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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
COMMISSION FILE NO. 0-11007
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0300558
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
(714) 662-5600
(Registrant's telephone number, including area code)
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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 $0.10 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of class)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 14, 2000, of $103.75, was $3,662,718,412.50.
As of September 14, 2000, the registrant had 36,489,159 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
2000 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
July 2, 2000.
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PART I
Item 1. BUSINESS.
All references to years refer to the Company's fiscal years ended July 2, 2000,
June 27, 1999, and June 28, 1998, as applicable, unless the calendar year is
specified. References to dollar amounts are in thousands, except share data,
unless otherwise specified.
INTRODUCTION
Emulex Corporation is a leading designer, developer and supplier of a broad line
of Fibre Channel host adapters, hubs, application-specific computer chips, or
ASICs, and software products that provide connectivity solutions for Fibre
Channel storage area networks, or SANs, network attached storage, or NAS, and
redundant array of independent disks, or RAID, storage. Our products are based
on internally developed ASIC technology, and are deployable across a variety of
SAN configurations, system buses and operating systems, enhancing data flow
between computers and peripherals. Emulex's products offer customers the unique
combination of critical reliability, scalability, and high performance, and can
be customized for mission-critical server and storage system applications.
Our Fibre Channel development efforts began in 1992 and we shipped our first
Fibre Channel product in volume in 1996. According to IDC and Dataquest, based
on revenue, we are the world's largest provider of Fibre Channel host bus
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 secure significant customer relationships with the
world's leading storage and server suppliers, including Compaq, EMC,
Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi, IBM, NEC and Unisys. In
addition, we include industry leaders Brocade, Intel, Legato, McDATA, Microsoft,
and VERITAS among our strategic partners.
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 the 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 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 Small Computer Systems Interface, or SCSI. Remote storage
systems are accessed through LAN-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.
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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 IDC, the
market for Fibre Channel adapters is expected to expand from approximately $270
million in calendar 1999 to $1.8 billion in calendar 2003. When compared to
traditional I/O technologies such as SCSI, Fibre Channel benefits can be
summarized as follows:
<TABLE>
<CAPTION>
ATTRIBUTE FIBRE CHANNEL(1) SCSI(2)
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<S> <C> <C>
Maximum bandwidth 400 megabytes/sec 160 megabytes/sec
Topologies Point-to-point, loop and switched Point-to-multipoint
fabric
Maximum number of connections 126 per loop, 15
16 million per switched fabric
Connection distance 10-100 kilometers 12 meters
Data transmission Full-duplex or half-duplex Half-duplex
Protocol support SCSI, IP, VI, FICON SCSI
</TABLE>
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(1) As specified in the 2 gigabit per second Fibre Channel implementation.
(2) As specified in the Ultra160 SCSI specification.
In order to enable longer distance connectivity or a higher performance link,
Fibre Channel is often deployed in traditional SCSI I/O applications such as
RAID or NAS. In such implementations, RAID provides for fault-tolerant storage
through the duplication of data over multiple interconnected disk drives, and
NAS consists of a thin file server with Fibre Channel connected storage. These
types of traditional I/O applications are characterized by a connection between
only one host server and one or more storage subsystems.
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 SANs that 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 I/O 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 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 being deployed to support an increasingly wide range of applications
such as LAN-free and serverless back-up, storage virtualization and disaster
recovery.
The majority of Fibre Channel solutions installed today are delivered to end
users via integrated systems solutions offered by storage and computer system
original equipment manufacturers, or 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.
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PRODUCTS
We are a leading designer, developer and supplier of Fibre Channel host
adapters, hubs, ASICs and software products that enhance access to, and storage
of, electronic data and applications. According to IDC and Dataquest, we are the
world's largest provider of Fibre Channel host adapters. 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 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
195 MB/sec and 33,000 I/O transactions per second from a single host bus
adapter. Furthermore, our products support high-performance connectivity
features such as concurrent multiprotocol data transmission, context cache for
superior performance in complex environments, and other features to enhance data
integrity.
Fibre Channel host adapters connect host computers to a Fibre Channel network.
Our adapters support a wide range of operating systems and host computer system
buses, including both PCI-based Intel platforms and SBus-based Sun Microsystems
platforms. Our Fibre Channel host adapter line, which has evolved from the
LP6000 to the LP9002 in the high end, also encompasses lower-priced adapters
such as the LP850 and LP950. Our high-end host adapters target enterprise
systems, while our lower-priced 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, the LightPulse LP7000E, LP8000 and the recently
introduced LP9000, LP9002, and LP8000S, a SBus host adapter, 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 addition, our enterprise applications strategy has led us to
offer a variety of other features in our high-end adapters, including additional
context cache to enable high-speed throughput in complex fabric installations,
and support for the FICON protocol, an emerging standard for IBM mainframe
storage over Fibre Channel SANs. Our high-end host adapters also provide the
widest range of physical interface options available, including copper,
short-wave optical and long-wave optical, as well as added buffer memory to
enable connectivity distances up to 100 kilometers. A broad range of operating
systems, including Windows NT and 2000, Unix, Linux and NetWare, are supported
as well. Our service level interface, or SLI, which is included with our
high-end adapters, 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 mid-range adapters that support a standard
open systems environment based on Windows, Linux or NetWare. These open systems
host adapters include the LightPulse LP850 and our recently introduced LP950.
Based on the same ASIC 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, Linux and NetWare, as
well as BIOS and configuration utilities.
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 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.
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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 have reduced product offerings and resources dedicated to these
non-Fibre Channel products. During the fourth quarter we issued last time buy
notifications to customers for our traditional networking products. We believe
that revenues associated with our traditional networking products will continue
to diminish in upcoming quarters.
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 12 patents issued, two patents allowed and 15 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
four years. A total of 10 of our issued U.S. patents, our two U.S. patents
allowed and all of our pending patent applications relate to our Fibre Channel
technology.
All of our software products, primarily embedded within our hardware 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 value-added resellers, or VARs, systems
integrators, industrial distributors and resellers. Because the Fibre Channel
market has been dominated by OEMs, our focus is to use Fibre Channel sales
specialists to expand opportunities with our existing OEMs, as well as to
develop new OEM relationships. However, we are also expanding our distribution
efforts, leveraging worldwide distribution channels through technical
distributors such as VARs and systems integrators, to complement our core OEM
relationships.
ORDER BACKLOG
At July 2, 2000, we had unshipped product orders of approximately $38.3 million
compared with approximately $10.7 million at June 27, 1999. At year-end, all
backlog was scheduled for delivery within six months or less with the exception
of orders pending release dates. Orders are subject to rescheduling and/or
cancellation with little or no penalty. Purchase order release lead times depend
upon the scheduling practices of the individual customer, and the rate of
booking new orders fluctuates from month to month. Therefore, the level of
backlog at any one time is not necessarily indicative of trends in our business.
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.
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Our competition for Fibre Channel host adapter products consists primarily of
Agilent, Adaptec, 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 includes reliability, scalability, 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, our intellectual property and our
technical alliances with strategic partners such as Brocade, Intel, Legato,
McDATA, Microsoft, and VERITAS.
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.
Our traditional networking products, which include printer servers and network
access products, compete in a market that is 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. During the fourth quarter of
fiscal 2000, we issued last time buy notifications to customers for traditional
networking products.
MANUFACTURING AND SUPPLIERS
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 some of our older-generation 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 QuickLogic. 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. However, both our software and the third-party software are sold
primarily as embedded programs within the hardware products. Additionally, in
1998, we began outsourcing the manufacturing of all of our products. Although we
are in the process of adding a second contract manufacturer, K*TEC Electronics
is currently our only contract manufacturer. 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.
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 our contract manufacturer. However, we also maintain an internal
test engineering group for continuing support of test operations. At July 2,
2000, we had 18 permanent manufacturing services employees at our facility in
Costa Mesa, California.
EMPLOYEES
At July 2, 2000, we employed 160 employees as follows: 80 in engineering and
development, 30 in general and administrative, 32 in selling and marketing and
18 in manufacturing. None of our employees is represented by a labor union, and
we believe our employee relations are good.
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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 55
Ronald P. Quagliara (1) Sr. Vice President, Research and Development 51
Kirk D. Roller (1) Sr. Vice President, Sales & Marketing 38
Joseph J. Garvey (1) Vice President, Channel Sales 43
William F. Gill (1) Vice President, OEM Sales 43
Sadie A. Herrera (1) Vice President, Human Resources 51
Karen Mulvany (1) Vice President, Business Planning and Development 43
Michael J. Rockenbach Vice President, Finance, Chief Financial Officer
and Secretary 39
Michael E. Smith (1) Vice President, Worldwide Marketing 38
</TABLE>
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(1) These persons serve in the indicated capacities as officers of the
Registrant's principal operating subsidiary; they are not officers of the
Registrant.
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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.
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. Garvey joined the Company in June 2000 as vice president, channel sales.
Prior to joining the Company, Mr. Garvey spent eight months with IBM
Corporation, a manufacturer of network computer systems, software and services,
most recently as senior director of Americas' Sales. From early 1998 through
1999, he was director, Americas' distribution sales at Mylex Corporation, which
was acquired by IBM in September 1999. From 1995 to 1998, Mr. Garvey was
distribution sales manager at Quantum Corporation.
Mr. Gill joined the Company in January 2000 as vice president, OEM sales. The
year before joining the Company, Mr. Gill was director, business development for
Pinnacle Multimedia, a developer of training management software. From 1994 to
1999, he held various senior sales positions with 3Com and U.S. Robotics.
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.
