Back to GetFilings.com
1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
COMMISSION FILE NO. 0-11007
EMULEX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0300558
(State or other jurisdiction (I.R.S Employer
of incorporation or organization) Identification No.)
3535 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
(714) 662-5600
(Registrant's telephone number, including area code)
------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.20 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of class)
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of September 19, 1997, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $105,011,592.
As of September 19, 1997, the registrant had 6,107,493 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (items 10, 11, 12 and 13) is incorporated
by reference to portions of the registrant's definitive proxy statement for the
1997 Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1997 year.
================================================================================
2
PART I
Item I. BUSINESS.
All references to years refer to the Company's fiscal years ended June 29, 1997,
June 30, 1996 and July 2, 1995, as applicable, unless the calendar year is
specified. References to dollar amounts are in thousands, except share data,
unless otherwise specified.
INTRODUCTION
Emulex Corporation is a leading designer and manufacturer of high-performance
network connectivity products including fibre channel, printer servers and
network access products. The Company's hardware and software-based networking
solutions improve communication in computer networks and enhance data flow
between computers and peripherals. Many of the Company's networking products are
based upon proprietary semiconductors designed by Emulex to maximize performance
and simultaneously reduce costs. Emulex utilizes its strengths in gigabit
networking, in-house design of application specific integrated circuits
("ASICs"), and development of local area network/wide area network ("LAN/WAN")
multiple protocol and interface communication technologies to secure original
equipment manufacturer ("OEM") design wins and end user installations. The
Company primarily markets through two-tier distribution, where the end user is
typically the operator of a large network, and to large OEMs. In 1997,
approximately 64 percent of Emulex's revenue was derived from OEMs.
Emulex was organized as a California corporation in 1979. In 1987 Emulex changed
its state of incorporation from California to Delaware by the formation of a
Delaware corporation (the "Registrant"), which acquired all of the stock of the
California corporation. The California corporation continues to operate as a
wholly-owned subsidiary of the Delaware corporation. Unless the context
indicates otherwise, the "Company" and "Emulex" each refer to the Registrant and
its subsidiaries.
In 1994, Emulex completed a major transition departing its historic storage
controller business and spinning off its wholly-owned SCSI subsidiary, QLogic
Corporation (see note 2 to the Consolidated Financial Statements). In May 1993,
Paul Folino was elected President and CEO of Emulex and in the ensuing quarters
he assembled a new management team to complement the group already in place,
including a new vice president of research and development and vice president of
sales. The management team has streamlined operations, expanded distribution
channels by adding a new two-tier distribution network and refocused the
Company's product development and marketing efforts toward networking markets
such as fibre channel, printer servers and wide area networking.
INDUSTRY BACKGROUND
The data communications industry encompasses a broad spectrum of technologies
which facilitate the transfer of computer data from one location to another.
These technologies extend from computer to peripheral communications managed by
input/output ("I/O") solutions, to computer communications within a building or
campus environment which typically occur over a local area network ("LAN"), to
computer communications between remote locations, which require wide area
network ("WAN") solutions. While its various technologies and market needs are
diverse, management believes the data communications industry as a whole is
being shaped by three major trends:
The ever-increasing need for higher bandwidth. While microprocessors have made
continual gains in computing capability, I/O channel and LAN speeds have not
kept pace and are increasingly responsible for overall performance constraints.
New technologies such as the American National Standard Institute ("ANSI") Fibre
Channel standard are emerging to relieve this performance bottleneck.
The worldwide growth in remote enterprise access. Enterprise access stems from
the growing interconnection of remote offices and remote users to the central
enterprise. As part of this trend, the dramatic expansion in information
services, financial services, airline reservations and on-line transaction
processing is propelling the need for real-time, mission critical communication
to and from centralized facilities. In addition, the proliferation of laptops,
home PCs and modems, and the drive to enhance the productivity of traveling and
1
3
telecommuting workers has led to the need to connect those remote computers to
the corporate LAN with a user-friendly remote access solution.
Increasing Demand for Flexible Access to Computing Resources. Computing
resources, such as printers, storage devices, and other peripheral devices, are
at various stages of being attached directly to the network itself rather than
to a single computer or server. Direct attachment improves the overall
efficiency of the network by enabling peripherals to be placed anywhere on the
network, thereby increasing availability of shared resources to multiple users,
eliminating bandwidth bottlenecks imposed by port or channel interfaces and
reducing server workload.
PRODUCTS
Emulex designs, manufactures, and markets three primary product families:
high-speed fibre channel products, printer servers and network access servers.
Fibre Channel
The Company's host adapter and hub products for the emerging fibre channel
market provide a scaleable high bandwidth communications connection among
computer systems and data storage systems at transmission speeds of up to one
gigabit per second, servicing both LAN and I/O requirements. By leveraging both
its networking expertise and its historical background in storage interfaces,
Emulex believes it has emerged as a leader in high speed fibre channel
communication products. Through June 29, 1997, Emulex had been awarded 33 fibre
channel design wins with high-end computer server and storage OEMs such as Data
General, Fujitsu PC, Hitachi, NEC and Sequent Computer Systems. The Company was
one of the developers of the ANSI standards applicable to fibre channel and the
Company has also joined the Gigabit Ethernet Alliance associated with the
evolving Gigabit Ethernet standard, a developing high speed LAN standard
partially based on the fibre channel specification. Emulex believes that it has
established a leadership role in fibre channel product development by
introducing, among other products, the first fibre channel host adapter with an
integrated RISC processor, which enables servers to offload the host networking
or I/O workload and increase system performance. Emulex also developed the first
Peripheral Component Interconnect ("PCI") host adapter that supported all three
fibre channel standard classes and topologies, which enables users to
transparently upgrade from a low-end arbitrated loop network to a high-end
switched fibre channel environment encompassing both I/O and LAN applications.
Since the introduction of the Company's first fibre channel products in the
fourth quarter of fiscal 1995, the Company expanded its sales of fibre channel
products to approximately $11,521, or 18 percent of total revenues, in the year
ended June 29, 1997.
Fibre channel is a communication standard developed by ANSI which is backed by
more than 120 companies, including Hewlett-Packard, Seagate Technologies and Sun
Microsystems. It is designed to allow communication at speeds of up to four
gigabits per second and accelerates I/O channel communications between computers
and peripherals while also serving high-speed LAN requirements.
The market for fibre channel host adapters and hubs is projected by two leading
market research firms to grow to approximately $2.5 billion by the year 2000.
The growing trend toward increasingly distributed computing environments, as
well as the increased demand for higher storage capacity, has stimulated demand
for fibre channel products due to fibre channel's high bandwidth characteristics
and its ability to accommodate large numbers of attached computers and storage
systems communicating over long distances. The fibre channel standard is also
designed to address emerging hybrid LAN/IO applications such as clustering, in
which multiple servers and storage systems share an application's workload, and
storage area networks ("SANs"), in which multiple servers are able to access
multiple storage systems on a fibre channel network. Fibre channel products
currently are incorporated primarily in high-end storage applications such as
RAID (redundant array of inexpensive disks). In response to this early market
demand, the Company's initial products have been primarily deployed in high-end
storage applications. However, due to the robust architecture of its ASIC
solution, the Company believes that its product lines can be adapted to a broad
range of performance applications which will enable the Company to take
advantage of other opportunities within the fibre channel market as they emerge.
2
4
Printer Servers
Emulex's family of printer server products improve performance by attaching
printers directly to the LAN, instead of to a file server. Emulex believes it is
the leading independent supplier of internal printer servers to OEMs and is a
leading supplier of printer servers to commercial end users. As a larger
percentage of printers are shipped and installed in network-ready
configurations, the printer server market has begun shifting toward OEM
solutions, and the Company has emphasized this sector. The Company has secured
design wins with 10 OEMs covering over 25 printers in 1996 and 1997. Currently,
the Company provides printer servers to several top printer OEMs including
Canon, IBM and Xerox. According to International Data Corp., printer server unit
shipments are expected to grow at a 23% compounded annual growth rate through
the year 2000, and total market revenues are expected to reach $1.9 billion by
such date. The Company believes that approximately 30% of the total current
printer server market is available to independent third party suppliers such as
the Company.
Network Access
Emulex's network access server products provide connectivity between resources
across both local and wide area networks. The four major product lines within
the network access family are WAN adapters, communications servers, remote
access servers ("RAS") and host software products. Emulex's marketing efforts
are concentrated in the expanding WAN adapter market.
Emulex supplies WAN adapters for a number of OEM programs, and has shipped over
3 million ports worldwide to date. WAN adapters are board-level products that
can be installed in a computer to provide a communications link. Traditionally,
Emulex's WAN adapters have primarily focused on wide area networking
requirements for the PC platform. In 1996, the Company introduced a family of
PCI WAN adapters that addresses the networking requirements of workstations and
UNIX servers, as well as the DCP_link family of server-based routers that
targets the commercial end-user sector of the router market.
The Company's network access products consist primarily of WAN adapters that
off-load remote communications processing from host computers and, to a lesser
extent, communications servers that allow computers and peripherals to access
local networks, and remote access servers that facilitate telecommuting
applications. While the Company continues to offer network access products and
such products continue to generate a significant portion of the Company's
revenues and profits, it has focused its resources on the continued development
and expansion of its fibre channel and printer server product lines. Due to the
maturation of certain of the Company's network access products, the Company
expects that its network access product line will account for a decreasing
portion of its revenues and profits in future years.
PATENTS AND LICENSES
The Company has applied and plans to continue to apply for patents and to
copyright its trademarks both in the United States and in foreign countries when
it seems to be advantageous to do so. However, the Company believes that there
can be no assurances that patents or copyrights will be issued or that any
patent or copyright issued will provide significant protection or could be
successfully defended.
As is the case with many companies in the electronics industry, it may be
desirable in the future for the Company to obtain technology licenses from other
companies. The Company has occasionally received notices of claimed infringement
of intellectual property rights and may receive additional such claims in the
future. The Company evaluates all such claims and, if necessary, will seek to
obtain appropriate licenses. There can be no assurance that any such licenses,
if required, will be available on acceptable terms. Failure to obtain such
patents or licenses in the future could have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
SELLING AND MARKETING
The Company markets its products worldwide to OEMs, Value Added Resellers
("VARs"), systems integrators, industrial distributors, resellers and end users.
Emulex offers repair services through a third-party organization and also
directly through the Company. At the end of 1997, the domestic sales
organization included 18 sales and support staff, including a vice president,
located in Costa Mesa and 9 satellite offices. At the end of 1997, the
international sales organization included 13 sales and support staff located in
3 international sales offices in Europe.
3
5
The Company's export revenues were 45, 40 and 47 percent of net revenues for
1997, 1996 and 1995, respectively. The majority of export shipments are to the
European marketplace.
Although the Company has broadened its line of product offerings in an attempt
to limit fluctuations in its quarterly results of operations, the Company's
markets are both cyclical and seasonal in nature which may cause the Company's
quarterly results of operations to vary significantly.
Reuters and Sequent Computer Systems accounted for 13 and 10 percent of net
revenues in 1997, respectively. Furthermore, the Company's top five customers
accounted for 44 percent of net revenues in 1997. IBM Corporation accounted for
15 percent of net revenues in 1996. Reuters and Xerox accounted for 16 and 13
percent of net revenues in 1995, respectively. The Company derived approximately
64 percent of its net revenues from sales to OEMs in 1997. Emulex's operating
results could be adversely affected if sales to one or more of such customers
significantly decline or if any one of these customers develop alternative
sources for Emulex's products.
ORDER BACKLOG
At June 29, 1997, the Company had unshipped product orders of approximately
$2,110 compared with approximately $7,839 at June 30, 1996. Approximately $6,900
of the June 30, 1996 backlog related to orders from Xerox, IBM and Reuters. At
year end, all backlog was scheduled for delivery within six months or less with
the exception of orders pending release dates. Orders are subject to
rescheduling and/or cancellation with little or no penalty. Purchase order
release lead times depend upon the scheduling practices of the individual
customer, and the rate of booking new orders fluctuates from month to month.
Therefore, the level of backlog at any one time is not necessarily indicative of
trends in the Company's business.
