONS:_____________________________________________________________
________________________________________________________________________________
All Borrower's representations and warranties in the Loan Agreement are true,
correct and complete in all material respects on the date of the telephone
request for and Advance confirmed by this Borrowing Certificate; but those
representations and warranties expressly referring to another date shall be
true, correct and complete in all material respects as of that date.
_______________________________________________________________________________
_______________________________________________________________________________
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_______________________________________ ________________________________
Authorized Requester Phone #
_______________________________________ ________________________________
Received By (Bank) Phone #
_____________________________________________
Authorized Signature (Bank)
_______________________________________________________________________________
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: EMULEX CORPORATION, A DELAWARE CORPORATION AND EMULEX CORPORATION, A
CALIFORNIA CORPORATION
The undersigned authorized officers of Emulex Corporation, a Delaware
corporation and Emulex Corporation, a California corporation ("Borrower")
certify that under the terms and conditions of the Loan Agreement between
Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for
the period ending _______________ with all required covenants except as noted
below and (ii) all representations and warranties in the Agreement are true and
correct in all material respects on this date. Attached are the required
documents supporting the certification. The Officer certifies that these are
prepared in accordance with Generally Accepted Accounting Principles (GAAP)
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies"
column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ ------------------ --------
<S> <C> <C>
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
Compliance Certificate Within 50 days of each quarter Yes No
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 2.00:1.00 ______:1.00 Yes No
Minimum Tangible Net Worth $120,000,000 $________ Yes No
Profitability: Quarterly $1 $________ Yes No
</TABLE>
________________________________
Comments Regarding Exceptions: See Attached. BANK USE ONLY
Received by:____________________
Authorized signer
Date:___________________________
Verified:_______________________
Authorized signer
Date:___________________________
Compliance Status: Yes No
________________________________
<PAGE>
Sincerely,
Emulex Corporation, a Delaware corporation
_____________________________________________
Signature
_____________________________________________
Title
_____________________________________________
Date
Emulex Corporation, a California corporation
_____________________________________________
Signature
_____________________________________________
Title
_____________________________________________
Date
<PAGE>
[LOGO]
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: Emulex Corporation, a Delaware corporation
Emulex Corporation, a California corporation
LOAN OFFICER: Marla W. Johnson
DATE: August 24, 1999
Revolving Loan Fee $14,062.50
Documentation Fee 750.00
TOTAL FEE DUE $14,812.50
------------- ==========
Please indicate the method of payment:
{ } A check for the total amount is attached.
{X} Debit DDA # 0600592670 for the total amount.
____________
{ } Loan proceeds
Borrower:
By: /s/ Michael J. Rockenbach
___________________________________
(Authorized Signer)
/s/ Paul F. Folino 9/12/99
______________________________________
Silicon Valley Bank (Date)
Account Officer's Signature
<PAGE>
CORPORATE BORROWING RESOLUTION
<TABLE>
<S> <C>
Borrower: Emulex Corporation, a Delaware corporation Bank: Silicon Valley Bank
3535 Harbor Boulevard 38 Technology Drive, Suite 150
Costa Mesa, CA 92626 Irvine, CA 92618
</TABLE>
I, the Secretary or Assistant Secretary of Emulex Corporation, a Delaware
corporation ("Borrower"), CERTIFY that Borrower is a corporation existing under
the laws of the State of Delaware.
I certify that at a meeting of Borrower's Directors (or by other authorized
corporate action) duly held the following resolutions were adopted.
It is resolved that any one of the following officers of Borrower, whose name,
title and signature is below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
Paul F. Folino President & CEO /s/ Paul F. Folino
___________________________________ ___________________________________ ___________________________________
Michael J. Rockenbach V.P. & CFO & Secy & Treasurer /s/ Michael J. Rockenbach
___________________________________ ___________________________________ __________________________________
___________________________________ ___________________________________ ___________________________________
___________________________________ ___________________________________ ___________________________________
</TABLE>
may act for Borrower and:
Borrow Money. Borrow money from Silicon Valley Bank ("Bank").
Execute Loan Documents. Execute any loan documents Bank requires.
Grant Security. Grant Bank a security interest in any of Borrower's
assets.
Negotiate Items. Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest
and receive cash or otherwise use the proceeds.
Letters of Credit. Apply for letters of credit from Bank.
Foreign Exchange Contracts. Execute spot or forward foreign exchange
contracts.
Issue Warrants. Issue warrants for Borrower's stock.