Ms. Mulvany joined the Company as vice president, business planning and
development in March 2000. Prior to joining the Company, Ms. Mulvany consulted
for the Company and various other technology companies since 1991 in the areas
of investor relations, mergers and acquisitions, strategic planning and
corporate finance.
Mr. Rockenbach joined the Company in 1991 and has served as the Company's vice
president, finance and 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.
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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 1/2 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.
RISK FACTORS
OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE FIBRE CHANNEL MARKET, AND OUR
REVENUES WILL BE LIMITED IF SUCH DEVELOPMENT DOES NOT OCCUR OR OCCURS MORE
SLOWLY THAN WE ANTICIPATE.
The size of our potential market is dependent upon the broad acceptance of Fibre
Channel technology as an alternative to other technologies traditionally
utilized for network and storage communications. The Fibre Channel market, while
rapidly evolving and attracting an increasing number of market participants, is
still at an early stage of development. We believe the Fibre Channel market will
continue to expand and that our investment in the Fibre Channel market
represents our greatest opportunity for revenue growth and profitability in the
future. However, we cannot be certain that Fibre Channel products will gain
broader market acceptance or that customers will choose our technology and
products. Fibre Channel products accounted for 85 percent of net revenues for
the fiscal year ended July 2, 2000. If the Fibre Channel market fails to
develop, develops more slowly than anticipated, attracts more competitors than
we expect (as discussed below), or if our products do not achieve market
acceptance, our business, results of operations and financial condition would be
materially adversely affected.
Alternative existing 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. Additionally, proposed new technologies such as SCSI over IP and
InfiniBand are still in the early development stages and it is impossible to
know what the end technology will provide. Given the enormous support for Fibre
Channel, we believe that there is a low probability that a new standard will
derail the Fibre Channel industry momentum in the foreseeable future. However,
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 early stages of
commercial shipments or at the developmental stage of incorporating Fibre
Channel throughout their product offerings. 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.
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:
o The size, timing and terms of customer orders;
o The relatively long sales and deployment cycles for our products,
particularly those sold through our OEM sales channels;
o Changes in our operating expenses;
o Our ability to develop and market new products;
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o The ability of our contract manufacturer to produce and distribute our
products in a timely fashion;
o Integration of additional contract manufacturers;
o Component shortages, experienced by us or ones which result in reduced
demand from our customers if they are unable to acquire the other
components used in conjunction with our products in their deployments;
o The market acceptance of our new Fibre Channel products;
o The timing of the introduction or enhancement of products by us, our
OEM customers and our competitors;
o The level of product and price competition;
o Our ability to expand our relationships with OEMs and distributors;
o Activities of, and acquisitions by, our competitors;
o Acquisitions made by us;
o Changes in technology, industry standards or consumer preferences;
o Increases in interest rates;
o Changes in the mix of sales channels;
o The level of international sales;
o Seasonality;
o Personnel changes;
o Changes in customer budgeting cycles;
o Foreign currency exchange rates;
o Difficulties with the implementation of a new Enterprise Resource
Planning (ERP) System; and
o 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 that contribute to the variability of our sales as well.
Historically, we have generally shipped products quickly after we receive
orders, meaning that we do not always have a significant backlog of unfilled
orders. As a result, our revenues in a given quarter may depend substantially on
orders booked in that quarter. Also, we have typically generated a large
percentage of our quarterly revenues in the last month of the quarter.
Additionally, individual OEM customer purchases can vary significantly from
quarter to quarter.
A decrease in the number of orders we receive is likely to adversely and
disproportionately affect our quarterly results of operations. This is because
our expense levels are partially based on our expectations of future sales and
our expenses may be disproportionately large as compared to sales in a quarter
with reduced orders. Hence, we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any shortfall in
sales in relation to our quarterly expectations or any delay of customer orders
would likely have an immediate and adverse impact on our business, quarterly
results of operations and financial condition.
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WE HAVE EXPERIENCED LOSSES IN OUR HISTORY.
We have experienced losses in our history, most recently a net loss of $10,838
for the fiscal year ended June 28, 1998, which included $12,545 of consolidation
charges related to the closure of our Puerto Rico manufacturing operations and
selected sales offices. While we have generated net income for 14 of the last 15
quarters through the quarter ended July 2, 2000, we cannot be certain that
revenues will remain at current levels or improve or that we will be profitable
at such revenue levels.
THE LOSS OF ONE OR MORE CUSTOMERS COULD HARM OUR REVENUES.
For the fiscal year ended July 2, 2000, direct sales to our top customer,
Compaq, represented 23 percent of our net revenues. Additionally, direct sales
to EMC, including Data General, were 14 percent; direct sales to IBM, including
Sequent, were 15 percent; and sales to Avnet were 10 percent of our net revenues
for the fiscal year ended July 2, 2000. Direct sales to McDATA, a former
subsidiary of EMC, were an additional two percent of our net revenues. For the
fiscal year ended June 27, 1999, direct sales to IBM, including Sequent,
represented 25 percent; direct sales to Compaq were 14 percent; and direct sales
to EMC, including Data General, accounted for 10 percent of our net revenues.
Direct sales to our top five customers accounted for 70 percent of net revenues
for the fiscal year ended July 2, 2000, and 58 percent of net revenues for the
fiscal year ended June 27, 1999. During the current year, some of our larger OEM
customers have purchased our products indirectly through distributors or
resellers. Total sales, including direct sales to our customers and their
customer-specific models purchased indirectly through other distribution
channels, amounted to 27 percent of our net revenues for Compaq, 22 percent for
EMC, and 19 percent for IBM. Although we have attempted to expand our base of
customers, we believe our revenues in the future will continue to be similarly
derived from a limited number of customers, especially given the consolidation
the industry has recently experienced.
THE FAILURE OF ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS TO 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 sales through distribution channels for
our revenue. For the fiscal year ended July 2, 2000, we derived approximately 75
percent of our net revenues from OEMs and 25 percent from sales through
distribution. For the fiscal year ended June 27, 1999, we derived approximately
74 percent of our net revenues from OEMs and 24 percent from distribution sales.
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, have no volume commitments,
and often may be terminated by either party without cause. Indeed, many of our
OEM and distributor customers carry or utilize competing product lines. If we
were to suddenly lose one or more important OEM or distributor customers to a
competitor, our business, results of operations and financial condition could be
materially adversely affected.
SOME OF OUR SUPPLIERS OR OUR OEM CUSTOMERS COULD BECOME COMPETITORS.
Some of our suppliers or our OEM customers currently have, and others could
develop, products internally that would replace our products. The resulting
production delays or reductions in sales of our products 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
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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, promote and deliver, on a timely basis, products that
incorporate our technology. The ability and willingness of OEM customers to
develop, promote and deliver such products is based upon a number of factors,
such as:
o The timely development by us and our OEM customers of new products with
new functionality, increased speed and enhanced performance at
acceptable prices;
o The development costs facing our OEM customers;
o The compatibility of new products with both existing and emerging
industry standards;
o Technological advances;
o The ability to acquire all required components;
o Intellectual property issues; and
o 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 that 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 THAT ARE BEING
PHASED OUT.
We have shifted the focus of our business to Fibre Channel technology. However,
some of our revenues still depend on sales of our traditional networking
products. These traditional networking products accounted for six percent of our
net revenues for the quarter ended July 2, 2000, and for 15 percent of our net
revenues for the fiscal year ended July 2, 2000. We believe any revenue
contribution from these products will be nominal after the end of calendar year
2000. If the maturation of these products were to occur faster than we
anticipate, our business, results of operations and financial condition could 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 also expect that an increasing number of companies will enter the markets for
our Fibre Channel products. 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. Additionally, 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 Adaptec, Agilent,
Gadzoox, JNI, LSI Logic, QLogic, Vixel and, to a lesser extent, several smaller
companies. During the fourth quarter of fiscal 2000, we issued last time buy
notifications to customers for our traditional networking products, which
include printer servers and network access products. In the printer server
market, we compete against Hewlett-Packard, Intel, Lexmark and a number of
smaller companies. In the network access market, we compete against a number of
networking companies who offer network access solutions, including Compaq and
IBM.
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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 such products 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:
o Changing OEM product specifications;
o Difficulties in hiring and retaining necessary personnel;
o Difficulties in reallocating engineering resources and other resource
limitations;
o Difficulties with independent contractors;
o Changing market or competitive product requirements;
o Unanticipated engineering complexity;
o Undetected errors or failures in software and hardware; and
o 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 that are used in our products,
and we have experienced delays or difficulty in securing components in the past.
Delays or difficulty in securing components may be caused by numerous factors
including, but not limited to:
o Discontinued production by a vendor;
o Undetected errors or failures;
o Natural disasters;
o Disruption in shipping channels;
o Difficulties associated with foreign operations; and
o Market shortages.
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Additionally, key components that we use in our products may only be available
from single sources with which we do not have long-term contracts. 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 some of our older-generation 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 QuickLogic. 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.
Because we transitioned the production of our products to a contract
manufacturer, K*TEC Electronics, a division of Kent Electronics Corporation, we
only maintain a minimal supply of product components. Currently, we 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 demand for sophisticated networking and data storage solutions which
support enterprise computing requirements, including on-line transaction
processing, data mining, data warehousing, multimedia and Internet applications.
Should there be a slowing in the growth of demand for such systems, our
business, results of operations and financial condition could be materially
adversely affected.