ENGINEERING AND DEVELOPMENT
At June 29, 1997, the Company employed approximately 74 engineers, other
technicians and support personnel engaged in the development of new products and
the improvement of existing products. Engineering and development expenses were
$10,006, $11,387 and $10,674 for 1997, 1996 and 1995, respectively.
COMPETITION
The Company's high-performance communications server products address both the
UNIX-based and Digital Equipment Corporation based computer market and compete
with a number of companies, including Digital Equipment Corporation. In the
remote access market, competition includes Shiva, 3Com, Ascend Communications
and others. Competition for the Company's WAN adapters is primarily IBM, which
holds the largest market share. The Company's primary competitor for its Hewlett
Packard ("HP") compatible network printing products is HP, which offers its own
network printer server. The Company's printer server products also compete with
a number of other manufacturers in the non-HP printer marketplace including
Intel. Primary competition for the Company's fibre channel products includes HP
and a number of smaller companies. The Company believes it competes successfully
due to its broad product line, which includes low cost, high value products, as
well as high-performance products. The Company operates in a volatile and
dynamic market, and more aggressive market and product positioning by certain of
these significantly larger competitors would have a material adverse effect on
the Company's business, results of operations, financial condition and/or
liquidity.
MANUFACTURING AND SUPPLIES
The Company's products consist primarily of electronic component parts assembled
on internally designed printed circuit boards which are sold as board-level
products. Most component parts can be purchased from two or more sources.
However, certain other component parts, which represent a small percentage of
the overall number of parts used by the Company, can only be obtained from
single sources. In addition, the Company designs its own semiconductors which
are embedded in its printer server and fibre channel products, and these are
manufactured by third party semiconductor foundries. In addition to hardware,
the Company designs software to provide functionality to its hardware products.
The Company also licenses software from third party providers for use with its
fibre channel, PCWAN and remote access products. Most of these providers are the
sole source for this software. An inability or an unwillingness on the part of a
single source supplier to provide the Company with the quantity of parts or
software that it needs in a timely fashion could have an adverse impact on the
Company's
4
6
ability to manufacture and ship products in accordance with customer
requirements. Both the Company's software and the third party software are sold
primarily as embedded programs within the hardware products, but may be
purchased separately as a software-only update for the Company's products.
At June 29, 1997, the Company had 175 manufacturing employees, including 123
permanent and 52 temporary employees, primarily at its manufacturing facility in
Puerto Rico. Assembly operations conducted by the Company are typical of the
electronics industry, and no unusual methods, procedures, or equipment are
required. The Company does, however, utilize automated assembly and handling
equipment, including surface mount technology production capabilities in its
Puerto Rico facility. The sophisticated nature of the products, in most cases,
requires extensive testing by specialized test devices operated by skilled
personnel. The Company has purchased and developed several types of specialized
test equipment to reduce the cost of this process, and maintains internal test
engineering groups for continuing support of test operations.
EMPLOYEES
The Company had 332 employees at June 29, 1997, including 280 with permanent
status and 52 temporaries, compared to 348 at June 30, 1996. This decrease is
primarily attributable to the consolidation discussed below and partially offset
by new hires throughout the year. None of the Company's employees are
represented by a labor union.
During the first quarter of 1997, the Company initiated a consolidation of its
operations to reduce its ongoing expense base and focus its activities in the
fibre channel, printer server and wide area networking markets. Emulex's remote
access and host software businesses, previously headquartered out of a Bellevue,
Washington facility, have been relocated to Emulex headquarters in Costa Mesa,
California. In addition, the Company has downsized its Pacific Rim sales
organization and also made selected reductions at its manufacturing plant in
Dorado, Puerto Rico and at its corporate headquarters. Total headcount worldwide
was reduced by approximately 36 employees as a result of this consolidation, and
the Company recognized a consolidation charge of $1,280.
RISK FACTORS
RECENT HISTORY OF LOSSES; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company incurred net losses of $9,288 in fiscal 1996 and $941 in the first
quarter of fiscal 1997. Results for the first quarter included consolidation
charges of $1,280. While the Company has generated net income for the last three
quarters, and for the year ended June 29, 1997, there can be no assurances that
revenues will remain at current levels or return to the levels experienced in
previous years or that the Company would be profitable at such revenue levels.
The Company's revenues and results of operations have varied on a quarterly
basis in the past and are expected to vary significantly in the future.
Accordingly, the Company believes that period to period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. The Company's revenue and results of
operations are difficult to forecast and could be adversely affected by many
factors, including, among others, the size, timing and terms of individual
transactions; the relatively long sales and deployment cycles for the Company's
products, particularly through its OEM channel; changes in the Company's
operating expenses; the ability of the Company to develop and market new
products; market acceptance of new products, particularly in the fibre channel
market; timing of introduction or enhancement of products by the Company or its
competitors; the level of product and price competition; the ability of the
Company to expand its OEM and distributor relationships; activities of and
acquisitions by competitors; changes in printer server, network access and fibre
channel technology and industry standards; changes in the mix of products sold,
since the Company's network access and fibre channel host adapter products
typically have higher margins than the Company's printer server and fibre
channel hub products; changes in the mix of channels through which products are
sold; levels of international sales; seasonality, since the Company typically
experiences lower demand for its products in Europe in the first fiscal quarter;
personnel changes; changes in customer budgeting cycles; foreign currency
exchange rates; and general economic conditions. As a result of the foregoing or
other factors in some future period the Company's results of operations could
fail to meet the expectations of public market analysts or investors, and the
price of the Company's common stock could be materially adversely affected.
5
7
Because the Company generally ships products within a short period after receipt
of an order, the Company typically does not have a material backlog of unfilled
orders, and revenues in any quarter are substantially dependent on orders booked
in that quarter. Typically, the Company generates a large percentage of its
quarterly revenues in the last month of the quarter. Adding further to the
variability of sales are certain large OEM customers that tend to order
sporadically and whose purchases can vary significantly from quarter to quarter.
A small variation in the timing of orders is likely to adversely and
disproportionately affect the Company's quarterly results of operations as the
Company's expense levels are based, in part, on its expectations of future sales
and only a small portion of the Company's expenses vary directly with its sales.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any shortfall of
demand in relation to the Company's quarterly expectations or any delay of
customer orders would have an immediate and adverse impact on the Company's
quarterly results of operations, financial condition and/or liquidity.
Reliance on OEMs, Distributors and Key Customers
In 1997, the Company derived approximately 31 percent of its revenue from
distributors and 64 percent from OEMs. In fiscal 1996 and 1995, respectively,
the Company derived approximately 50 percent and 40 percent of its revenue from
distributors and 39 percent and 53 percent of its revenues from OEMs. The
Company's agreements with distributors and OEMs are typically non-exclusive and
in many cases may be terminated by either party without cause, and many of the
Company's distributors and OEMs carry competing product lines. There can be no
assurance that the Company will retain its current OEMs or distributors or that
it will be able to recruit additional or replacement OEMs or distributors. The
loss of important distributors or OEMs would adversely affect the Company's
business, results of operations, financial condition and/or liquidity. The
Company's negotiates individual agreements with the majority of its OEMs and
distributors. Although these agreements are substantially standardized, due to
the individual negotiations variances do occur. However, these agreements
generally provide for discounts based on expected or actual volumes of products
purchased or resold by the reseller in a given period and do not require minimum
purchases. Certain of these agreements provide manufacturing rights and access
to source code upon the occurrence of specified conditions or defaults.
The Company expects that certain of its OEMs will in the future develop
competitive products and, if they do so, they may decide to terminate their
relationship with the Company. Any reduction or delay in sales of the Company's
products by its OEMs or distributors could have a material adverse effect on the
Company's business, results of operations, financial condition and/or liquidity.
Reuters and Sequent Computer Systems accounted for 13 percent and 10 percent,
respectively, of the Company's net revenues in fiscal 1997. The Reuters project
now underway is expected to be completed by the end of calendar 1997. After that
time, revenues from Reuters will be dependent upon the extension of the existing
project or the award of new design wins on future projects. Furthermore, the
Company's top five customers accounted for 44 percent of 1997 net revenues.
The Company's revenues are significantly dependent upon the ability and
willingness of its OEMs to timely develop and promote products that incorporate
the Company's technology. The ability and willingness of these OEMs to do so is
based upon a number of factors such as: the timely development by the Company
and the OEMs of new products with new functionality, increased speed and
enhanced performance at acceptable prices to end users; development costs of the
OEMs; compatibility with both existing and emerging industry standards;
technological advances; patent and other intellectual property issues and
competition generally. No assurance can be given as to the ability or
willingness of the Company's OEMs to continue developing, marketing and selling
products incorporating the Company's technology. Since the Company's business is
dependent on its relationships with its OEMs and distributors, the inability or
unwillingness of any of the Company's significant customers to continue their
relationships with the Company and to develop and promote products incorporating
the Company's technology would have a material adverse effect on the Company's
business, results of operations, financial condition and/or liquidity.
Concentration of OEM Customers
Historically, revenues from the Company's top OEM customers have accounted for a
significant portion of net revenues. In fiscal 1997, the Company's top five OEM
customers accounted for 40 percent of the Company's net revenues. Although the
Company has attempted to expand its base of OEMs, there can be no assurance that
its revenues in the future will not be similarly derived from a limited number
of OEM customers. The Company's
6
8
largest OEM customers vary to some extent from year to year as product cycles
end, contractual relationships expire and new products and customers emerge.
Many of the arrangements with the Company's OEMs are provided on a
project-by-project basis, are terminable with limited or no notice, and, in
certain instances, are not governed by long-term agreements. The Company also is
subject to a credit risk associated with the concentration of its accounts
receivable from these OEMs. No assurance can be given as to the ability or
willingness of any of the Company's OEMs to continue utilizing the Company's
products and technology. Any loss or significant decrease in the Company's
current OEMs or any failure of the Company to replace its existing OEMs, or any
delay in or failure to receive the payments due to the Company from such OEMs
would have a material adverse effect on the Company's business, results of
operations, financial condition and/or liquidity.
Dependence on Emerging Fibre Channel Market and Acceptance of Fibre Channel
Standard
The Company has invested and continues to invest substantially in the
engineering of products to address the fibre channel market, which is at an
early stage of development, is rapidly evolving and is attracting an increasing
number of market entrants. The Company's investment in fibre channel designs was
over 50% of the Company's engineering and development expenditures for the year
ended June 29, 1997. The Company's future success in the fibre channel market
will depend to a significant degree upon broad market acceptance of fibre
channel technology. Competing or alternative technologies, including Gigabit
Ethernet, are being or are likely in the future to be promoted by current and
potential competitors of the Company, some of which have well-established
relationships with current and potential customers of the Company, extensive
knowledge of the markets served by the Company, better name recognition and more
extensive development, sales and marketing resources than the Company. The
Company's success will be dependent in part on the ability of the Company's OEM
customers to develop new products that provide the functionality, performance,
speed and network connectivity demanded by the market at acceptable prices, and
to convince end users to adopt fibre channel. While the Company has secured
numerous design wins for its fibre channel products from its OEM customers,
nearly all of these customers are currently developing systems that incorporate
the Company's products, and only a limited number of OEM customers have shipped
products that incorporate the Company's fibre channel products. To the extent
these customers are unable to or otherwise do not deploy or ship systems that
incorporate the Company's products, or if these systems are not commercially
successful, this would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity. The Company
believes the fibre channel market will continue to expand, and that the
Company's investment in the fibre channel market represents a significant
portion of the Company's opportunities for revenue growth in the future.
However, there can be no assurance that customers will choose the Company's
technology for use, or that fibre channel products will gain market acceptance.
If the fibre channel market fails to develop, develops more slowly than
anticipated or attracts competitors, or if the Company's products do not achieve
market acceptance, the Company's business, results of operations, financial
condition and/or liquidity would be materially adversely affected.