Further Acts. Designate other individuals to request advances, pay fees
and costs and execute other documents or agreements (including documents or
agreement that waive Borrowers right to a jury trial) they think necessary
to effectuate these Resolutions.
Further resolved that all acts authorized by these Resolutions and performed
before they were adopted are ratified. These Resolutions remain in effect and
Bank may rely on them until Bank receives written notice of their revocation.
I certify that the persons listed above are Borrower's officers with the titles
and signatures shown following their names and that these resolutions have not
been modified are currently effective.
<PAGE>
CERTIFIED TO AND ATTESTED BY:
X /s/ Michael J. Rockenbach
______________________________________________
*Secretary or Assistant Secretary
X /s/ Paul F. Folino
______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
<PAGE>
CORPORATE BORROWING RESOLUTION
<TABLE>
<S> <C>
Borrower: Emulex Corporation, a California Bank: Silicon Valley Bank
corporation 38 Technology Drive, Suite 150
3535 Harbor Boulevard Irvine, CA 92618
Costa Mesa, CA 92626
</TABLE>
I, the Secretary or Assistant Secretary of Emulex Corporation, a California
corporation ("Borrower"), CERTIFY that Borrower is a corporation existing under
the laws of the State of California.
I certify that at a meeting of Borrower's Directors (or by other authorized
corporate action) duly held the following resolutions were adopted.
It is resolved that any one of the following officers of Borrower, whose name,
title and signature is below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
Paul F. Folino President & CEO /s/ Paul F. Folino
___________________________________ ___________________________________ ___________________________________
Michael J. Rockenbach V.P., CFO, Sec'y & Treasurer /s/ Michael J. Rockenbach
___________________________________ ___________________________________ ___________________________________
___________________________________ ___________________________________ ___________________________________
___________________________________ ___________________________________ ___________________________________
</TABLE>
may act for Borrower and:
Borrow Money. Borrow money from Silicon Valley Bank ("Bank").
Execute Loan Documents. Execute any loan documents Bank requires.
Grant Security. Grant Bank a security interest in any of Borrower's
assets.
Negotiate Items. Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an interest
and receive cash or otherwise use the proceeds.
Letters of Credit. Apply for letters of credit from Bank.
Foreign Exchange Contracts. Execute spot or forward foreign exchange
contracts.
Issue Warrants. Issue warrants for Borrower's stock.
Further Acts. Designate other individuals to request advances, pay fees
and costs and execute other documents or agreements (including documents or
agreement that waive Borrowers right to a jury trial) they think necessary
to effectuate these Resolutions.
Further resolved that all acts authorized by these Resolutions and performed
before they were adopted are ratified. These Resolutions remain in effect and
Bank may rely on them until Bank receives written notice of their revocation.
I certify that the persons listed above are Borrower's officers with the titles
and signatures shown following their names and that these resolutions have not
been modified are currently effective.
<PAGE>
CERTIFIED TO AND ATTESTED BY:
X /s/ Michael J. Rockenbach
______________________________________________
*Secretary or Assistant Secretary
X /s/ Paul F. Folino
______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
<PAGE>
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
(inactive)............. 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>
60
<PAGE>
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 4, 1999, except for the fourth paragraph of note 1 and the
first paragraph of note 9, which are as of August 30, 1999, relating to the
consolidated balance sheets of Emulex Corporation and subsidiaries as of June
27, 1999 and June 28, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended June 27, 1999, and the related schedule, which report
appears in the June 27, 1999 annual report on Form 10-K of Emulex Corporation.
KPMG LLP
Orange County, California
September 15, 1999
61
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EMULEX
CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET, STATEMENT OF
OPERATIONS AND STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JUNE 27, 1999 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-27-1999
<PERIOD-END> JUN-27-1999
<CASH> 22,284
<SECURITIES> 83,164
<RECEIVABLES> 17,638
<ALLOWANCES> 550
<INVENTORY> 11,083
<CURRENT-ASSETS> 134,338
<PP&E> 12,735
<DEPRECIATION> 9,567
<TOTAL-ASSETS> 169,991
<CURRENT-LIABILITIES> 16,044
<BONDS> 0
0
0
<COMMON> 3,393
<OTHER-SE> 148,500
<TOTAL-LIABILITY-AND-EQUITY> 169,991
<SALES> 68,485
<TOTAL-REVENUES> 68,485
<CGS> 41,442
<TOTAL-COSTS> 41,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 86
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 5,512
<INCOME-TAX> 247
<INCOME-CONTINUING> 5,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,265
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.37
</TABLE>