THE INADEQUACY OF OUR INTELLECTUAL PROPERTY PROTECTIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We believe that our continued success depends primarily on continuing
innovation, marketing and technical expertise, as well as the quality of product
support and customer relations. At the same time, our success is partially
dependent on the proprietary technology contained in our products. We currently
rely on a combination of patents, copyrights, trademarks, trade secret laws and
contractual provisions to establish and protect our intellectual property rights
in our products. For a more complete description of our intellectual property,
you should read "Business--Intellectual Property" contained in this Form 10-K.
We cannot be certain that the steps we take to protect our intellectual property
will adequately protect our proprietary rights, that others will not
independently develop or otherwise acquire equivalent or superior technology, or
that we can maintain such technology as trade secrets. In addition, the laws of
some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States or at all. Our
failure to protect our intellectual property rights could have a material
adverse effect on our business, results of operations and financial condition.
THIRD-PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT 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 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. However, we have in the past and may be required in the future to
obtain licenses of technology owned by other parties. 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.
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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 local
community as well as 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.
For the fiscal year ended July 2, 2000, sales in the United States accounted for
70 percent of our net revenues, sales in Europe accounted for 26 percent of our
net revenues, and sales in the Pacific Rim countries accounted for four percent
of our net revenues. During the fiscal year ended June 27, 1999, sales in the
United States accounted for 68 percent of net revenues, sales in Europe
accounted for 27 percent of our net revenues, and sales in the Pacific Rim
countries accounted for five percent of our net revenues. We expect that sales
in the United States and Europe will continue to account for the substantial
majority of our revenues for the foreseeable future.
We encounter risks inherent in international operations. All of our sales are
currently denominated in U.S. dollars. As a result, if the value of the U.S.
dollar increases relative to foreign currencies, our products could become less
competitive in international markets. Our international business activities
could be limited or disrupted by any of the following factors:
o The imposition of governmental controls and regulatory requirements;
o The costs and risks of localizing products for foreign countries;
o Restrictions on the export of technology;
o Financial and stock market dislocations;
o Increases in interest rates;
o Longer accounts receivable payment cycles;
o Potentially adverse tax consequences;
o The burden of complying with a wide variety of foreign laws;
o Trade restrictions; and
o 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.
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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 change in the century. To date, we have not experienced any
significant impact from the change to Year 2000. 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. We believe that we have fully
addressed all areas of this issue, including internal systems, products and
third parties; however, if any significant issues were to be identified in the
future, there can be no assurance given that our business, results of operations
and financial condition would not be materially adversely affected.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND SUCH ADDITIONAL FINANCING MAY
NOT BE AVAILABLE.
We currently anticipate that our available cash resources 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:
o Take advantage of unanticipated opportunities, including more rapid
international expansion or acquisitions of complementary businesses or
technologies;
o Develop new products or services; or
o 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
AND MAY ADVERSELY AFFECT THE PRICE OF OUR COMPANY STOCK.
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 and amortization of expenses related to goodwill
and other intangible assets. Moreover, to the extent that any proposed
acquisition is not favorably received by stockholders, analysts and others in
the investment community, the price of our common stock could be adversely
affected. In addition, acquisitions involve numerous risks, including:
o Difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
o The diversion of management's attention from other business concerns;
o Risks of entering markets in which we have no or limited prior
experience; and
o 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 operations, technologies, products 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 company. The market price of
our common stock has fluctuated in the past and is likely to fluctuate in the
future as well. Factors which could have a significant impact on the market
price of our common stock include, but are not limited to, the following:
o Quarterly variations in operating results;
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o Announcements of new products by us or our competitors;
o The gain or loss of significant customers;
o Changes in analysts' earnings estimates;
o Pricing pressures;
o Short selling of our common stock;
o General conditions in the computer, storage or communications markets;
or
o 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.
OUR CORPORATE OFFICES AND PRINCIPAL PRODUCT DEVELOPMENT FACILITIES ARE LOCATED
IN A REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities, including our corporate offices and principal product
development facilities, are located near major earthquake faults. The Company is
not specifically insured for earthquakes, or other such natural disaster. Any
personal injury or damage to the facilities as a result of such occurrences
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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.
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 8 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.
Item 2. PROPERTIES.
The Company's corporate offices and principal product development facilities are
currently located in approximately 68,000 square feet of leased buildings 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 an engineering and development facility in Colorado and
approximately 10 other 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.
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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 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 2000.
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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.
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. Additionally, on December 15, 1999, the Company
completed a two-for-one stock split. Share prices have been retroactively
adjusted for both of these events.
HIGH LOW
-------- -------
2000 Fourth Quarter.............................. $218.063 $41.688
Third Quarter............................... 215.500 88.500
Second Quarter.............................. 93.219 40.875
First Quarter............................... 44.375 23.000
1999 Fourth Quarter.............................. $23.000 $ 7.969
Third Quarter............................... 10.109 6.844
Second Quarter.............................. 8.563 2.766
First Quarter............................... 3.469 1.438
NUMBER OF COMMON STOCKHOLDERS
The approximate number of holders of record of the Company's common stock as of
September 14, 2000, was 339.
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 that 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.
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Item 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table summarizes certain selected consolidated financial data. 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 two stock splits. The first was 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, and was
completed on August 30, 1999. The second two-for-one stock split changed the par
value of the Company's common stock from $0.20 per share to $0.10 per share, and
was completed on December 15, 1999.
Selected Consolidated Statement of Operations Data
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------
July 2, June 27, June 28, June 29, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenues:
Fibre Channel ............................... $119,134 $ 38,693 $ 18,944 $ 11,521 $ 1,138
Traditional networking and other ............ 20,638 29,792 40,541 53,242 50,200
-------- -------- -------- -------- --------
Total net revenues ...................... 139,772 68,485 59,485 64,763 51,338
-------- -------- -------- -------- --------
Cost of sales ............................... 73,346 40,138 34,913 40,205 34,848
Cost of sales - inventory charges related
to consolidation ......................... -- 1,304 5,314 -- --
-------- -------- -------- -------- --------
Total cost of sales .................... 73,346 41,442 40,227 40,205 34,848
-------- -------- -------- -------- --------
Gross profit ........................... 66,426 27,043 19,258 24,558 16,490
-------- -------- -------- -------- --------
Operating expenses:
Engineering and development ................. 14,727 11,766 11,270 10,063 11,415
Selling and marketing ....................... 10,077 6,953 7,589 7,637 11,071
General and administrative .................. 6,923 4,279 4,207 4,586 4,912
Consolidation charges, net .................. -- (987) 7,231 1,280 --
-------- -------- -------- -------- --------
Total operating expenses ................. 31,727 22,011 30,297 23,566 27,398
-------- -------- -------- -------- --------
Operating income (loss) ........................ 34,699 5,032 (11,039) 992 (10,908)
Nonoperating income ............................ 9,131 480 113 71 483
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 43,830 5,512 (10,926) 1,063 (10,425)
Income tax provision (benefit) ................. 11,016 247 (88) (506) (1,137)
-------- -------- -------- -------- --------
Net income (loss) .............................. $ 32,814 $ 5,265 $(10,838) $ 1,569 $ (9,288)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic ..................................... $ 0.93 $ 0.21 $ (0.44) $ 0.06 $ (0.39)
======== ======== ======== ======== ========
Diluted ................................... $ 0.86 $ 0.19 $ (0.44) $ 0.06 $ (0.39)
======== ======== ======== ======== ========
Number of shares used in per share computations:
Basic ..................................... 35,412 25,370 24,486 24,176 23,746
======== ======== ======== ======== ========
Diluted ................................... 38,226 28,262 24,486 25,176 23,746
======== ======== ======== ======== ========
</TABLE>
18
<PAGE> 20
Selected Consolidated Balance Sheet Data
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------
July 2, June 27, June 28, June 29, June 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Total current assets .................. $190,146 $134,338 $24,384 $29,328 $31,579
Total current liabilities ............. 24,544 16,044 14,399 10,859 15,494
-------- -------- ------- ------- -------
Working capital ....................... 165,602 118,294 9,985 18,469 16,085
Total assets .......................... 229,995 169,991 30,157 37,175 39,300
Long-term capitalized lease obligations -- -- 7 79 204
Retained earnings ..................... 43,014 10,200 4,935 15,773 14,204
Total stockholders' equity ............ 205,451 151,893 13,606 24,276 22,030
</TABLE>
19
<PAGE> 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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 Management's Discussion and Analysis Of Financial Condition And
Results Of Operations set forth below, as well as 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.
References contained herein to "Emulex," the "Company," "we," "our" and "us"
refer to Emulex Corporation and its subsidiaries.
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 July 2, 2000, June
27, 1999, and June 28, 1998, as applicable, unless the calendar year is
specified. References to dollar amounts are in thousands unless otherwise
specified.