Competition
The Company's products are targeted at the fibre channel, printer server and
network access markets. The markets for the Company's products are highly
competitive and are characterized by rapid technological advances, price
erosion, frequent new product introductions and evolving industry standards. In
the fibre channel market, the Company primarily competes against Adaptec,
Hewlett-Packard, QLogic Corporation, Symbios Logic, and to a lesser extent
against several smaller companies. In the printer server market, the Company
competes directly against a number of smaller companies and indirectly against
Hewlett-Packard and Lexmark, the two largest printer vendors, who primarily use
their own internally developed printer servers. In the network access market,
the Company competes against the numerous networking companies who offer network
access solutions.. The Company expects that other companies will enter its
markets, particularly the new and evolving fibre channel market. Furthermore,
the Company's OEM customers may in the future develop competitive products and
may then decide to terminate their relationships with the Company. The Company's
current and potential competition consists of major domestic and international
companies, many of which have substantially greater financial, technical,
marketing and distribution resources than the Company, as well as emerging
companies attempting to obtain a share of the existing market. The Company's
competitors continue to introduce products with improved price/performance
characteristics, and the Company will have to do the same to remain competitive.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share, any of which would have a material
adverse effect on the Company's
7
9
business, results of operations, financial condition and/or liquidity. There can
be no assurance that the Company will be able to compete successfully against
either current or potential competitors in the future.
Rapid Technological Change and New Product Development
The markets for the Company's products are characterized by rapidly changing
technology, evolving industry standards and frequent introduction of new
products and enhancements. The Company believes that its future success will
depend in large part on its ability to enhance its existing products and to
introduce new products on a timely basis to meet changes in customer
preferences, emerging technologies and evolving industry standards. There can be
no assurance that the Company will be successful in developing, manufacturing
and marketing new products or product enhancements that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of these products or that its new products will
adequately meet the requirements of the marketplace and achieve market
acceptance. There can be no assurance that the Company will be able to develop
or license from third parties the underlying core technologies necessary for new
products and enhancements. A key element of the Company's strategy is the
development of multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing the price/performance of the Company's
printer server and fibre channel products. There can be no assurance the Company
will be successful at developing and incorporating ASICs effectively and on
time. Additionally, there can be no assurance that services, products or
technologies developed by others will not render the Company's products or
technologies uncompetitive or obsolete. If the Company is unable, for
technological or other reasons, to develop new products or enhancements of
existing products in a timely manner in response to changing market conditions
or customer preferences, the Company's business, results of operations,
financial condition and/or liquidity would be materially adversely affected.
The Company has in the past engaged and expects that it will continue in the
future to engage in joint development projects with third parties. Joint
development creates several risks for the Company, including loss of control
over the development of aspects of the jointly developed product and over the
timing of product availability. There can be no assurance that joint development
activities will result in products, or that any products developed will be
commercially successful.
Risks Associated with Product Development; Product Delays
The Company in the past has experienced delays in product development, and the
Company may experience similar delays in the future. Prior delays have resulted
from numerous factors such as changing OEM product specifications, difficulties
in hiring and retaining necessary personnel, difficulties in reallocating
engineering resources and other resources limitations, difficulties with
independent contractors, changing market or competitive product requirements and
unanticipated engineering complexity. In addition, the Company's software and
hardware have in the past, and may in the future, contain undetected errors or
failures that become evident upon product introduction or as product production
volume increases. There can be no assurance, despite testing by the Company and
its OEMs, that errors will not be found, that the Company will not experience
development challenges resulting in unanticipated problems or delays in the
acceptance of products by the Company's OEMs or shipment of the OEMs' products,
or that the Company's new products and technology will meet performance
specifications under all conditions or for all anticipated applications. Given
the short product life cycles in the Company's product markets, any delay or
unanticipated difficulty associated with new product introductions or product
enhancements would have a material adverse effect on the Company's business,
results of operations, financial condition and/or liquidity.
Reliance on Third Party Suppliers
The Company relies on third party suppliers who supply the components used in
the Company's products. Most components are readily available from alternate
sources. However, the unavailability of certain components from current
suppliers, especially custom components fabricated for the Company, such as
ASICs, could result in delays in the shipment of the Company's products as well
as additional expense associated with obtaining and qualifying a new supplier or
redesigning the Company's product to accept more readily available components.
In addition, certain key components used in the Company's products are available
only from single sources and the Company does not have long-term contracts
ensuring the supply of such components. Furthermore, the components used for the
Company's fibre channel products are based on an emerging
8
10
technology and may not be available with the performance characteristics and in
the quantities required by the Company. As the Company typically attempts to
maintain less than 90 days supply of such components, there can be no assurance
that the components will be available to meet the Company's future requirements
at favorable prices, if at all. The Company also relies on third party suppliers
for some of the software incorporated in some of the Company's products. These
software items are not generally readily available from alternate sources. The
Company's future inability to obtain components or software or to redesign its
products to accept alternatives, in a timely manner, could materially and
adversely affect the Company's business and financial condition. In addition,
any significant increase in prices or inability to ship products due to a lack
of components or software could adversely affect the Company's business, results
of operations, financial condition and/or liquidity.
Dependence on Key Personnel
The Company's success depends to a significant degree on the performance and
continued service of its senior management and certain key employees. The
Company's future success also depends upon its ability to attract, train and
retain highly qualified technical, sales and marketing and managerial personnel.
An increase in technical staff with experience in highspeed networking
applications will be required as the Company further develops its fibre channel
product line. Competition for such highly skilled employees with technical,
management, marketing, sales, product development and other specialized skills
is intense and there can be no assurance that the Company will be successful in
recruiting and retaining such personnel. In addition, there can be no assurance
that employees will not leave the Company and, after leaving, compete against
the Company. The loss of key management, technical and sales personnel would
have a material adverse effect on the Company's business, results of operations,
financial condition and/or liquidity.
Risks Associated with International Operations and Regulatory Standards
For fiscal 1997, sales in the United States, Europe and in the Pacific Rim
countries accounted for 55 percent, 39 percent and 6 percent of the Company's
net revenues, respectively. For fiscal 1996 and 1995, sales outside of the
United States accounted for 40 percent and 47 percent, respectively, of the
Company's net revenues. The Company expects that sales in the United States and
Europe will continue to account for the substantial majority of the Company's
revenues for the foreseeable future. There can be no assurance that the Company
will achieve significant penetration in other markets.
All of the Company's sales are currently denominated in U.S. dollars. An
increase in the value of the U.S. dollar relative to foreign currencies would
make the Company's products more expensive and therefore potentially less
competitive in those markets. Additional risks inherent in the Company's
international business activities generally include unexpected changes in
regulatory requirements, tariffs and other trade barriers, cost and risks of
localizing products for foreign countries, longer accounts receivable payment
cycles, potentially adverse tax consequences, repatriation of earning and the
burdens of complying with a wide variety of foreign laws. In addition, revenues
of the Company earned in various countries where the Company does business may
be subject to taxation by more than one jurisdiction, thereby adversely
affecting the Company's earnings. There can be no assurance that such factors
will not have an adverse effect on the revenues from the Company's future
international sales and, consequently, the company's business, results of
operations, financial condition and/or liquidity.
Risks Associated With Puerto Rican Manufacturing Facility
The Company's primary manufacturing operation is located in Dorado, Puerto Rico,
an area which is subject to hurricanes at certain times of the year. Damage to
this facility or an interruption in the ability to receive components or ship
products to its customers could have a material adverse impact on the Company's
business, results of operations, financial condition and/or liquidity. In
addition, the economic viability of the Company's Puerto Rican manufacturing
facility depends in great part upon the availability of favorable tax treatment
for such operations under current tax laws. Such laws are subject to change and
may be limited or phased-out by Congress at any time.
The Company's current Puerto Rico tax exemption grants for property and
municipal license tax and for income and tollgate tax expires at the end of
calendar years 1997 and 1999, respectively. The Company is currently negotiating
with the Puerto Rican government to extend these exemption grants through 2007.
The Company
9
11
believes it will negotiate a renewal of these exemption grants with terms and
conditions which are not materially different from the Company's current
exemption grants. However, if the Company is unable to obtain a renewal of these
exemption grants or if the terms and conditions are materially different, the
Company's business, results of operations, financial condition and/or liquidity
would be materially adversely affected.
Dependence on Proprietary Technology
Although the Company believes that its continued success will depend primarily
on continuing innovation, sales, marketing and technical expertise and the
quality of product support and customer relations, the Company's success is
dependent in part on the proprietary technology contained in its products. The
Company currently relies on a combination of patents, copyrights, trademarks,
trade secret laws and contractual provisions to establish and protect
proprietary rights in its products. There can be no assurance that the steps
taken by the Company in this regard will be adequate to deter misappropriation
or independent third party development of its technology. Although the Company
believes that its products and technology do not infringe proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims or that the Company will not be required to obtain licenses
of third party technology. Any such claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. No assurance can be
given that any necessary licenses will be available or that if available, such
license can be obtained on commercially reasonable terms. The failure to obtain
such royalty or licensing agreements on a timely basis would have a material
adverse effect on the Company's business, results of operations, financial
condition and/or liquidity.
Possible Volatility of Stock Price
As is the case with many technology based companies, the market price of the
Company's common stock has been, and is likely to continue to be, extremely
volatile. Factors such as new product introductions by the Company or its
competitors, fluctuations in the Company's quarterly operating results, the gain
or loss of significant contracts, pricing pressures, changes in earnings
estimates by analysts, and general conditions in the computer and communications
markets, among other factors, may have a significant impact on the market price
of the Company's common stock. In addition, the stock market recently has
experienced significant price and volume fluctuations which have particularly
affected the market price for many high technology companies like the Company.
Item 2. PROPERTIES.
The Company's corporate offices and principal product development facilities are
currently located in an approximately 55,000 square foot leased building in
Costa Mesa, California. The lease expires in calendar year 1999. Under the terms
of this agreement, the Company has the option to renew this lease for a period
of 30 months.
Emulex Caribe, Inc., one of the Company's subsidiaries, has its corporate
offices and production facilities located in two adjacent buildings owned by
that subsidiary in Dorado, Puerto Rico. The two buildings have an aggregate of
approximately 41,000 square feet. The Company believes these facilities are
sufficient to meet its production needs at least through the next year.
The Company leases approximately 12 sales offices throughout the world.
The Company's future facilities requirements will depend upon the Company's
business, but the Company believes additional space, if required, may be
obtained on reasonable terms.
Item 3. LEGAL PROCEEDINGS.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company is not aware of any pending legal proceedings which could have a
material adverse effect on the financial position or operations of the Company.
10
12
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 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRINCIPAL MARKET AND PRICES
The Company's common stock is traded on the Nasdaq National Market under the
symbol EMLX. The following table sets forth for the indicated periods the high
and low sales prices of the common stock, as reported on the Nasdaq National
Market.
HIGH LOW
------ -------
1996 First Quarter................................... 28 1/2 13
Second Quarter.................................. 16 3/4 10 1/8
Third Quarter................................... 14 3/8 6 3/8
Fourth Quarter.................................. 21 3/8 13
1997 First Quarter................................... 16 1/4 12 7/8
Second Quarter.................................. 18 3/8 14 1/2
Third Quarter................................... 20 3/8 15
Fourth Quarter.................................. 21 1/4 14 3/4
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as of
September 19, 1997 was 387.
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 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 "Distribution"). The rights were distributed on February 2, 1989 to
stockholders of record on the close of business on that date. See note 11 to the
Consolidated Financial Statements, "Stockholders' Equity", for further
information on preferred stock purchase rights.
At a special meeting of stockholders of the Company held on February 24, 1994,
the stockholders voted on a single, unified proposal which in part provided for
the distribution to stockholders, on a share-for-share basis, of all outstanding
shares of common stock of QLogic Corporation. On February 28, 1994, subsequent
to stockholders approving the aforementioned proposal, the Company declared a
special distribution to the Company's stockholders of all the shares of QLogic
Corporation effective on the record date, February 25, 1994. See note 2 to the
Consolidated Financial Statements, Distribution of QLogic Corporation.
11
13
Item 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected consolidated financial data.
Certain reclassifications have been made to the 1994 and 1993 data to conform to
the 1997, 1996 and 1995 presentation. The consolidated results of operations
data for the years ended July 3, 1994 and June 27, 1993 have been restated to
present QLogic Corporation as a discontinued operation. The consolidated balance
sheet data presented in the following tables have not been retroactively
restated for the spin off of QLogic Corporation (See note 2 to the Consolidated
Financial Statements).