<TABLE>
<CAPTION>
Percentage of Net Revenues
----------------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Net revenues:
Fibre Channel ............................................ 85.2% 56.5% 31.8%
Traditional networking and other ......................... 14.8 43.5 68.2
----- ----- -----
Total net revenues ................................... 100.0 100.0 100.0
----- ----- -----
Cost of sales ............................................ 52.5 58.6 58.7
Cost of sales - inventory charges related to consolidation -- 1.9 8.9
----- ----- -----
Total cost of sales ...................................... 52.5 60.5 67.6
----- ----- -----
Gross profit ......................................... 47.5 39.5 32.4
----- ----- -----
Operating expenses:
Engineering and development .............................. 10.5 17.2 18.9
Selling and marketing .................................... 7.2 10.2 12.8
General and administrative ............................... 5.0 6.2 7.1
Consolidation charges, net ............................... -- (1.4) 12.2
----- ----- -----
Total operating expenses ............................. 22.7 32.2 51.0
----- ----- -----
Operating income (loss) ....................................... 24.8 7.3 (18.6)
Nonoperating income ........................................... 6.6 0.7 0.2
----- ----- -----
Income (loss) before income taxes ............................. 31.4 8.0 (18.4)
Income tax provision (benefit) ................................ 7.9 0.3 (0.2)
----- ----- -----
Net income (loss) ............................................. 23.5% 7.7% (18.2)%
===== ===== =====
</TABLE>
20
<PAGE> 22
EMULEX CORPORATION AND SUBSIDIARIES
FISCAL 2000 VERSUS FISCAL 1999
Net Revenues. Net revenues for 2000 were $139,772, an increase of $71,287, or
104 percent from 1999. Net revenues for 2000, consisted of $104,780 from sales
to OEMs, $34,526 from sales sold through distribution channels and $466 from
sales directly to end users. This represented an increase in OEM sales of
$53,948, or 106 percent, and an increase in distribution sales of $18,348, or
113 percent, compared to the prior year. These increases were partially offset
by a decrease in end-user sales of $1,009, or 68 percent.
From a product line perspective, net revenues generated from the Company's Fibre
Channel products were $119,134, or 85 percent of net revenues in 2000. This
represented an increase of $80,441, or 208 percent, from 1999. This increase in
net revenues from the Company's Fibre Channel products was primarily the result
of the increased size of the market for Fibre Channel products and the increased
market acceptance of the Company's Fibre Channel products. The Company's
revenues in this emerging market have continued to be generated from OEMs taking
product directly and through distribution channels. Net revenues from the
Company's traditional networking products were $20,638, or 15 percent of net
revenues in 2000. This represented a decrease of $9,154, or 31 percent, compared
to 1999. This decrease in net revenues from the Company's traditional networking
products was principally due to the ongoing maturation of these products and a
decrease in the Company's focus on these products. The Company issued last time
buy notifications to customers for its traditional networking products during
the last quarter of fiscal 2000. The Company expects that these products will
show continued maturation through calendar 2000.
In 2000, direct sales to Compaq accounted for 23 percent; direct sales to IBM,
including Sequent, accounted for 15 percent; direct sales to EMC, including Data
General, accounted for 14 percent; and sales to Avnet accounted for 10 percent
of the Company's net revenues. No other customer accounted for more than 10
percent of net revenues during this period. Direct sales to McDATA, a former
subsidiary of EMC, were an additional 2% of our net revenues. In 2000, some of
the Company's larger OEM customers have purchased our products through
distributors or resellers. Total sales, including direct sales to the Company's
customers and their customer-specific models purchased indirectly through other
distribution channels, amounted to 27 percent of our net revenues for Compaq, 22
percent for EMC, and 19 percent for IBM. In 1999, sales to IBM, including
Sequent, accounted for 25 percent; sales to Compaq were 14 percent; and sales to
EMC, including Data General, accounted for 10 percent of the Company's net
revenues. No other customer accounted for more than 10 percent of net revenues
during this period. Direct sales to the Company's top five customers accounted
for 70 percent of net revenues in 2000 compared to 58 percent in 1999.
Domestic net revenues were $97,428, or 70 percent of total net revenues, and
$46,751, or 68 percent of total net revenues, for 2000 and 1999, respectively.
This increase in domestic net revenues of $50,677, or 108 percent, was
principally due to the increasing level of Fibre Channel product shipments
during the current fiscal year. The increase in Fibre Channel shipments is
primarily the result of the increased size of the market for Fibre Channel
products and the increased market acceptance of the Company's Fibre Channel
products. International net revenues were $42,344, or 30 percent of total net
revenues, and $21,734, or 32 percent of total net revenues, for 2000 and 1999,
respectively. This increase in international revenues of $20,610, or 95 percent,
was also principally due to the increasing level of Fibre Channel product
shipments during the current fiscal year. Although both domestic and
international revenues have increased, domestic revenues have become a larger
percent of net revenues due to the heavier concentration of Fibre Channel
shipments to domestic OEMs.
Gross Profit. Cost of sales included the cost of production of finished
products, as well as support costs and other expenses related to inventory
management, manufacturing quality and order fulfillment. In 2000, gross profit
increased $39,383, or 146 percent, to $66,426 from $27,043 for 1999. Gross
margin increased to 48 percent in 2000 compared to 39 percent in 1999. During
1999, the Company recorded $1,304 of inventory charges related to consolidation
in cost of sales. When the initial consolidation charge, which is discussed in
more detail below, was taken in fiscal 1998, management believed this inventory
would be sold at positive margins. However, as the Company neared the closure of
its manufacturing facility, management determined this inventory was no longer
saleable, and these additional reductions in inventory were recorded. Excluding
this charge, gross profit for 1999 would have been $28,347 and gross margin
would have been 41 percent. This improvement in gross margin from 1999 was
primarily due to a continuing shift in product mix towards the Company's higher
margin Fibre Channel products.
Engineering and development. Engineering and development expenses consisted
primarily of salaries and related expenses for personnel engaged in the design,
development and technical support of the Company's products. These expenses
included 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 $14,727 and $11,766
for 2000 and 1999, representing 11 percent and 17 percent of net revenues,
respectively. Engineering and development expenses increased
21
<PAGE> 23
by $2,961, or 25 percent, in 2000 compared to 1999 as the Company increased its
investment in its Fibre Channel product development. Even though the Company has
continued to increase its investment in Fibre Channel product development, it
has not increased as quickly as revenue has expanded. Consequently, engineering
and development has decreased as a percentage of net revenues. Due to 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 intends 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.
Selling and marketing. Selling and marketing expenses consisted primarily of
salaries, commissions and related expenses for personnel engaged in the
marketing and sale of the Company's products, as well as trade shows, product
literature and promotional support costs. Selling and marketing expenses were
$10,077 and $6,953 in 2000 and 1999, representing seven percent and 10 percent
of net revenues, respectively. Selling and marketing expenses in 2000 increased
by $3,124, or 45 percent, from 1999. This increase was primarily due to
increased salaries and commissions associated with additional employees and
higher revenues as well as increased promotion and advertising costs. However,
as a portion of the selling and marketing expenses is fixed, these expenses have
not expanded at the same rate as the Company's net revenues. Consequently, as a
percentage of net revenues, selling and marketing expenses have decreased.
General and administrative. General and administrative expenses consisted
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 $6,923
and $4,279 in 2000 and 1999, representing five percent and six percent of net
revenues, respectively. General and administrative expenses increased by $2,644,
or 62 percent, in 2000 compared to 1999, primarily due to additional employees
and higher compensation associated with the higher revenues. Similar to selling
and marketing expenses, these expenses have not expanded at the same rate as the
Company's net revenues. Consequently, as a percentage of net revenues, general
and administrative expenses have decreased slightly.
Consolidation Charges. On March 25, 1998, the Company announced plans to
outsource the manufacturing of its product lines to K*TEC Electronics, a
contract manufacturing division of Kent Electronics with advanced manufacturing
capabilities that the Company requires for its new generation Fibre Channel
designs. The Company made this strategic decision in an attempt to reduce
required future capital expenditures and production costs, as well as to take
advantage of K*TEC Electronics' consolidated purchasing power and materials
management capabilities. This announcement resulted in, among other things, the
decision to close the Company's Puerto Rico manufacturing subsidiary and to
close selected sales offices.
During 1999, as the Company was completing this consolidation plan, the Company
completed the sale of the land and buildings at its former manufacturing
facility in Puerto Rico. The sale resulted in a gain of $777. No impairment had
previously been recognized related to the land and buildings. 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 in cost of sales.
When the initial consolidation charge was taken in fiscal 1998, management
believed this inventory would be sold at positive margins. However, as the
Company neared the closure of the manufacturing facility, management determined
that this inventory was no longer saleable and these additional reductions in
inventory were recorded. Furthermore, during 1999, the Company recorded a net
reduction of other accrued consolidation charges of $210 based on management's
review of the adequacy of the remaining consolidation accrual. The Company
substantially completed this consolidation plan in fiscal 1999.
Nonoperating Income. Nonoperating income consisted primarily of interest income.
The Company's nonoperating income increased $8,651 to $9,131 in 2000 compared to
$480 in 1999. This increase in nonoperating income was primarily due to an
increase in interest income associated with the investments of the funds the
Company received from the secondary offering of common stock completed during
the fourth quarter of fiscal 1999, as well as cash generated from operations.
Income Taxes. For the year ended July 2, 2000, the Company recorded a 25 percent
tax provision in the amount of $11,016. The Company's effective tax rate of 25
percent for this period is due to a reduction of the valuation allowance held
against certain net operating loss carryforwards. For the twelve months ended
June 28, 1999, the Company recorded a tax provision of $247, or approximately
four percent. The Company's effective tax rate of approximately four percent for
1999 is primarily due to the utilization of certain net operating losses.
For the six months ended December 26, 1999, the Company's deferred tax valuation
allowance was reduced by $5,643, due to the assessment of the recoverability of
a portion of the Company's net operating loss carryforwards due to the
profitability levels being incurred by the Company. For the six months ended
July 2, 2000, despite the continued levels of profitability, the large
difference between the exercise prices of the Company's stock options and the
related market prices
22
<PAGE> 24
created a significant tax deduction, and as such it was determined that it was
not more likely than not that the remaining deferred tax asset would be
realized. As a result, no valuation allowance was reversed during the six months
ended July 2, 2000.
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's 1989, 1990 and 1991 California income tax returns.