Selected Statement of Operations Data
- -------------------------------------
Year Ended
--------------------------------------------------------
June 29, June 30, July 2, July 3, June 27,
1997 1996 1995 1994 1993
-------- -------- ------- -------- --------
(in thousands, except per share data)
Net revenues ................................. $ 64,763 $ 51,338 $ 75,475 $ 61,558 $ 55,056
Cost of sales ................................ 39,924 34,538 44,412 38,248 29,948
-------- -------- -------- -------- --------
Gross profit .............................. 24,839 16,800 31,063 23,310 25,108
Operating expenses:
Engineering and development ............... 10,006 11,387 10,674 8,498 8,608
Selling and marketing ..................... 7,918 11,381 12,170 13,361 14,926
General and administrative ................ 4,643 4,940 5,435 5,393 2,504
Amortization of goodwill .................. -- -- 337 467 600
Impairment of goodwill .................... -- -- 785 1,001 --
Consolidation charges ..................... 1,280 -- -- 2,413 1,890
-------- -------- -------- -------- --------
Total operating expenses ..................... 23,847 27,708 29,401 31,133 28,528
-------- -------- -------- -------- --------
Operating income (loss) ...................... 992 (10,908) 1,662 (7,823) (3,420)
Nonoperating income (expense) ................ 71 483 1,120 123 (6)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes ............. 1,063 (10,425) 2,782 (7,700) (3,426)
Income tax benefit ........................... (506) (1,137) (1,156) (23) (34)
-------- -------- -------- -------- --------
Income (loss) from continuing operations ..... 1,569 (9,288) 3,938 (7,677) (3,392)
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax ........... -- -- -- (4,558) 6,498
Gain (loss) on disposal of discontinued
operations, net of income tax ........... -- -- -- (2,994) 408
-------- -------- -------- -------- --------
Net income (loss) ............................ $ 1,569 $ (9,288) $ 3,938 $(15,229) $ 3,514
======== ======== ======== ======== ========
Income (loss) from continuing operations
per common and common equivalent share .... $ 0.25 $ (1.56) $ 0.64 $ (1.39) $ (0.61)
Gain (loss) from discontinued operations and
disposal of discontinued operations, net of
income tax, per common and common
equivalent share .......................... -- -- -- (1.36) 1.25
-------- -------- -------- -------- --------
Net income (loss) per common and common
equivalent share .......................... $ 0.25 $ (1.56) $ 0.64 $ (2.75) $ 0.64
======== ======== ======== ======== ========
Weighted-average number of common and
common equivalent shares .................. 6,295 5,936 6,172 5,537 5,533
======== ======== ======== ======== ========
12
14
Selected Balance Sheet Data
Year Ended
-----------------------------------------------
June 29, June 30, July 2, July 3, June 27,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(in thousands)
Total current assets .................. $29,328 $31,579 $39,014 $26,152 $53,442
Total current liabilities ............. 10,859 15,494 13,970 9,223 20,580
------- ------- ------- ------- -------
Working capital ....................... $18,469 $16,085 $25,044 $16,929 $32,862
Total assets .......................... $37,175 $39,300 $47,550 $37,354 $77,956
Long-term capitalized lease obligations 79 204 253 506 1,805
Retained earnings ..................... 15,773 14,204 23,492 19,554 48,184
Total stockholders' equity ............ 24,276 22,030 30,678 25,559 53,482
13
15
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 "projected", "in the opinion",
"believes", "expects" and similar expressions are intended to identify
forward-looking statements. Actual future results could differ materially from
those described in the forward-looking statements as a result of factors
discussed in "Risk Factors" set forth herein. The Company cautions the reader,
however, that these lists of risk factors may not be exhaustive. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and notes thereto included elsewhere in this Form 10-K. During the
third quarter of 1994, the Company spun off QLogic Corporation, a wholly owned
subsidiary, as a separate, publicly-traded company. The financial statement
presentation and the discussion of the results of operations reflect the
discontinuance of this business. See note 2 to the Consolidated Financial
Statements for a discussion of discontinued operations. All references to years
refer to the Company's years ended June 29, 1997, June 30, 1996 and July 2,
1995, as applicable, unless the calendar year is specified. References to dollar
amounts are in thousands unless otherwise specified.
Percentage of Net Revenues
--------------------------
1997 1996 1995
---- ---- ----
Net revenues .................... 100.0% 100.0% 100.0%
Cost of sales ................... 61.6 67.3 58.8
----- ----- -----
Gross profit ................. 38.4 32.7 41.2
Operating expenses:
Engineering and development .. 15.5 22.2 14.2
Selling and marketing ........ 12.2 22.1 16.1
General and administrative ... 7.2 9.6 7.2
Amortization of goodwill ..... -- -- 0.5
Impairment of goodwill ....... -- -- 1.0
Consolidation charges ........ 2.0 -- --
----- ----- -----
Total operating expenses ........ 36.9 53.9 39.0
----- ----- -----
Operating income (loss) ......... 1.5 (21.2) 2.2
Nonoperating income ............. 0.1 0.9 1.5
----- ----- -----
Income (loss) before income taxes 1.6 (20.3) 3.7
Income tax benefit .............. (0.8) (2.2) (1.5)
----- ----- -----
Net income (loss) ............... 2.4% (18.1)% 5.2%
===== ===== =====
14
16
EMULEX CORPORATION AND SUBSIDIARIES
NET REVENUES
Fiscal 1997 versus Fiscal 1996
Net revenues for 1997 were $64,763, an increase of $13,425, or 26.2 percent,
from 1996. This increase in net revenues was primarily due to a $21,370, or
106.3 percent, increase in sales to original equipment manufacturers ("OEMs").
The higher level of OEM sales was attributable to significantly improved
shipments to Xerox and Reuters when compared to the depressed results of 1996;
numerous printer server design wins the Company achieved in 1997 and 1996, and
shipments of the Company's fibre channel products which, as expected, have been
primarily to OEMs during the early stages of the fibre channel market
development. The increase in net revenues to OEMs is partially offset by
reductions in net revenues from distribution and end user sales. Net revenues
from distribution decreased by $5,302, or 20.8 percent, and end user net
revenues decreased by $2,643, or 45.8 percent, compared to the prior year.
From a product line perspective, net revenues generated by the Company's
emerging fibre channel products increased by $10,383, or 912.4 percent, to
$11,521 in the current fiscal year as OEMs in this emerging market have begun to
take volume shipments. Printer server net revenues increased by $4,217, or 17.4
percent, to $28,428 in 1997 due to increased sales to OEMs, partially offset by
reductions in distribution sales of printer servers. The Company believes this
decrease in net revenues from distribution sales of printer servers was the
result of a combination of lower average selling price and decreased demand for
after-market solutions, as more OEMs are shipping their printers with the
printer server included. Network access net revenues increased by $1,342, or
6.3%, to $22,479, and net revenues from other miscellaneous product lines
decreased by $1,045, or 30.9%, to $2,335. Net revenues from 1996 also included
$1,472 of memory devices that had been engineered out of certain products.
Although fibre channel represented 17.8 percent of net revenues for 1997, the
market is an emerging technology and there can be no assurance that the
Company's products will adequately meet the requirements of the market, or
achieve market acceptance. Because the Company's fibre channel products are
designed to provide both an input/output (I/O) and a networking connection
between computers and storage devices, the future revenues of the fibre channel
product line depend on the availability of other fibre channel products not
manufactured or sold by the Company. Furthermore, the Company's fibre channel
products are dependent upon components supplied by third parties for this
emerging technology and there can be no assurance that these components will be
available in the quantities desired, at a competitive price and function as
needed.
Export revenues increased by $8,630, or 41.7 percent, to $29,330 in 1997.
Exports accounted for 45.3 percent of net revenues in 1997, up from 40.3 percent
in 1996. Domestic revenues increased by $4,795, or 15.7 percent, to $35,433 in
the current year. During 1997, Reuters and Sequent Computer Systems accounted
for 12.6 and 10.1 percent of net revenues, respectively. The Company's top five
customers accounted for 44.2 percent of net revenues in 1997.
Fiscal 1996 versus Fiscal 1995
Net revenues for 1996 decreased $24,137, or 32.0 percent, from 1995. This
decrease in net revenues resulted primarily from lower sales to OEMs, which were
$20,111 in 1996, down $19,495, or 49.2 percent, from the $39,606 recorded in the
prior year. This lower level of OEM sales was attributable to a combined
$21,568, or 85.7 percent, reduction in shipments to Xerox, Cisco Systems and
Reuters, offset by a $2,073, or 14.3 percent, increase in shipments to other OEM
accounts. While Xerox took delivery of their new generation of printer servers
during the second quarter of 1996, volumes were lower than a year earlier for
the previous generation of printer servers. Additionally, one product as
anticipated reached the end of its life cycle in the fourth quarter of 1995 with
Cisco Systems. Sales to Reuters declined from the levels recorded a year earlier
due to the completion of certain of Reuters' modernization projects in Europe.
However, in the fourth quarter of 1996, Emulex received over $2,500 in orders
from Reuters related to a new program. Approximately half of these new Reuters
orders shipped in the fourth quarter of 1996.
15
17
Export revenues decreased by $14,500, or 41.2 percent, to $20,700 in 1996.
Exports accounted for 40.3 percent of the Company's net revenues in 1996, down
from 46.6 percent in 1995. Domestic revenues decreased $9,637, or 23.9 percent,
to $30,638 in 1996. During 1996, IBM Corporation accounted for 14.7 percent of
net revenues.
GROSS PROFIT
Fiscal 1997 versus Fiscal 1996
In 1997, gross profit increased by $8,039, or 47.9 percent, to $24,839. Gross
profit was 38.4 percent of net revenues in the current year compared to 32.7
percent in 1996. The improvement in the 1997 gross profit percentage was
primarily due to a product mix which contains a higher percentage of higher
margin products, lower prices for components used in the Company's products and
higher absorption of manufacturing overhead which resulted from the higher level
of production activity in the current year compared to the prior year.
Fiscal 1996 versus Fiscal 1995
Gross profit in 1996 decreased by $14,263 to $16,800, down 45.9 percent from the
previous year. Gross profit for 1996 was 32.7 percent of net revenues, down from
41.2 percent in 1995. Fiscal 1995 gross profit included a $685 charge for the
impairment of capitalized software development costs. Without this charge, 1995
gross margins were 42.1 percent of net revenues. The decrease in 1996 gross
profit percentage from a year earlier was primarily attributable to a lower
absorption of manufacturing overhead which resulted from a lower level of
production activity in 1996.
OPERATING EXPENSES
Fiscal 1997 versus Fiscal 1996
In 1997, operating expenses decreased by $3,861, or 13.9 percent, to $23,847
compared to the prior year. Due to higher revenue levels and lower operating
expenses, operating expenses as a percent of revenue improved to 36.9 percent
compared to 53.9 percent in the prior year. Included in the current year were
consolidation charges (see note 1 to the Consolidated Financial Statements) of
$1,280 recognized during the first quarter of 1997. Excluding these charges,
operating expenses in the current year would have been 34.9 percent of revenues,
or $22,567. This represents a decrease of $5,141, or 18.6 percent, compared to
operating expenses of $27,708 in 1996. Engineering and development expenses
decreased by $1,381, or 12.1 percent, to $10,006 during 1997. Selling and
marketing expenses decreased by $3,463, or 30.4 percent, to $7,918 for the
current year. These reductions were primarily the result of the Company's
reduction of investment in product areas outside of the Company's core focus in
fibre channel, printer server and wide area networking markets. General and
administrative expenses decreased by $297, or 6.0 percent, to $4,643 in 1997
primarily due to reduced staffing levels.