The Company is also undergoing examination by the Internal Revenue Service of
Emulex Caribe's 1995 U.S. tax return. It is management's belief that the outcome
of these examinations will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
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 products 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 products of $19,749, or 104 percent, was 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 decreased its focus on these products.
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, including Sequent, accounted for 25 percent; sales to
Compaq were 14 percent; and sales to EMC, including Data General, accounted for
10 percent of the Company's net revenues. No other customer accounted for more
than 10 percent of net revenues during this period. In 1998, sales to IBM,
including Sequent, accounted for 23 percent of the Company's net revenues, and
no other customer accounted for more than 10 percent of net revenues during this
period. Furthermore, sales to the Company's top five customers accounted for 58
percent of net revenues in 1999 and 45 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, was 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 were primarily to the domestic market place;
however, the Company began to experience a higher level of Fibre Channel product
shipments to the international market place. International revenues for all
products, however, accounted for 32 percent of net revenues in 1999, down from
35 percent in 1998.
Gross Profit. 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.
Engineering and Development. 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.
23
<PAGE> 25
Selling and Marketing. 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 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 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. On March 25, 1998, the Company announced plans to
outsource the manufacturing of its product lines to K*TEC Electronics, a
contract manufacturing division of Kent Electronics with advanced manufacturing
capabilities that the Company requires for its new generation Fibre Channel
designs. The Company made this strategic decision in an attempt to reduce
required future capital expenditures and production costs, as well as to take
advantage of K*TEC Electronics' consolidated purchasing power and materials
management capabilities. This announcement resulted in, among other things, the
decision to close the Company's Puerto Rico manufacturing subsidiary and to
close 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, as the Company was completing this consolidation plan, the Company
completed the sale of the land and buildings at its former manufacturing
facility in Puerto Rico. The sale resulted in a gain of $777. No impairment had
previously been recognized related to the land and buildings. 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 in cost of sales.
When the initial consolidation charge was taken in fiscal 1998, management
believed this inventory would be sold at positive margins. However, as the
Company neared the closure of the manufacturing facility, management determined
that this inventory was no longer saleable and these additional reductions in
inventory were recorded. Furthermore, during 1999, the Company recorded a net
reduction of other accrued consolidation charges of $210 based on management's
review of the adequacy of the remaining consolidation accrual. The Company
substantially completed this consolidation plan in fiscal 1999.
Nonoperating Income. Nonoperating income consisted 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 were primarily due to changes in interest income and expense
as a result of varying cash balances. The Company completed a secondary offering
of 9,260,000 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 was primarily due to utilization in 1999 of net operating
loss carryforwards which were held net of a substantial valuation allowance. 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.
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 change from 1999 to 2000. The Company has continued to monitor
this situation and has determined, to date, that no material issues have
resulted from the date change. Furthermore, the Company's remediation and
preparation for the date change did not have a material effect on the Company's
business, financial condition or results of operations.
24
<PAGE> 26
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.
In June 1999, the FASB issued Statement 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", which deferred the effective date of Statement 133 to all
fiscal quarters for fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued Statement 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FASB Statement No. 133". The
adoption of these statements did not have a material impact on the Company's
financial position or overall trends in results of operations and did not result
in significant changes to the Company's financial risk management practices.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". The
objective of this SAB is to provide further guidance on revenue recognition
issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. All companies are required to follow the
guidance in the SAB no later than the fourth quarter in fiscal year 2001, with
restatement of earlier quarters in fiscal 2001 required, if necessary. The SEC
has recently indicated it intends to issue further guidance with respect to
adoption of specific issues addressed by SAB 101. Until such time as this
additional guidance is issued, the Company is unable to assess the impact, if
any, SAB 101 may have on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). This Interpretation clarifies the definition of employee for
purposes of applying Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"), the criteria for determining whether a
plan qualifies as a noncompensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and the
accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company believes that the impact of
FIN 44 will not have a material effect on its financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $1,187 during fiscal 2000
from $22,284 as of June 27, 1999, to $23,471 as of July 2, 2000. This increase
in cash and cash equivalents was primarily due to the operating activities and
financing activities, which provided $44,942 and $4,065 of cash and cash
equivalents, respectively, while investing activities used $47,820 of cash and
cash equivalents.
Operating activities provided $44,942 of cash and cash equivalents for 2000
compared to providing $1,896 of cash and cash equivalents for 1999. This
increase in cash and cash equivalents is primarily due to the Company's
increased net income. Operating activities in 2000 included net income of
$32,814, increases in income taxes payable of $16,629 and accounts payable of
$6,474, offset by an increase in accounts receivable of $7,679 and deferred
income taxes of $5,643, as well as changes in other working capital balances.
Investing activities, which include purchases of investments of $637,892,
maturities of investments of $595,745, as well as the acquisition and
disposition of property and equipment of $5,673, used $47,820 of cash and cash
equivalents during fiscal 2000. For fiscal 1999, investing activities, which
included purchases of investments of $115,380, as well as the sale of the
Company's production equipment and its former manufacturing facility in Puerto
Rico, used $114,334 of cash and cash equivalents. The Company received net
proceeds of $2,447 in cash and recognized a gain of $777 associated with the
sale of this manufacturing facility in fiscal 1999. Net financing activities,
which were limited to payments under capital lease obligations and proceeds from
the exercise of stock options in fiscal 2000, provided $4,065 of cash and cash
equivalents during fiscal 2000 compared to providing $132,946 of cash and cash
equivalents in fiscal 1999. Fiscal 1999 included net proceeds from a secondary
offering of common stock of $132,838.
As part of the Company's continued investment in Fibre Channel product
development, the Company expects to increase its capital expenditures, most
notably for engineering and development. The Company believes that its existing
cash balances, facilities and equipment leases, investments and anticipated cash
flows from operating activities will be sufficient to support its working
capital needs and capital expenditure requirements for at least the next 12
months.
25
<PAGE> 27
Item 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE SENSITIVITY
At July 2, 2000, the Company's investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents, of $157,527 (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 July 2, 2000, 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.
FOREIGN CURRENCY
The Company has executed and will continue to execute a small amount of
transactions in foreign currencies. As a result, the Company may be exposed to
financial market risk resulting from fluctuations in foreign currency rates,
particularly the British Pound and the French Franc.
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.
26
<PAGE> 28
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 2000 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 July 2, 2000.
See "Executive Officers of the Registrant" in Part I, Item 1 of this Annual
Report on Form 10-K, which is incorporated herein by this reference.
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 2000 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 July 2, 2000.
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 2000 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 July 2, 2000.
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 2000 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 July 2, 2000.
27
<PAGE> 29
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.
28
<PAGE> 30
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
July 2, 2000, June 27, 1999, and June 28, 1998
(With Independent Auditors' Report Thereon)
Page Number
-----------
Consolidated Financial Statements
Independent Auditors' Report........................................ 30
Consolidated Balance Sheet -- July 2, 2000 and June 27, 1999 ..... 31
Consolidated Statements of Operations -- Years ended
July 2, 2000, June 27, 1999 and June 28, 1998..................... 32
Consolidated Statements of Stockholders' Equity -- Years ended
July 2, 2000, June 27, 1999 and June 28, 1998..................... 33
Consolidated Statements of Cash Flows -- Years ended
July 2, 2000, June 27, 1999 and June 28, 1998..................... 34
Notes to Consolidated Financial Statements.......................... 35
Schedule
Schedule II -- Valuation and Qualifying Accounts and Reserves..... 51
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.