Fiscal 1996 versus Fiscal 1995
During 1996, operating expenses decreased $1,693, or 5.8 percent, from the
levels recorded a year earlier. However, due to lower net revenues in 1996 when
compared to 1995, operating expenses as a percent of net revenues increased to
53.9 percent in 1996 from 39.0 percent in 1995. The results for 1995 include
$785 for the write-off of the remaining goodwill associated with the 1992
acquisition of InterConnections, Inc. Without this write-off, operating expenses
in 1995 were 37.9 percent of net revenues. Engineering and development expenses
increased in 1996 by $713, or 6.7 percent, compared to 1995. Engineering and
development expenses were 22.2 percent of net revenues in 1996 compared to 14.2
percent in 1995. Selling and marketing expenses decreased by $789, or 6.5
percent, mainly due to lower commissions and related expenses. Selling and
marketing expenses were 22.1 percent of net revenues in 1996 compared to 16.1
percent in the prior year. General and administrative expenses in 1996 decreased
by $495, or 9.1 percent, compared to the preceding year, primarily as a result
of reduced staffing levels. General and administrative expenses were 9.6 percent
of net revenues in 1996 compared to 7.2 percent in the prior year. There was no
goodwill amortization in the current year compared to $337 in the prior year.
The decrease in goodwill amortization was due to the 1995 write-off of goodwill
mentioned earlier in this paragraph.
16
18
NONOPERATING INCOME
Fiscal 1997 versus Fiscal 1996
Nonoperating income, which consists primarily of interest income, interest
expense and foreign exchange translation, decreased by $412 to $71 in 1997,
compared to $483 in 1996. 1997 included $238 of interest income associated with
prior years' tax returns and 1996 included a $312 gain on the sale of a building
at the Company's production facility in Puerto Rico. Excluding these
nonrecurring items, nonoperating income decreased by $338, primarily from
reduced interest income and an increase in interest expense due to the Company's
financing activities during the current year.
Fiscal 1996 versus Fiscal 1995
Nonoperating income was $483 in 1996, decreasing by $637, or 56.9 percent, from
the $1,120 recorded in 1995. Net interest income in 1996 decreased by $832, or
80.2 percent, from the 1995 level of $1,037, primarily due to $538 of 1995
interest income related to a tax refund and lower levels of interest-bearing
deposits during 1996. The $312 gain in 1996 resulted from the sale of a building
at the Company's production facility in Puerto Rico.
INCOME TAXES
The Company recorded a tax benefit of $506 in 1997 compared to a benefit of
$1,137 in 1996. The benefit in the current year included a $612 tax recovery
from a tax sharing agreement with QLogic, the Company's former subsidiary (see
note 2 to the Consolidated Financial Statements), compared to a $750 tax
recovery, also related to the tax sharing agreement with QLogic, in the prior
year. The Company has both local Puerto Rico and federal tax exemption credits,
and had $36,582 and $8,851 of net operating loss carryforwards for federal and
state income tax purposes, respectively, at June 29, 1997, which are available
to offset future federal and state taxable income through 2012 and 2002,
respectively. Additionally, the Company had $2,494 of business credit
carryforwards, available through 2011, and $1,865 of alternative minimum tax
credit carryforwards available over an indefinite period to further reduce
future federal income taxes. The Company also has $1,480 of research and
experimentation credit carryforwards for state purposes available through 2012.
The Company's current Puerto Rico tax exemption grants for property and
municipal license tax and for income and tollgate tax expire at the end of
calendar years 1997 and 1999, respectively. Although there can be no assurance,
the Company is currently negotiating with the Puerto Rican government to extend
these exemption grants through 2007. The Company believes it will negotiate a
renewal of these exemption grants with terms and conditions which are not
materially different from the Company's current exemption grants. However, if
the Company is unable to obtain a renewal of these exemption grants or if the
terms and conditions are materially different, the Company's business, results
of operations, financial condition and/or liquidity would be materially
adversely affected.
The Company is currently undergoing an examination by the California Franchise
Tax Board for the Company's California income tax returns for years 1989, 1990
and 1991. In the opinion of management, this examination will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("Statement") 128, "Earnings Per
Share". Statement 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in financial statements by simplifying
the existing computational guidelines, revising the disclosure requirements and
increasing the comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (a) eliminating the
presentation of primary EPS and replacing it with basic EPS, with the principal
difference being that the common stock equivalents are not considered in
computing basic EPS, (b) eliminating the modified treasury stock method and the
three percent materiality provision, and (c) revising the contingent share
provisions and the supplemental EPS data requirements. Statement 128 also makes
a number of changes to existing disclosure requirements. Statement 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company has not yet determined the impact
of the implementation of Statement 128.
17
19
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income".
The new statement is effective for both interim and annual periods beginning
after December 15, 1997. The Company has not yet determined the impact of
adopting this new standard on the consolidated financial statements.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments of an
Enterprise and Related Information". The new statement is effective for fiscal
years beginning after December 15, 1997. The Company has not yet determined the
impact of adopting this new standard on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $1,151 during 1997 to $484.
Operating activities, which include changes in working capital balances,
provided $532 of cash and cash equivalents in 1997 compared to using $7,839 of
cash and cash equivalents in the prior year. Investing activities, which were
limited to the acquisition and disposition of property, plant and equipment,
used $2,099 of cash and cash equivalents in the current year compared to using
$1,157 in 1996. Net financing activities, which were limited to payments under
capital lease obligations and proceeds from the exercise of employee stock
options, provided $416 of cash and cash equivalents during 1997 compared to
providing $397 of cash and cash equivalents in the prior year.
Discontinued operations used $74 of cash in 1996.
In addition to its cash balances, the Company had a line of credit of up to
$7,000 with Silicon Valley Bank which has been recently expanded to $10,000. The
Company utilized the line of credit for a substantial portion of 1997. However,
there were no borrowings outstanding under this line at June 29, 1997 or June
30, 1996. Under the terms of the line of credit, the Company has granted Silicon
Valley Bank a security interest in its accounts receivable, inventories,
equipment and other property. The line of credit with Silicon Valley Bank
requires the Company to satisfy certain financial and other covenants and
conditions, including prescribed levels of tangible net worth, profitability and
liquidity. In the event the Company fails to comply with any financial or other
covenant in its loan agreement with Silicon Valley Bank, the line of credit
could become unavailable to the Company. In addition, after borrowings have been
made under the line of credit, a failure to continue to satisfy such covenants
would constitute an event of default, giving rise to the various remedies
available to a secured lender. There can be no assurance that the Company will
continue to satisfy the financial and other covenants and conditions of the line
of credit or that the line of credit will continue to be available to meet the
Company's liquidity requirements. The Company anticipates that borrowings under
the line of credit will be required periodically during the next twelve months.
The Company's line of credit with Silicon Valley Bank, which is renewed
periodically in the normal course of business, was scheduled to expire in
September 1997. The Company recently completed negotiations with Silicon Valley
Bank to extend its existing line of credit to September 1998 and expand it to
$10,000. A failure to renew this line of credit in the future would adversely
affect the Company's ability to meet its financial obligations and liquidity
requirements.
The Company believes that its existing cash balances, facilities and equipment
leases, anticipated cash flows from operating activities and available
borrowings under its line of credit will be sufficient to support its working
capital needs and capital expenditure requirements for the next twelve months.
However, the Company has experienced reductions in revenue levels, significant
losses from operations during several quarters of the last two years and large
fluctuations in the timing of significant customer orders on a quarterly basis.
The Company's ability to meet its future liquidity requirements is dependent
upon its ability to operate profitably or, in the absence thereof, to draw on
its line of credit and to arrange additional financing. If the Company were to
continue to experience losses at the rate experienced in 1996 and the first
quarter of 1997, additional debt or equity financing would be required within
three to nine months. There can be no assurances that revenues will remain at
current levels or return to the levels experienced in prior years or that the
Company would be profitable at such revenue levels. In addition, there can be no
assurances that the Company may not be required to utilize its line of credit
even during profitable periods for various reasons including, but not limited
to, the timing of component purchases and/or customer orders and shipments.
Furthermore, there can be no assurances that future requirements to fund
operations will not require the Company to draw on its line of credit again or
seek additional financing, or that such line of credit or additional financing
will be available on terms favorable to the Company and its stockholders, or at
all.
18
20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is included herein as part of Item 14(a)
of Part IV of this annual report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1997 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 29, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive and certain other officers of the Company or its principal
operating subsidiary are as follows:
Name Position Age
- ---- -------- ---
Paul F. Folino President and Chief Executive Officer and Director 52
Michael A. Peitler (1) Sr. Vice President, Worldwide Sales 55
Charles N. Goff (1) Vice President, Manufacturing 63
Teresa W. Blackledge (1) Vice President, Marketing 42
Sadie A. Herrera (1) Vice President, Human Resources 48
Ronald P. Quagliara (1) Vice President, Research and Development 48
Michael J. Rockenbach Vice President, Finance, Acting Chief Financial Officer 36
and Secretary
- -----------
(1) These persons serve in the indicated capacities as officers of the
Registrant's principal operating subsidiary; they are not officers of the
Registrant.
- ------------
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. Peitler joined the Company in September 1993 as vice president, sales, and
was promoted to senior vice president, sales in September 1994. Mr. Peitler had
been senior vice president of sales at Thomas-Conrad Corporation, a local area
networking products manufacturer, since September 1991. From February 1988 to
June 1990, he was president and managing director of Datapoint Canada, Inc., a
manufacturer of networking products.
Ms. Blackledge joined the Company in May 1991 as marketing manager and was
promoted to vice president, marketing in September, 1994. From July 1982 to
April 1991, Ms. Blackledge held a variety of marketing, planning and research
positions with the Digital Communications Division of Rockwell International.
Mr. Goff joined the Company in 1985 as manager, warehouse operations and after
holding several operations management positions was promoted to vice president,
manufacturing in September 1994. Mr. Goff worked for Printronix, a manufacturer
of high speed dot-matrix printers, for over 10 years prior to joining the
Company.
Ms. Herrera joined the Company in 1988 as benefits administrator and was
promoted to vice president, human resources in May 1995. At the time of her
promotion, Ms. Herrera was senior director, human resources. Ms. Herrera had
over 15 years of human resource management experience with the Remex Division of
Ex-Cell- O/Textron Corporation and other companies prior to joining the Company.
19
21
Mr. Quagliara joined the Company in March 1995 as vice president, research and
development. Prior to joining the Company, Mr. Quagliara spent five years with
Ascom Timeplex, Inc., a manufacturer of router bridges and other networking
equipment. Most recently he was vice president and general manager of Acsom's
LAN Interworking Business Unit.
Mr. Rockenbach joined the Company in 1991 and has served as the Company's vice
president, finance and acting chief financial officer since late 1996. From 1991
to 1996, Mr. Rockenbach served in senior finance and accounting positions with
the Company. From 1987 until joining the Company, Mr. Rockenbach served in
various manufacturing finance and financial planning positions at Western
Digital Corporation. Most recently he was manager of financial planning for the
microcomputer products division.
None of the executive officers of the parent Company or officers of its
principal operating subsidiary has any family relationship with any other
executive officer of the Company, other officer of its principal operating
subsidiary or director of the Company.
Item 11. EXECUTIVE COMPENSATION.
There is incorporated herein by reference the information required by this Item
in the Company's definitive proxy statement for the 1997 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 29, 1997.
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 1997 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 29, 1997.
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 1997 Annual Meeting of
Stockholders which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended June 29, 1997.
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 on 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 on the accompanying
Index to Consolidated Financial Statements and Schedule is
filed as part of this report.
3. Exhibits
The exhibits listed on 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.
20
22
EMULEX CORPORATION AND SUBSIDIARIES
Annual Report -- Form 10-K
Items 8, 14(a)(1) and 14(a)(2)
Indexto Consolidated Financial Statements and
Schedule June 29, 1997, June 30, 1996 and July 2, 1995
(With Independent Auditors' Report Thereon)
Consolidated Financial Statements Page Number
- --------------------------------- -----------
Independent Auditors' Report.......................................................... 22
Consolidated Balance Sheets-- June 29, 1997 and June 30, 1996......................... 23
Consolidated Statements of Operations--Years ended June 29, 1997,
June 30, 1996 and July 2, 1995...................................................... 24
Consolidated Statements of Stockholders' Equity--Years ended
June 29, 1997, June 30, 1996 and July 2, 1995....................................... 25
Consolidated Statements of Cash Flows--Years ended
June 29, 1997, June 30, 1996 and July 2, 1995....................................... 26
Notes to Consolidated Financial Statements............................................ 27
Schedule
- --------
Schedule II - Valuation and Qualifying Accounts and Reserves......................... 41
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.