29
<PAGE> 31
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 auditing standards generally accepted
in the United States of America. 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 July 2, 2000 and June 27, 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 2, 2000, in conformity with accounting principles generally accepted
in the United States of America. 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, 2000
30
<PAGE> 32
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
July 2, 2000, and June 27, 1999
(in thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................... $ 23,471 $ 22,284
Investments ......................................... 128,234 83,164
Accounts and other receivables, less allowance for
doubtful accounts of $844 in 2000 and $550 in 1999 24,332 17,088
Inventories, net .................................... 12,635 11,083
Prepaid expenses .................................... 1,021 475
Deferred income taxes ............................... 453 244
-------- --------
Total current assets ............................ 190,146 134,338
Property and equipment, net .............................. 6,927 3,168
Long-term investments .................................... 29,293 32,216
Deferred income taxes and other assets ................... 3,629 269
-------- --------
$229,995 $169,991
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable .................................... $ 17,869 $ 11,395
Accrued liabilities ................................. 6,355 4,291
Income taxes payable and other current liabilities .. 320 358
-------- --------
Total current liabilities ....................... 24,544 16,044
Deferred income taxes and other liabilities .............. -- 2,054
-------- --------
24,544 18,098
-------- --------
Commitments and contingencies (note 7)
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized (150,000 shares designated as Series A
Junior Participating Preferred Stock); none issued
and outstanding ................................... -- --
Common stock, $0.10 par value; 120,000,000 shares
authorized; 36,233,424 and 33,933,888 issued and
outstanding in 2000 and 1999, respectively ........ 3,623 3,393
Additional paid-in capital .......................... 158,814 138,300
Retained earnings ................................... 43,014 10,200
-------- --------
Total stockholders' equity ............................... 205,451 151,893
-------- --------
$229,995 $169,991
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 33
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended July 2, 2000, June 27, 1999, and June 28, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenues ............................................. $139,772 $ 68,485 $ 59,485
-------- -------- --------
Cost of sales ............................................ 73,346 40,138 34,913
Cost of sales - inventory charges related to consolidation -- 1,304 5,314
-------- -------- --------
Total cost of sales ................................. 73,346 41,442 40,227
-------- -------- --------
Gross profit ............................................ 66,426 27,043 19,258
-------- -------- --------
Operating expenses:
Engineering and development ........................... 14,727 11,766 11,270
Selling and marketing ................................. 10,077 6,953 7,589
General and administrative ............................ 6,923 4,279 4,207
Consolidation charges, net ............................ -- (987) 7,231
-------- -------- --------
Total operating expenses .......................... 31,727 22,011 30,297
-------- -------- --------
Operating income (loss) .................................. 34,699 5,032 (11,039)
Nonoperating income ...................................... 9,131 480 113
-------- -------- --------
Income (loss) before income taxes ........................ 43,830 5,512 (10,926)
Income tax provision (benefit) ........................... 11,016 247 (88)
-------- -------- --------
Net income (loss) ........................................ $ 32,814 $ 5,265 $(10,838)
======== ======== ========
Net income (loss) per share:
Basic ................................................ $ 0.93 $ 0.21 $ (0.44)
======== ======== ========
Diluted .............................................. $ 0.86 $ 0.19 $ (0.44)
======== ======== ========
Number of shares used in per share computations:
Basic ................................................ 35,412 25,370 24,486
======== ======== ========
Diluted .............................................. 38,226 28,262 24,486
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 34
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Equity Years ended July 2, 2000, June 27, 1999, and June 28, 1998
(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 29, 1997 ..................... 24,402,184 $2,440 $ 6,063 $ 15,773 $ 24,276
Exercise of stock options ................ 131,104 13 155 -- 168
Net loss ................................. -- -- -- (10,838) (10,838)
---------- ------ -------- -------- ---------
Balance at June 28, 1998 ..................... 24,533,288 2,453 6,218 4,935 13,606
Stock offering ........................... 9,260,000 926 131,912 -- 132,838
Exercise of stock options, net of
844 shares retired ..................... 140,600 14 170 -- 184
Net income ............................... -- -- -- 5,265 5,265
---------- ------ -------- -------- ---------
Balance at June 27, 1999 ..................... 33,933,888 3,393 138,300 10,200 151,893
Exercise of stock options, net of
3,698 shares retired ................... 2,299,536 230 3,853 -- 4,083
Tax benefit from exercise of stock options -- -- 16,661 -- 16,661
Net income ............................... -- -- -- 32,814 32,814
---------- ------ -------- -------- ---------
Balance at July 2, 2000 ...................... 36,233,424 $3,623 $158,814 $ 43,014 $ 205,451
========== ====== ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended July 2, 2000, June 27, 1999, and June 28, 1998
(in thousands)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................. $ 32,814 $ 5,265 $(10,838)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................... 1,814 1,648 2,347
Impairment of property, plant and equipment ............. -- -- 1,022
Impairment of intangibles ............................... 175 125 --
Loss (gain) on disposal of property, plant and equipment 112 (750) 51
Provision for doubtful accounts ......................... 435 86 190
Deferred income taxes ................................... (5,643) -- (380)
Changes in assets and liabilities:
Accounts receivable ................................. (7,679) (5,033) 2,454
Inventories ......................................... (1,552) (1,177) 2,807
Prepaid expenses and other assets ................... (701) 18 1,280
Income taxes receivable ............................. -- -- 280
Accounts payable .................................... 6,474 4,486 2,615
Accrued liabilities ................................. 2,064 (2,987) 1,158
Deferred revenue .................................... -- -- (6)
Income taxes payable ................................ 16,629 215 136
--------- --------- --------
Net cash provided by operating activities ......... 44,942 1,896 3,116
--------- --------- --------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment ........... 30 2,999 21
Additions to property and equipment ............................... (5,703) (1,953) (1,592)
Purchases of investments .......................................... (637,892) (115,380) --
Maturity of investments ........................................... 595,745 -- --
Additions to intangibles .......................................... -- -- (300)
--------- --------- --------
Net cash used in investing activities ....................... (47,820) (114,334) (1,871)
--------- --------- --------
Cash flows from financing activities:
Principal payments under capital leases ........................... (18) (76) (121)
Net proceeds from issuance of common stock under stock option plans 4,083 184 168
Net proceeds from stock offering .................................. -- 132,838 --
--------- --------- --------
Net cash provided by financing activities ................... 4,065 132,946 47
--------- --------- --------
Net increase in cash and cash equivalents ......................... 1,187 20,508 1,292
Cash and cash equivalents at beginning of year .................... 22,284 1,776 484
--------- --------- --------
Cash and cash equivalents at end of year .......................... $ 23,471 $ 22,284 $ 1,776
========= ========= ========
Supplemental disclosures:
Cash paid during the year for:
Interest .................................................... $ 21 $ 60 $ 169
Income taxes ................................................ 32 53 64
</TABLE>
During the year ended July 2, 2000, the Company recognized a credit to
additional paid-in capital and a debit to income taxes payable of $16,661
related to the tax benefit from exercises of stock options under the Company's
stock option plans.
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(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
year 2000 was comprised of 53 weeks. Fiscal years 1999 and 1998 were
each comprised of 52 weeks.
Common Stock Splits
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. As the par value of the Company's common
stock remained at $0.20 per share, all periods presented reflect a
reclass from additional paid-in capital to common stock. Additionally,
on December 15, 1999, the Company completed another two-for-one stock
split, and the par value of the Company's common stock changed from
$0.20 per share to $0.10 per share. All share, per share and related
data presented in the consolidated financial statements and footnotes
have been retroactively adjusted to reflect these stock splits.
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 was in the manufacturing area; however, selected
reductions were also made in other areas related to the streamlining of
product offerings.
35
<PAGE> 37
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(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 judgment 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 the 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.
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 11).
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.
36
<PAGE> 38
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
Property and Equipment
Property 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 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 Statement 121, the
recoverability of long-lived assets is assessed by determining whether
the carrying value of an 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 fair value, which is
determined using projected discounted future operating cash flows.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Intangible Assets
Capitalized software development costs can consist of costs to purchase
software to be used within the Company's products and costs to develop
software internally. Capitalization of purchased software occurs only if
technological feasibility has been established 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 2000 or 1999. No internally developed software costs were capitalized
in 2000, 1999 or 1998. As a result of an announcement made by a
competitor during the quarter ended June 27, 1999, the Company 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. During
the quarter ended December 26, 1999, the Company discontinued
development of the project related to the remaining $175 of capitalized
purchased software costs, and accordingly, the Company recognized
impairment of $175 in cost of sales during the quarter ended December
26, 1999. As of July 2, 2000, there were no unamortized costs of
capitalized purchased software included in other assets.
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 generally recognizes revenue at the time of shipment. The
Company makes certain sales through two-tier distribution channels and
has various agreements with certain of its distributors and Master Value
Added Resellers (collectively the "Distributors"). These agreements may
be terminated upon written notice by either party. Additionally, these
Distributors are generally given privileges to return a portion of
inventory and to participate in various cooperative marketing programs.
The Company recognizes revenues to its Distributors based on
management's estimates to approximate the point that products have been
resold, except when management can reasonably estimate the amount of
potential returns by the Distributors, in which case revenue is
recognized upon shipment and an allowance for estimated returns is
recorded. Additionally, the Company maintains appropriate accruals and
allowances for all other programs. Furthermore, 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
The Company applies Statement 128, "Earnings per Share." Statement 128
specifies standards designed to improve the earnings per share ("EPS")
information provided in financial statements by simplifying the existing
computational
37
<PAGE> 39
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
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 made a number of changes to previous
disclosure requirements.
Accounting for Stock Options
Prior to July 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On July 1, 1996, the Company adopted
Statement 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, Statement
123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma net income
per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in
Statement 123 had been applied. The Company has elected to continue to
apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of Statement 123 (see note 8).
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 July 2, 2000, and June 27, 1999, management believes the
fair value of all financial instruments approximated carrying value.
Concentration of Credit Risk
The Company sells its products to original equipment manufacturers and
distributors throughout the world; however, sales in the United States
and Europe currently account for 96 percent of the Company's net
revenues, and the Company expects for the foreseeable future, these
sales 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 is 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
38
<PAGE> 40
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
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.
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 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:
2000 1999
--------- ---------
Money market funds............................. $ 23,325 $ 22,284
Commercial paper............................... 66,101 83,164
U.S. Government Agency securities.............. 58,031 32,216
Corporate bonds................................ 33,395 --
-------- --------
$180,852 $137,664
======== ========
At July 2, 2000 and June 27, 1999, the net unrealized holding gains and
losses on investments were immaterial. Investments at July 2, 2000 and
June 27, 1999 were classified as shown below:
2000 1999
-------- --------
Cash and cash equivalents...................... $ 23,471 $ 22,284
Short-term investments......................... 128,234 83,164
Long-term investments (with maturities
from 1 to 2 years)........................... 29,293 32,216
-------- --------
$180,998 $137,664
======== ========
NOTE 3 INVENTORIES
Components of inventories, net of reserves, are as follows:
2000 1999
------- ------
Raw materials................................. $ 1,016 $ 805
Finished goods................................ 11,619 10,278
------- -------
$12,635 $11,083
======= =======
39
<PAGE> 41
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
NOTE 4 PROPERTY AND EQUIPMENT
Components of property and equipment, net, are as follows:
2000 1999
------- -------
Production and test equipment................... $10,275 $ 8,137
Furniture and fixtures.......................... 5,768 4,180
Leasehold improvements.......................... 569 396
Other equipment................................. -- 22
------- -------
16,612 12,735
Less accumulated depreciation and amortization.. (9,685) (9,567)
------- -------
$ 6,927 $ 3,168
======= =======
NOTE 5 ACCRUED LIABILITIES
Components of accrued liabilities are as follows:
2000 1999
------- -------
Payroll and related costs........................ $ 3,213 $ 1,849
Warranty and related reserves.................... 998 868
Unearned revenue................................. 556 951
Other............................................ 1,588 623
------- -------
$ 6,355 $ 4,291
======= =======
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 four
percent of a participant's compensation. The Company's contributions
under this plan were $374, $287 and $270 in 2000, 1999 and 1998,
respectively.