21
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Emulex Corporation:
We have audited the consolidated financial statements of Emulex Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emulex Corporation
and subsidiaries as of June 29, 1997 and June 30, 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 29, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Orange County, California
August 12, 1997
22
24
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 29, 1997 and June 30, 1996
(in thousands, except share data)
1997 1996
------- -------
Assets (note 5)
Current assets:
Cash and cash equivalents .............................................. $ 484 $ 1,635
Accounts and notes receivable, less allowance for
doubtful accounts of $496 in 1997 and $482 in 1996 .................. 14,785 12,993
Inventories, net (note 3) ............................................. 12,713 14,671
Prepaid expenses ....................................................... 1,066 1,892
Income taxes receivable (note 4) ....................................... 280 388
------- -------
Total current assets ............................................... 29,328 31,579
Property, plant and equipment, net (notes 3 and 9) .......................... 6,961 7,533
Prepaid expenses and other assets ........................................... 886 188
------- -------
$37,175 $39,300
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capitalized lease obligations (note 9) ......... $ 125 $ 261
Accounts payable ....................................................... 4,294 8,699
Accrued liabilities (note 3) ........................................... 6,120 5,846
Deferred income taxes (note 4) ......................................... 320 688
------- -------
Total current liabilities .......................................... 10,859 15,494
Capitalized lease obligations, excluding
current installments (note 9) .......................................... 79 204
Deferred revenue ............................................................ 6 --
Deferred income taxes (note 4) ............................................. 1,955 1,572
------- -------
12,899 17,270
------- -------
Commitments and contingencies (note 9)
Stockholders' equity (note 11):
Preferred stock, $.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, $.20 par value; 20,000,000 shares
authorized; 6,100,546 and 5,993,403 issued and
outstanding in 1997 and 1996, respectively ......................... 1,220 1,199
Additional paid-in capital ............................................. 7,283 6,627
Retained earnings ...................................................... 15,773 14,204
------- -------
Total stockholders' equity .................................................. 24,276 22,030
------- -------
$37,175 $39,300
======= =======
See accompanying notes to consolidated financial statements.
23
25
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 29, 1997, June 30, 1996 and July 2, 1995
(in thousands, except per share data)
1997 1996 1995
-------- -------- --------
Net revenues (note 8) ................... $ 64,763 $ 51,338 $ 75,475
Cost of sales ........................... 39,924 34,538 44,412
-------- -------- --------
Gross profit ........................ 24,839 16,800 31,063
Operating expenses:
Engineering and development ......... 10,006 11,387 10,674
Selling and marketing ............... 7,918 11,381 12,170
General and administrative .......... 4,643 4,940 5,435
Amortization of goodwill ............ -- -- 337
Impairment of goodwill .............. -- -- 785
Consolidation charges (note 1) ...... 1,280 -- --
-------- -------- --------
Total operating expenses ........ 23,847 27,708 29,401
-------- -------- --------
Operating income (loss) ......... 992 (10,908) 1,662
Nonoperating income (note 6) ............ 71 483 1,120
-------- -------- --------
Income (loss) before income taxes 1,063 (10,425) 2,782
Income tax benefit (note 4) ............. (506) (1,137) (1,156)
-------- -------- --------
Net income (loss) ................... $ 1,569 $ (9,288) $ 3,938
======== ======== ========
Net income (loss) per common and
common equivalent share ............. $ 0.25 $ (1.56) $ 0.64
======== ======== ========
Weighted average number of common
and common equivalent shares ........ 6,295 5,936 6,172
======== ======== ========
See accompanying notes to consolidated financial statements.
24
26
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Equity Years ended June 29, 1997, June 30, 1996 and July 2, 1995
(in thousands, except share data)
Common Stock Additional Total
--------------------- Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- --------- --------- ---------
Balance at July 3, 1994 .............. 5,578,461 $ 1,116 $ 4,889 $ 19,554 $ 25,559
Exercise of stock options (note 11) 282,462 56 1,125 -- 1,181
Net income ........................ -- -- -- 3,938 3,938
--------- --------- --------- --------- ---------
Balance at July 2, 1995 .............. 5,860,923 1,172 6,014 23,492 30,678
Exercise of stock options (note 11) 132,480 27 613 -- 640
Net loss .......................... -- -- -- (9,288) (9,288)
--------- --------- --------- --------- ---------
Balance at June 30, 1996 ............. 5,993,403 1,199 6,627 14,204 22,030
Exercise of stock options (note 11) 107,143 21 656 -- 677
Net income ........................ -- -- -- 1,569 1,569
--------- --------- --------- --------- ---------
Balance at June 29, 1997 .............. 6,100,546 $ 1,220 $ 7,283 $ 15,773 $ 24,276
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
25
27
EMULEX CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 29, 1997, June 30, 1996 and July 2, 1995
(in thousands)
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $ 1,569 $ (9,288) $ 3,938
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and goodwill impairment 2,616 2,412 4,619
Loss (gain) on disposal of property, plant and equipment 55 (125) 109
Provision for doubtful accounts 131 125 64
Changes in assets and liabilities:
Accounts receivable (1,923) (222) (3,204)
Inventories 1,958 (410) (5,323)
Income taxes receivable 108 (38) (113)
Accounts payable (4,405) 328 5,356
Accrued liabilities 274 564 (151)
Deferred income taxes 15 (389) 584
Deferred revenue 6 -- (1)
Prepaid expenses 138 (693) (750)
Other assets (10) (103) 283
-------- -------- --------
Net cash provided by (used in) operating activities 532 (7,839) 5,411
-------- -------- --------
Cash flows from investing activities:
Net proceeds from sale of property, plant and equipment 62 1,032 8
Additions to property, plant and equipment (2,161) (2,189) (2,353)
-------- -------- --------
Net cash used in investing activities (2,099) (1,157) (2,345)
-------- -------- --------
Cash flows from financing activities:
Principal payments under capital leases (261) (243) (261)
Proceeds from issuance of common stock 677 640 1,181
-------- -------- --------
Net cash provided by financing activities 416 397 920
-------- -------- --------
Net cash provided by (used in) continuing operations (1,151) (8,599) 3,986
Net cash used in discontinued operations -- (74) (450)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,151) (8,673) 3,536
Cash and cash equivalents at beginning of year 1,635 10,308 6,772
-------- -------- --------
Cash and cash equivalents at end of year $ 484 $ 1,635 $ 10,308
======== ======== ========
Supplemental disclosures:
Cash paid during the year (related to continuing and discontinued operations)
for:
Interest $ 184 $ 33 $ 28
Income taxes 53 141 8
Capital lease obligations of $212 were incurred in 1996, when the Company
entered into a lease for new equipment. There were no capital lease obligations
in 1997 or 1995.
See accompanying notes to consolidated financial statements.
26
28
EMULEX CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial
Statements June 29, 1997, June 30, 1996 and July 2, 1995
(in thousands, except share data)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Emulex
Corporation, a Delaware corporation, and its wholly-owned subsidiaries
(collectively, the "Company" or "Emulex"). All significant intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company's fiscal year ends on the Sunday nearest June 30. Fiscal
years 1997, 1996 and 1995 each comprised 52 weeks.
Reverse Stock Split
On February 24, 1994, the Board of Directors of the Company declared a
one-for-two reverse split of the Company's common stock to stockholders
of record on February 25, 1994. Par value of the common stock increased
from $0.10 to $0.20 per share. Accordingly, all references to share and
per share data have been retroactively restated to reflect this
one-for-two reverse stock split.
Consolidation Charges
During the first quarter of fiscal 1997, the Company initiated a
consolidation of its operations to reduce its ongoing expense base and
focus its activities in the fibre channel, printer server and wide area
networking markets. Emulex's remote access and host software business,
previously headquarted out of a Bellevue, Washington facility, have
been relocated to Emulex headquarters in Costa Mesa, California. In
addition, the Company has downsized its Pacific Rim sales organization
and also made selected reductions at its manufacturing plant in Dorado,
Puerto Rico and at its corporate headquarters. The Company recognized
consolidation charges of $1,280 in fiscal 1997.
The charges related to this consolidation of operations consisted of
approximately $806 for severance and related charges, $236 for office
rent and related charges, $65 for write-off of fixed assets and $173 of
other charges relating primarily to the transition of product support
to Costa Mesa, California. Total headcount worldwide was reduced by
approximately 36 employees. As of June 29, 1997, the 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 6).
27
29
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Equivalents
At June 29, 1997, no money market fund investments were included in
cash and cash equivalents of $484. At June 30, 1996, $367 of money
market fund investments were included in cash and cash equivalents. All
highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, and depreciation and
amortization are provided on the straight-line method over estimated
useful lives of two to thirty years.
Intangible Assets
Intangible assets are stated at the lower of cost or net realizable
value, less accumulated amortization. Amortization is provided on a
straight-line basis over the estimated useful lives of the assets and
totaled $2,588 for the year ended July 2, 1995. Intangible assets
consisted of goodwill (discussed below), capitalized software
development costs (discussed below) and license fees.
Goodwill
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized over the periods expected to be
benefited. In 1995, the Company adopted Statement of Financial
Accounting Standards No. ("Statement") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". Under the provisions of Statement 121, the recoverability
of goodwill is assessed by determining whether the amortization of
goodwill over its remaining life can be recovered through projected
undiscounted future operating cash flows. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows. Prior to the adoption of Statement 121, the
Company had used a similar approach for assessing the recoverability of
goodwill based on net income.
In October 1991, the Company recorded goodwill related to the
acquisition of InterConnections, Inc. in the amount of $3,599 assuming
a useful life of six years. During the quarter ended December 26, 1993,
the Company completed a forecast of its operations, including its
InterConnections, Inc. subsidiary. The forecast indicated that the
expected future financial results no longer supported full
recoverability of the unamortized goodwill and that a partial
impairment of the asset had resulted. The amount of the impairment was
determined to be $1,001, and was recognized as a charge to partially
write down the remaining unamortized goodwill balance in the quarter
ended December 26, 1993. Remaining unamortized goodwill related to the
acquisition of InterConnections at July 3, 1994 was $1,122.
In the fourth quarter of 1995, as the result of weak sales and changes
in the marketplace, the Company decided to discontinue the product line
that was the basis for the remaining goodwill at InterConnections, Inc.
With no future product revenues, a review of the expected future cash
flows from the product line, undiscounted and without interest charges,
indicated that the remaining unamortized goodwill was fully impaired. A
charge of $785 to operating expenses was recorded in the fourth quarter
of 1995 to write off the remaining unamortized goodwill from the
InterConnections, Inc.
acquisition.
28
30
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Software Development Costs
Capitalized software development costs consist of costs to purchase
software and to develop software internally. Capitalization of
internally developed software begins upon the establishment of
technological feasibility. 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. No software development costs were
capitalized in 1997, 1996 or 1995.
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. The Company's capitalized software
development costs were primarily associated with the InterConnections,
Inc. product line discussed above in Goodwill. As a result of the
Company's decision to discontinue this product line, there will be no
future product revenue stream to support the capitalized software
development costs. Accordingly, in the fourth quarter of 1995, the
Company recorded a charge of $685 to cost of sales to write off all
remaining capitalized software development costs.
Software Revenue Recognition
The Company recognizes revenue from licenses of networking software
upon delivery and acceptance of the product. Revenue from sales of
post-contract customer support ("PCS") agreements is recognized at the
time of sale, with a reserve maintained equivalent to the cost of
providing the related services, as the estimated cost of providing PCS
during the initial period of the PCS arrangement is insignificant.
Distributor Revenue Recognition
The Company has agreements with certain of its distributors and Master
Value Added Resellers ("VARs") to provide price protection and stock
rotation privileges with respect to inventories which the distributors
may have on hand when the Company's published list prices are reduced
and/or when items are slow moving. These agreements may be terminated
upon written notice by either party. Pursuant to the Company's
contractual obligations under these agreements, or in the event of
termination, the Company may be obligated to issue credits to provide
price protection and/or to repurchase a certain portion of a
distributor's or VAR's inventory. The Company recognizes revenue at the
time of shipment and records a reserve for price protection and
inventory repurchase.
Net Income (Loss) per Share
Net income (loss) per common and common equivalent share was computed
based on the weighted average number of common and common equivalent
shares outstanding during the years presented. Primary and fully
diluted net income (loss) per share are approximately the same. The
Company has granted certain stock options (see note 11) which have been
treated as common share equivalents, except in those periods where such
inclusion would be antidilutive.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board ("FASB")
issued Statement 107, "Disclosures about Fair Value of Financial
Instruments". Statement 107 requires all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to
estimate fair value. Statement 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties. As of June 29, 1997, the
fair value of all financial instruments approximated carrying value.
29
31
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting for Stock Options
Prior to July 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On July 1, 1996, the
Company adopted Statement 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, Statement 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma net income per share disclosures for employee
stock option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in Statement 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of Statement
123.
Use of Estimates
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
Income Taxes
The Company accounts for income taxes pursuant to Statement 109,
"Accounting for Income Taxes". Statement 109 uses the asset and
liability method of accounting for income taxes, which recognizes
deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
Recent Accounting Pronouncements
In February 1997, the FASB issued Statement 128, "Earnings Per Share".
Statement 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on
an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS
and replacing it with basic EPS, with the principal difference being
that the common stock equivalents are not considered in computing basic
EPS, (b) eliminating the modified treasury stock method and the three
percent materiality provision, and (c) revising the contingent share
provisions and the supplemental EPS data requirements. Statement 128
also makes a number of changes to existing disclosure requirements.
Statement 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. The Company
has not yet determined the impact of the implementation of Statement
128.
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income". The new statement is effective for both interim and annual
periods beginning after December 15, 1997. The Company has not yet
determined the impact of adopting this new standard on the consolidated
financial statements.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments
of an Enterprise and Related Information". The new statement is
effective for fiscal years beginning after December 15, 1997. The
Company has not yet determined the impact of adopting this new standard
on the consolidated financial statements.
30
32
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 DISTRIBUTION OF QLOGIC CORPORATION
At a special meeting of stockholders of the Company held on February
24, 1994, the stockholders voted on a single, unified proposal which in
part provided for the distribution (the "Distribution") to
stockholders, on a share-for-share basis, of all outstanding shares of
common stock of QLogic Corporation, then a wholly-owned subsidiary of
the Company. 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. In
addition, on February 25, 1994, the Securities and Exchange Commission
declared the Registration Statement on Form 10 of QLogic Corporation
effective, and trading commenced under the symbol QLGC on the Nasdaq
National Market.
NOTE 3 BALANCE SHEET DETAIL
Components of inventories are as follows:
1997 1996
-------- ---------
Raw materials................................................... $ 7,932 $ 8,074
Work-in-process................................................. 2,012 1,844
Finished goods.................................................. 2,769 4,753
-------- --------
$ 12,713 $ 14,671
======== ========
Components of property, plant and equipment, net, are as follows:
1997 1996
--------- --------
Land............................................................ $ 531 $ 531
Buildings....................................................... 2,123 2,114
Production and test equipment................................... 13,461 13,375
Furniture and fixtures.......................................... 4,079 3,861
Leasehold improvements.......................................... 405 401
Other equipment................................................. 492 492
--------- --------
21,091 20,774
Less accumulated depreciation and amortization.................. (14,130) (13,241)
--------- --------
$ 6,961 $ 7,533
========= =========
Components of accrued liabilities are as follows:
1997 1996
--------- --------
Payroll and related costs....................................... $ 2,082 $ 1,896
Warranty and related reserves................................... 797 883
Royalties....................................................... 312 824
Deferred revenue................................................ 1,155 -
Other........................................................... 1,774 2,243
-------- --------
$ 6,120 $ 5,846
======== =========
31
33
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 INCOME TAXES
The components of income tax benefit are as follows:
1997 1996 1995
-------- -------- -------
Federal:
Current .............................................. $ (506) $ (753) $(1,174)
Deferred ............................................. -- (387) 105
State:
Current .............................................. -- -- --
Deferred ............................................. -- -- (105)
Foreign and Puerto Rico:
Current .............................................. -- 3 18
Deferred ............................................. -- -- --
------- ------- -------
$ (506) $(1,137) $(1,156)
======= ======= =======
Income (loss) before income taxes consists of the following:
1997 1996 1995
-------- --------- --------
* Domestic .............................................. $ 713 $(10,010) $ 2,388
Foreign ............................................... 350 (415) 394
-------- -------- --------
Total............................................. $ 1,063 $(10,425) $ 2,782
======== ======== ========
*Domestic income includes the Company's Puerto Rico and Virgin Islands
operations.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented
below:
1997 1996
-------- --------
Deferred tax assets:
Reserves not currently deductible .......... $ 690 $ 825
Provisions for discontinued operations ..... 48 116
Net operating loss carryforwards ........... 13,398 13,357
Business credit carryforwards .............. 3,240 2,618
Alternative minimum tax credit carryforwards 1,865 1,865
-------- --------
Total gross deferred tax assets ......... 19,241 18,781
Less valuation allowance ................ (17,397) (16,644)
-------- --------
Net deferred tax assets ................. 1,844 2,137
-------- --------
Deferred tax liabilities:
Capitalization of inventory costs .......... 258 258
Various state taxes ........................ 591 524
Accelerated depreciation ................... (214) 117
Taxes provided on Emulex Caribe, Inc. ......
undistributed income ..................... 1,286 1,286
Other ...................................... 2,198 2,212
-------- --------
Total gross deferred tax liabilities .... 4,119 4,397
-------- --------
Net deferred tax liabilities ............ $ 2,275 $ 2,260
======== ========
32
34
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the Company's historical pre-tax results of operations,
management believes it is more likely than not that the Company will
realize the benefit of the existing net deferred tax assets as of June
29, 1997. Management believes the existing net deductible temporary
differences will reverse during periods in which the Company generates
net taxable income; however, there can be no assurance that the Company
will generate any earnings or any specific level of continuing earnings
in future years. Certain tax planning or other strategies could be
implemented, if necessary, to supplement earnings from operations to
fully realize recorded tax benefits.
Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of June 29, 1997 will be allocated
as follows:
Income tax benefit that would be reported in the
consolidated statements of operations......................... $15,224
Additional paid-in capital...................................... 2,173
-------
$17,397
=======
Income tax expense realized from discontinued operations was $29 for
1997, and $0 for 1996 and 1995.
The effective income tax benefit on pretax income (loss) differs from
expected federal income tax for the following reasons:
1997 1996 1995
------- -------- -------
Expected income tax at 34 percent .................. $ 361 $(3,545) $ 946
State income tax, net of federal tax benefit ....... 38 (285) 135
Net increase (decrease) in tax as a result of Emulex
Caribe, Inc. and foreign income taxed at
a rate different from U.S. statutory rate ....... (175) 1,216 (972)
Puerto Rican tollgate taxes provided for
current year income ............................. -- -- 168
Amortization and impairment of goodwill ............ -- -- 449
Change in beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income taxes ....................... 267 2,554 (439)
Refund from Internal Revenue Service ............... -- -- (1,581)
Recovery from QLogic Corporation pursuant
to tax sharing agreement ........................ (612) (750) --
Other, net ......................................... (385) (327) 138
------- ------- -------
$ (506) $(1,137) $(1,156)
======= ======= =======
During the years ended June 29, 1997 and June 30, 1996, the Company
received an income tax benefit in the amount of $612 and $750,
respectively, related to recoveries under a tax sharing agreement with
QLogic Corporation, a former subsidiary of the Company (see note 2).
During the year ended July 2, 1995, the Company received a federal
income tax refund of $1,581 pertaining to prior years.
At June 29, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of $36,582 which are available to offset
future federal taxable income through 2012 and $8,851 for state
purposes available through 2002. The Company has both local Puerto Rico
and Internal Revenue Code Section 936 tax exemption credits and also
has business credit carryforwards for federal purposes of approximately
$2,494 which are available to reduce federal income taxes through 2011.
In addition, the
33
35
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company has alternative minimum tax credit carryforwards of
approximately $1,865 which are available to reduce future federal
regular income taxes over an indefinite period. Additionally, the
Company has approximately $1,480 of research and experimentation credit
carryforwards for state purposes available through 2012.
The Company's current Puerto Rico tax exemption grants for property and
municipal license tax and for income and tollgate tax expire at the end
of calendar years 1997 and 1999, respectively. The Company is currently
negotiating with the Puerto Rican government to extend these exemption
grants through 2007. The Company believes it will negotiate a renewal
of these exemption grants with terms and conditions which are not
materially different from the Company's current exemption grants.
However, if the Company is unable to obtain a renewal of these
exemption grants or if the terms and conditions are materially
different, the Company's business, results of operations, financial
condition and/or liquidity would be materially and adversely affected.
The Company is currently undergoing an examination by the California
Franchise Tax Board for the Company's California income tax returns for
years 1991, 1990 and 1989. In the opinion of management, this
examination will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
NOTE 5 LINE OF CREDIT
The Company had a $7,000 bank line of credit with Silicon Valley Bank
that was to have expired in September 1997. In September 1997, the
Company expanded this line of credit to $10,000, and extended it one
year to expire in September 1998. The agreement allows the Company to
borrow at the bank's prime rate (8.5 percent at June 29, 1997) plus one
half percent. During 1997, the Company utilized this line of credit.
However, there were no borrowings outstanding under this line at June
29, 1997 or June 30, 1996. The bank line of credit is secured by
substantially all assets and requires the Company to satisfy certain
financial and other covenants and conditions, including prescribed
levels of tangible net worth, profitability and liquidity, and
prohibits, among other things, the payment of cash dividends. At June
29, 1997, the Company was in compliance with all such covenants.
NOTE 6 NONOPERATING INCOME
Nonoperating income, net, is as follows:
1997 1996 1995
-------- ------- -------
Interest income ............................................................ $ 267 $ 248 $ 1,055
Interest expense ........................................................... (185) (43) (18)
Foreign exchange ........................................................... -- (34) 51
Gain on sale of building ................................................... -- 312 --
Other ...................................................................... (11) -- 32
------- ------- -------
$ 71 $ 483 $ 1,120
======= ======= =======
NOTE 7 EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has a pretax savings and profit sharing plan under Section
401(k) of the Internal Revenue Code for substantially all domestic
employees. Under the plan, eligible employees are able to contribute up
to 12 percent of their compensation not to exceed the maximum IRS
deferral amount. Company discretionary contributions match up to 3
percent of a participant's compensation. The Company's contributions
under this plan were $271, $287 and $272 in 1997, 1996 and 1995,
respectively.
The Company has a similar plan for all employees in the Company's
Puerto Rico facility under Section 165(e) of the Internal Revenue Code.
Under the plan, eligible employees are able to contribute up to 10
percent of their compensation not to exceed the maximum IRS deferral
amount. Company discretionary
34
36
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contributions match up to 3 percent of a participant's compensation.
The Company's contributions under this plan were $86, $88 and $88 for
1997, 1996 and 1995, respectively.
NOTE 8 EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
The Company designs, manufactures and markets three major distinct
product families: high-speed fibre channel products, printer servers
and network access servers. The Company markets these products through
distributors, resellers and to OEMs. The Company's export revenues were
approximately $29,330, $20,700 and $35,200 representing 45, 40 and 47
percent of net revenues for 1997, 1996 and 1995, respectively. The
majority of export shipments are to the European marketplace.
In 1997, Reuters and Sequent Computer Systems represented 13 and 10
percent of net revenues, respectively. Furthermore, the Company's top
five customers accounted for 44 percent of net revenues in 1997. In
1996, IBM Corporation represented 15 percent of net revenues. In 1995,
Reuters and Xerox represented 16 and 13 percent of net revenues,
respectively. The Company derived approximately 64, 39 and 53 percent
of its net revenues from sales to OEMs in 1997, 1996 and 1995,
respectively. Emulex's operating results could be adversely affected if
sales to one or more such customers significantly decline, or if any
one of these customers develop alternative sources for the Company's
products.
NOTE 9 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and equipment under long-term
noncancelable operating lease agreements which expire at various dates
through 2000. Rent expense for the Company under operating leases,
including month-to-month rentals, totaled $1,200, $1,178 and $1,189 in
1997, 1996 and 1995, respectively.