The Company offers a similar plan to eligible employees in the United
Kingdom, whereby they may contribute up to 15 percent of their
compensation. Company discretionary contributions match up to four
percent of a participant's compensation. The Company's contributions
under this plan were $6, $5 and $0 in 2000, 1999 and 1998, 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 $0, $25
and $116 in 2000, 1999 and 1998, respectively.
40
<PAGE> 42
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
NOTE 7 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 $918, $840 and $1,038 in 2000,
1999 and 1998, respectively.
Future minimum noncancelable lease commitments are as follows:
Operating
Leases
---------
Fiscal year:
2001.................................................... $ 867
2002.................................................... 172
2003.................................................... 27
------
Total minimum lease payments........................... $1,066
======
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 8 STOCKHOLDERS' EQUITY
Common Stock Splits
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. As the par value of the Company's common
stock remained at $0.20 per share, all periods presented reflect a
reclass from additional paid-in capital to common stock. Additionally,
on December 15, 1999, the Company completed another two-for-one stock
split, and the par value of the Company's common stock changed from
$0.20 per share to $0.10 per share. All share and per share data
presented in the consolidated financial statements and footnotes have
been retroactively adjusted to reflect these stock splits.
Stock Offering
In the quarter ended June 27, 1999, the Company completed a secondary
offering of 9,260,000 shares of the Company's common stock at a price of
$15.25 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 12,570,000. 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 $1.50 to an exercise price of $1.50 per share which was the
market value on July 6, 1998. Stock options totaling 2,171,496 shares
were repriced. These shares
41
<PAGE> 43
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
were 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 had been repriced could 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, as amended, allows for a maximum of 600,000
shares of common stock. The Director Plan provides that an option to
purchase 60,000 shares of common stock of the Company will be granted to
each non-employee director of the Company upon the first date that such
director becomes eligible to participate. These options shall be
exercisable as to one-third of the shares on each anniversary of the
grant if the director is still a director of the Company. In addition,
on each yearly anniversary of the date of the initial grant, each
eligible director shall automatically be granted an additional option to
purchase 20,000 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 140,000,
80,000 and 240,000 shares were granted under the Director Plan in 2000,
1999 and 1998, respectively.
Following is a summary of stock option transactions for 1998, 1999 and
2000:
Weighted
Number average exercise
of Shares price per share
---------- ---------------
Options outstanding at June 29, 1997 2,953,904 $ 3.24
Granted .......................... 1,218,764 3.62
Exercised ........................ (131,104) 1.28
Canceled ......................... (205,400) 4.38
----------
Options outstanding at June 28, 1998 3,836,164 3.36
Granted .......................... 2,985,496 3.00
Exercised ........................ (141,444) 1.41
Canceled ......................... (2,487,836) 3.78
----------
Options outstanding at June 27, 1999 4,192,380 2.92
Granted .......................... 1,524,200 63.68
Exercised ........................ (2,303,234) 1.83
Canceled ......................... (59,780) 2.01
----------
Options outstanding at July 2, 2000 3,353,566 31.30
==========
42
<PAGE> 44
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
As of July 2, 2000, June 27, 1999, and June 28, 1998, the number of
options exercisable was 1,040,602, 1,118,000 and 1,907,844,
respectively, and the weighted average exercise price of those options
was $6.59, $2.43 and $2.91, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted Weighted Weighted
average average average
Outstanding exercise remaining Exercisable exercise
Range of as of price per contractual as of price per
Exercise Prices July 2, 2000 option life (years) July 2, 2000 option
----------------- ------------ ----------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.95 to $ 2.44 785,181 $ 1.64 6.38 531,397 $ 1.71
$ 2.69 to $ 9.25 932,085 $ 4.70 7.50 441,705 $ 4.76
$19.88 to $ 29.28 508,900 $ 26.40 9.08 27,500 $19.88
$41.69 to $ 52.56 673,400 $ 44.00 9.82 -- --
$55.19 to $218.06 454,000 $123.83 9.51 40,000 $82.41
--------- ---------
$ 0.95 to $218.06 3,353,566 $ 31.30 8.21 1,040,602 $ 6.59
========= =========
</TABLE>
The Company applies APB Opinon No. 25 and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for 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 the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------ --------
<S> <C> <C> <C>
Net income (loss) as reported...................... $32,814 $5,265 $(10,838)
Assumed stock compensation cost.................... 14,839 2,399 1,417
------- ------ --------
Pro forma net income (loss)...................... $17,975 $2,866 $(12,255)
======= ====== ========
Diluted net income (loss) per share as reported.... $ 0.86 $ 0.19 $ (0.44)
Pro forma diluted net income (loss) per share.... $ 0.47 $ 0.10 $ (0.50)
======= ====== ========
</TABLE>
Pro forma net income (loss) reflects options granted in 2000, 1999, 1998
and 1997. 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.
43
<PAGE> 45
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
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>
2000 1999 1998
------- ------- ------
<S> <C> <C> <C>
Risk-free interest rate............................ 6.2% 5.1% 5.7%
Stock volatility................................... 83.9% 70.8% 64.4%
Dividend yield..................................... 0.0% 0.0% 0.0%
Average expected lives (years)..................... 3.8 2.3 3.2
Weighted-average fair value per option granted..... $39.50 $2.77 $3.52
</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 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.
44
<PAGE> 46
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
NOTE 9 INCOME TAXES
The components of income tax expense (benefit) are as follows:
2000 1999 1998
-------- ----- -----
Federal:
Current ............. $ 14,503 $ 187 $ 291
Deferred ............ (5,643) -- (380)
State:
Current ............. 2,156 59 --
Deferred ............ -- -- --
Foreign and Puerto Rico:
Current ............. -- 1 1
Deferred ............ -- -- --
-------- ----- -----
$ 11,016 $ 247 $ (88)
======== ===== =====
During the year ended July 2, 2000, the Company recognized a credit to
additional paid-in capital and a debit to income taxes payable of $16,661
related to the tax benefit from exercises of stock options under the Company's
stock option plans.
Income (loss) before income taxes consists of the following:
2000 1999 1998
------- ------- --------
Domestic ........... $43,830 $ 5,647 $(10,991)
Foreign ............ -- (135) 65
------- ------- --------
Total.......... $43,830 $ 5,512 $(10,926)
======= ======= ========
45
<PAGE> 47
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(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>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Capitalization of inventory costs .............................. $ 578 $ --
Accelerated depreciation ....................................... 209 160
Reserves not currently deductible .............................. 2,133 839
Provisions for discontinued operations and consolidation charges 100 351
Net operating loss carryforwards ............................... 30,989 11,647
General business and state credit carryforwards ................ 7,450 4,154
Alternative minimum tax credit carryforwards ................... 1,185 1,185
-------- --------
Total gross deferred tax assets ............................. 42,644 18,336
Less valuation allowance .................................... (35,601) (16,566)
-------- --------
Net deferred tax assets ..................................... 7,043 1,770
-------- --------
Deferred tax liabilities:
Capitalization of inventory costs .............................. -- 21
Various state taxes ............................................ 1,451 689
Other .......................................................... 1,759 2,870
-------- --------
Total gross deferred tax liabilities ........................ 3,210 3,580
-------- --------
Net deferred tax assets (liabilities) ....................... $ 3,833 $ (1,810)
======== ========
</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 July 2, 2000. 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 July 2, 2000, will be allocated as
follows:
Income tax benefit that would be reported in the
consolidated statements of operations......................... $19,066
Additional paid-in capital...................................... 16,535
-------
$35,601
=======
The effective income tax expense (benefit) on pretax income (loss)
differs from expected federal income tax for the following reasons:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Expected income tax (benefit) at 34 percent ................. $ 14,902 $ 1,874 $(3,715)
State income tax, net of federal tax benefit ................ 1,671 91 (20)
Net increase 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
Change in valuation allowance allocated to income tax expense (5,643) (1,584) 753
Recovery from QLogic Corporation pursuant
to tax sharing agreement ................................. -- 50 (188)
Other, net .................................................. 86 (217) 496
-------- ------- -------
$ 11,016 $ 247 $ (88)
======== ======= =======
</TABLE>
46
<PAGE> 48
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
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, the Company received an income tax benefit in the
amount of $188 related to a recovery under the tax sharing agreement.
At July 2, 2000, the Company had net operating loss carryforwards for
federal income tax purposes of $87,747 which are available to offset
future federal taxable income through 2020 and $13,072 for state
purposes available through 2005. The Company has business credit
carryforwards for federal purposes of approximately $4,229 and foreign
tax credit carryforwards of $81 that are available to reduce federal
income taxes through 2020. In addition, the Company has alternative
minimum tax credit carryforwards of approximately $1,185 which are
available for carryforward indefinitely. The Company also has
approximately $3,140 of research and experimentation credit
carryforwards for state purposes available through 2020.
For the six months ended December 26, 1999, the Company's deferred tax
valuation allowance was reduced by $5,643, due to the assessment of the
recoverability of a portion of the Company's net operating loss
carryforwards due to the profitability levels being incurred by the
Company. For the six months ended July 2, 2000, despite the continued
levels of profitability, the large difference between the exercise
prices of the Company's stock options and the related market prices
created a significant tax deduction, and as such it was determined that
it was not more likely than not that the remaining deferred tax asset
would be realized. As a result, no valuation allowance was released
during the six months ended July 2, 2000. For the twelve months ended
July 2, 2000, there was an increase in the valuation allowance of
$19,035, net of the $5,643 reduction described above.
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.
NOTE 10 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>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Net revenues:
Fibre Channel ............................. $119,134 $38,693 $18,944
Traditional networking and other:
Printer servers ........................ 13,276 17,003 23,963
Network access ......................... 6,923 12,125 15,506
Other .................................. 439 664 1,072
-------- ------- -------
Total traditional networking and other 20,638 29,792 40,541
-------- ------- -------
Total net revenues ........................... $139,772 $68,485 $59,485
======== ======= =======
</TABLE>
Revenues by Geographic Area:
The Company's net revenues by geographic area based on bill-to location
are:
<TABLE>
<CAPTION>
2000 1999 1998
------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
United States ....... $ 97,428 70% $46,751 68% $38,773 65%
Europe .............. 37,154 26% 18,378 27% 15,627 26%
Pacific Rim Countries 5,190 4% 3,356 5% 5,085 9%
-------- --- ------- --- ------- ---
$139,772 100% $68,485 100% $59,485 100%
======== === ======= === ======= ===
</TABLE>
47
<PAGE> 49
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
In 2000, net revenues to the United Kingdom, based on bill-to location,
were 10 percent, and no other country in Europe accounted for more than
10 percent of net revenues during this period. In 1999 and 1998, no
country other than the United States accounted for more than 10 percent
of net revenues.
Significant Customers:
The following table represents direct 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
-------------------- ------------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
IBM, including Sequent................... 15% 25% 23% 14% 21%
Compaq ................................. 23% 14% -- 30% 26%
EMC, including Data General.............. 14% 10% -- -- --
Avnet ................................... 10% -- -- -- --
Bell Microproducts....................... -- -- -- 10% --
</TABLE>
In 2000, some of the Company's larger OEM customers have purchased
products through distributors or resellers. Total sales, including
direct sales to these customers and their customer-specific models
purchased indirectly through other distribution channels, amounted to 27
percent of the Company's net revenues for Compaq, 22 percent for EMC,
and 19 percent for IBM.
NOTE 11 NONOPERATING INCOME
Nonoperating income, net, is as follows:
2000 1999 1998
------- ----- -----
Interest income.... $ 9,325 $ 670 $ 97
Interest expense... (32) (72) (94)
Foreign exchange... (10) (17) (8)
Other ............. (152) (101) 118
------- ----- -----
$ 9,131 $ 480 $ 113
======= ===== =====
48
<PAGE> 50
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2000, June 27, 1999, and June 28, 1998
(dollars in thousands, except share and per share data)
NOTE 12 NET INCOME (LOSS) PER SHARE
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;
and all amounts have been retroactively restated for the fiscal 2000
stock splits:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss) ........................... $32,814 $ 5,265 $(10,838)
======= ======= ========
Denominator:
Denominator for basic net income (loss) per
share - weighted average shares outstanding 35,412 25,370 24,486
Effect of dilutive securities:
Dilutive options outstanding .............. 2,814 2,892 --
------- ------- --------
Denominator for diluted net income (loss) per
share - adjusted weighted average shares .. 38,226 28,262 24,486
======= ======= ========
Basic net income (loss) per share ............... $ 0.93 $ 0.21 $ (0.44)
======= ======= ========
Diluted net income (loss) per share ............. $ 0.86 $ 0.19 $ (0.44)
======= ======= ========
</TABLE>
Options to purchase 304,867 and 206,200 shares of common stock
outstanding at July 2, 2000, and June 27, 1999, respectively, were not
included in the computation of diluted earnings per share for the years
then ended. These options were excluded from the computation of diluted
earnings per share because the options' exercise prices were greater
than the average market price of the common shares of $77.66 and $8.05
for the years ended July 2, 2000, and June 27, 1999, respectively.
Therefore, including these shares would have an antidilutive effect. As
the Company recorded a net loss for the year ended June 28, 1998, all
3,836,164 outstanding stock options were excluded from the calculation
of diluted loss per share, because the effect would have been
antidilutive.
NOTE 13 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Net Net Diluted income
revenues Gross profit income per share
-------- ------------ ------- --------------
<S> <C> <C> <C> <C>
2000:
Fourth quarter... $ 40,755 $20,467 $ 9,569 $0.25
Third quarter.... 36,518 17,369 7,678 0.20
Second quarter... 33,603 15,693 8,767 0.23
First quarter.... 28,896 12,897 6,800 0.36
-------- ------- -------
Total ........... $139,772 $66,426 $32,814
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Net Net Diluted income
revenues Gross profit income per share
-------- ------------ ------- --------------
<S> <C> <C> <C> <C>
1999:
Fourth quarter... $ 20,453 $ 9,087 $ 3,048 $0.10
Third quarter.... 18,235 7,409 1,355 0.05
Second quarter... 15,746 5,465 440 0.02
First quarter.... 14,051 5,082 422 0.02
-------- ------- -------
Total ........... $ 68,485 $27,043 $ 5,265
======== ======= =======
</TABLE>
49
<PAGE> 51
CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES
50
<PAGE> 52
SCHEDULE II
EMULEX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 2, 2000, June 27, 1999, and June 28, 1998
(in thousands)
<TABLE>
<CAPTION>
Additions Amounts
Balance at Charged to Charged Balance
Beginning Costs and Against at End
Classification of Period Expenses Reserve of Period
-------------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Year ended July 2, 2000:
Allowance for doubtful accounts $ 550 $ 435 $ 141 $ 844
====== ====== ====== ======
Inventory valuation reserves .. $ 585 $2,744 $ 782 $2,547
====== ====== ====== ======
Sales returns and allowances .. $1,091 $3,305 $3,311 $1,085
====== ====== ====== ======
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
====== ====== ====== ======
</TABLE>
51
<PAGE> 53
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 18, 2000 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.
SIGNATURE TITLE
--------- -----
Principal Executive Officer:
/s/ Paul F. Folino President, Chief Executive Officer
------------------------------------ and Director
(Paul F. Folino)
Principal Financial and Accounting Officer:
/s/ Michael J. Rockenbach Vice President, Chief Financial
------------------------------------ Officer and Secretary
(Michael J. Rockenbach)
/s/ Fred B. Cox Director and Chairman of the Board
------------------------------------
(Fred B. Cox)
/s/ Robert H. Goon Director
------------------------------------
(Robert H. Goon)
/s/ Don M. Lyle Director
------------------------------------
(Don M. Lyle)
/s/ Michael P. Downey Director
------------------------------------
(Michael P. Downey)
/s/ Bruce C. Edwards Director
------------------------------------
(Bruce C. Edwards)
52
<PAGE> 54
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- -------------------------------------------------------------- --------------------
<S> <C> <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 Amendment to Certificate of Incorporation (incorporated by
reference to Annex B to the Registrant's Proxy Statement dated
January 24, 1994, for the Special Meeting of Stockholders held
on February 24, 1994).
3.3 Certificate of Amendment of Certificate of Incorporation of
the Registrant, effective December 15, 1999.
3.4 By-laws (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form S-8 [File No. 33-40959] filed
June 3, 1991).
3.5 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).
4.2 Certificate regarding extension of Final Expiration Date of
Rights Agreement, dated January 18, 1999 (incorporated by
reference to Exhibit 4.2 of Amendment No. 2 to the
Registration Statement on form S-3, filed on May 17, 1999).
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).
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- -------------------------------------------------------------- --------------------
<S> <C> <C>
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).
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).
</TABLE>
54
<PAGE> 56
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- -------------------------------------------------------------- --------------------
<S> <C> <C>
10.10 Form of Assignment, Assumption and Consent Re: Lease among
Emulex Corporation, a California corporation, QLogic
Corporation and C.J. Segerstrom & Sons, a general partnership
(incorporated by reference to Exhibit 10.14 to the
Registrant's 1994 Annual Report 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 Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors as amended (incorporated by reference to Appendix C
to the Registrant's Proxy Statement dated October 22, 1999 for
the Annual Meeting of Stockholders held on November 18, 1999).
10.15 Emulex Corporation Employee Stock Option Plan as amended
(incorporated by reference to Appendix B to the Registrant's
Proxy Statement dated October 22, 1999 for the Annual Meeting
of Stockholders held on November 18, 1999).
10.16 Master Purchase Agreement dated March 12, 1998, between Emulex
Corporation and K*TEC Electronics Corporation (incorporated by
reference to Exhibit 10.21 to the Registrant's 1999 Annual
Report on Form 10-K).
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- -------------------------------------------------------------- --------------------
<S> <C> <C>
10.17 Amendment to Master Purchase Agreement dated March 12, 1998,
between Emulex Corporation and K*TEC Electronics Corporation
(incorporated by reference to Exhibit 10.22 to the
Registrant's 1999 Annual Report on Form 10-K).
10.18 Amendment to Master Purchase Agreement effective February 1,
1999, between Emulex Corporation and K*TEC Electronics
Corporation (incorporated by reference to Exhibit 10.23 to the
Registrant's 1999 Annual Report on Form 10-K).
21 List of the Registrant's subsidiaries.
23 Independent Auditors' Consent.
27.1 Financial Data Schedule.
</TABLE>
56