Future minimum noncancelable lease commitments are as follows:
Capitalized Operating
Leases Leases
----------- ---------
Fiscal year:
1998 ...................................... $ 140 $ 796
1999 ...................................... 84 580
2000 ...................................... 7 143
------ ------
Total minimum lease payments .............. 231 $1,519
======
Less amounts representing interest ........ 27
------
Present value of future minimum capitalized
lease obligations ...................... 204
Less current installments of capitalized
lease obligations ...................... 125
------
Capitalized lease obligations, excluding
current installments ................... $ 79
======
In January 1994, in anticipation of the Distribution, the Company
agreed to assign its lease on a 70,000 square foot facility in Costa
Mesa, California to QLogic Corporation. In consideration to the lessor,
the Company has agreed to guaranty satisfaction of all obligations and
responsibilities of QLogic Corporation to the lessor under the terms
and conditions of the lease should QLogic Corporation default on said
terms and conditions during the term of the lease, which terminates on
October 31, 1999. In the event of a default by QLogic Corporation, the
Company reserves the right to seek reimbursement from QLogic
Corporation for any and all expenses the Company incurs due to the
default.
35
37
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 10 QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1997 and 1996 is as follows:
Net Net Net
Revenues Gross Profit Income (loss) Income (loss)*
-------- ------------ ------------- --------------
1997:
Fourth quarter.................. $15,742 $ 6,424 $ 920 $ 0.15
Third quarter................... 17,011 6,999 1,103 0.18
Second quarter.................. 16,058 5,946 487 0.08
First quarter................... 15,952 5,470 (941) (0.16)
------ ------- -----
Total $64,763 $24,839 $1,569
====== ====== =====
1996:
Fourth quarter.................. $15,516 $ 5,225 $ (554) $(0.09)
Third quarter................... 12,702 4,257 (2,337) (0.39)
Second quarter.................. 12,672 4,024 (2,916) (0.49)
First quarter................... 10,448 3,294 (3,481) (0.59)
------ ------- -------
Total........................... $51,338 $16,800 $(9,288)
====== ====== =====
* Per common and common equivalent share
NOTE 11 STOCKHOLDERS' EQUITY
Stock Option Plans
Under the Company's Employee Stock Option Plan (the "Plan"), the
exercise price of options granted will not be less than the fair market
value at the date of grant. The total number of shares of common stock
available for grant under the Plan is 2,580,000. 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.
Under the Company's Non-Employee Director Stock Option Plan (the
"Director Plan"), a maximum of 125,000 shares of common stock of the
Company can be issued. The Director Plan provides that an option to
purchase 12,500 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. 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. Although the
Director Plan expired on December 31, 1996, all existing grants will
continue under the terms and conditions of this plan. The Company is
currently preparing a new Non-Employee Director Stock Option Plan for
the shareholder meeting in November 1997. No shares were granted during
1997, 1996 or 1995.
36
38
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the February 1994 Distribution of shares of common
stock of QLogic Corporation to the Company's stockholders and a
one-for-two reverse stock split, certain adjustments were made to
options outstanding under the Plan and the Director Plan on the date of
the distribution (the "Distribution Date"). Each option which was
outstanding under the Plan on the Distribution Date (a "Converted
Option"), other than options held by the Company's President and Chief
Executive Officer, was converted into two separately exercisable
options: one to purchase the same number of shares of Emulex common
stock which the Converted Option covered as of the Distribution Date,
after adjustment for the reverse stock split (a "New Emulex Option");
and one to purchase that same number of shares of QLogic Corporation
common stock (a "New QLogic Option"). The purchase price per share of
Emulex common stock subject to the New Emulex Option was an amount
which bears the same ratio to the exercise price per share under the
Converted Option (after adjustment for the reverse stock split) that
the fair market value of Emulex common stock after the Distribution
bears to the sum of the fair market value per share of Emulex common
stock after the Distribution plus the fair market value per share of
QLogic common stock after the Distribution. The President and Chief
Executive Officer of the Company held an option to purchase 250,000
shares of Emulex common stock at a price of $6.50 per share under the
Plan. On the Distribution Date, his option was converted into two
separately exercisable options: one to purchase the same number of
shares of Emulex common stock which the Converted Option covered as of
the Distribution Date, after adjustment for the reverse stock split,
and a second option to purchase 25,000 shares of QLogic common stock
after giving effect to the reverse stock split. The purchase price per
share of Emulex common stock and QLogic common stock subject to the
Emulex option and the QLogic option was the fair market value per share
of Emulex common stock and QLogic common stock, respectively, after the
Distribution.
In connection with the Distribution, each option which was outstanding
under the Director Plan on the Distribution Date was converted into a
New Emulex Option and a New QLogic Option in substantially the same
manner that Converted Options held by employees under the Plan were
converted, as described above. Service as a director of either Emulex
or QLogic after the distribution is treated the same as service as a
director of the other for purposes of determining termination and
vesting of exercisability of both new options.
37
39
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of stock option transactions for 1997, 1996 and 1995:
Weighted
Number average exercise
of Shares price per share
--------- ---------------
Options outstanding at July 3, 1994 844,520 $4.48
Granted.......................................... 233,500 13.70
Exercised........................................ (282,462) 4.18
Canceled......................................... (61,614) 5.24
--------
Options outstanding at July 2, 1995 733,944 7.46
Granted.......................................... 284,800 18.53
Exercised........................................ (132,480) 4.82
Canceled......................................... (85,066) 10.46
----------
Options outstanding at June 30, 1996 801,198 11.51
Granted.......................................... 205,750 15.85
Exercised........................................ (107,143) 6.33
Canceled......................................... (161,329) 13.96
-------
Options outstanding at June 29, 1997 738,476 12.94
=======
As of June 29, 1997 and June 30, 1996 the number of options exercisable was
351,058 and 262,564, respectively, and the weighted average exercise price of
those options was $9.66 and $6.67, respectively.
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted Weighted Weighted
average average average
Outstanding exercise remaining Exercisable exercise
as of price per contractual as of price per
Range of Exercise Prices June 29, 1997 option life (years) June 29, 1997 option
- ------------------------ ------------- ---------- ------------ ------------- ---------
$ 3.20 to $ 5.13 177,595 $ 4.15 5.50 170,080 $ 4.15
5.17 to 13.50 191,369 10.30 7.76 88,833 9.28
13.63 to 18.00 187,462 16.02 9.20 14,640 15.01
18.13 to 28.38 182,050 21.10 8.18 77,505 21.20
------- ------- ----- -------- -----
$ 3.20 to $ 28.38 738,476 $ 12.94 7.69 351,058 $ 9.66
======= ======= ===== ======= =======
38
40
EMULEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinon No. 25 and related Interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under Statement 123, the Company's net income (loss) would have
been reduced to the pro forma amounts indicated below:
1997 1996
-------- --------
Net income (loss) as reported .......... $ 1,569 $ (9,288)
Assumed stock compensation cost ........ 882 778
-------- --------
Pro forma net income (loss) ......... $ 687 $(10,066)
======== ========
Net income (loss) per share as reported $ 0.25 $ (1.56)
Pro forma net income (loss) per share $ 0.11 $ (1.70)
======== ========
Pro forma net income (loss) reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under Statement 123 is not reflected in the pro forma net income (loss) amounts
presented above because compensation cost is reflected over the options' vesting
period of four years and compensation cost for options granted prior to July 3,
1995 is not considered.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions for 1997 and
1996, respectively: risk-free interest rates of 6.3 percent and 5.9 percent;
dividend yield of 0.0 percent for 1997 and 1996; expected lives of 4.9 years for
1997 and 1996; and volatility of 66.1 percent for 1997 and 1996. The
weighted-average fair value per option granted in 1997 and 1996 was $8.19 and
$9.24, respectively. The Black-Scholes model, as well as other currently
accepted option valuation models, was developed to estimate the fair value of
freely-tradable, fully-transferable options without vesting restrictions, which
significantly differ from the Company's stock option plans. These models also
require highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated fair value
on the grant date.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan that provides for Preferred Stock
Purchase Rights ("Rights") that attach to and transfer with each share of common
stock. When the Rights become exercisable, each Right entitles the holder to
purchase from the Company one unit consisting of 1/100 of a share of Series A
Junior Participating Preferred Stock for $50 per unit, subject to adjustment.
The Rights become exercisable if (i) a person or group ("Acquiring Person") has
acquired, or obtained the right to acquire, 20 percent or more of the
outstanding shares of common stock, (ii) a person becomes the beneficial owner
of 30 percent or more of the outstanding shares of common stock, (iii) an
Acquiring Person engages in one or more "self-dealing" transactions with the
Company or (iv) an event occurs which results in an Acquiring Person's ownership
interest being increased by more than 1 percent. Upon exercise and payment of
the purchase price for the Rights, the Rights holder (other than an Acquiring
Person) will have the right to receive Company common stock (or, in certain
circumstances, cash, property or other securities of the Company) equal to two
times the purchase price. The Company is entitled to redeem the Rights at any
time prior to the expiration of the Rights in January 1999, or 10 days following
the time that a person has acquired beneficial ownership of 20 percent or more
of the shares of common stock then outstanding. The Company is entitled to
redeem the Rights in whole, but not in part, at a price of $0.01 per Right,
subject to adjustment.
39
41
CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE OF EMULEX CORPORATION AND SUBSIDIARIES
40
42
Schedule II
EMULEX CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended June 29, 1997, June 30, 1996 and July 2, 1995
(in thousands)
Additions
Balance at Charged to Amounts Balance
Beginning Costs and Written at End
Classification of Period Expenses Off of Period
-------------- --------- -------- --- ---------
Year ended June 29, 1997:
Allowance for doubtful accounts $ 482 $ 131 $ 117 $ 496
====== ====== ====== ======
Inventory valuation reserves .. $1,709 $1,249 $1,762 $1,196
====== ====== ====== ======
Year ended June 30, 1996:
Allowance for doubtful accounts $ 492 $ 125 $ 135 $ 482
====== ====== ====== ======
Inventory valuation reserves .. $1,740 $ 840 $ 871 $1,709
====== ====== ====== ======
Year ended July 2, 1995:
Allowance for doubtful accounts $ 538 $ 64 $ 110 $ 492
====== ====== ====== ======
Inventory valuation reserves .. $2,147 $ 276 $ 683 $1,740
====== ====== ====== ======
41
43
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 25, 1997 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 25, 1997.
SIGNATURE TITLE
--------- -----
Principal Executive Officer:
/s/ Paul F. Folino President, Chief Executive Officer
- --------------------------------------------
(Paul F. Folino) and Director
Principal Financial and Accounting Officer:
/s/ Michael J. Rockenbach Vice President, Finance, Acting Chief
- --------------------------------------------
(Michael J. Rockenbach) Financial Officer and Secretary
/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)
42
44
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- ---------------------- -------------
3.1 Certificate of Incorporation, as amended.
3.2 By-laws, as amended.
3.3 Certificate of Designations of Series A
Junior Participating Preferred Stock
(incorporated by reference to Exhibit 4 to
the Registrant's Current Report on Form 8-
K filed February 2, 1989).
4.1 Rights Agreement dated as of January 19,
1989 between Emulex Corporation and
First Interstate Bank, Ltd. (incorporated by
reference to Exhibit 4 to the Registrant's
Current Report on Form 8-K filed
February 2, 1989).
10.1 Emulex Corporation Non-Employee
Director Stock Option Plan (incorporated
by reference to Annex E and F to the
Registrant's Proxy Statement dated
January 24, 1994 for the Special Meeting of
Stockholders Held on February 24, 1994).
10.2 Standard Industrial Lease--Net dated
April 6, 1982 between C.J. Segerstrom &
Sons and the Registrant and amendments
thereto (incorporated by reference to
Exhibit 10.15 to Registration Statement on
Form S-1 [File No. 2-79466] filed on
September 23, 1982, Exhibit 10.8 to the
Registrant's 1983 Annual Report on Form
10-K, and Exhibit 10.6 to the Registrant's
1986 Annual Report on Form 10-K).
10.3 Amendment #9 to Standard Industrial
Lease--Net dated April 6, 1982 between
C.J. Segerstrom & Sons and the Registrant
(incorporated by reference to Exhibit 10.9
to the Registrant's 1990 Annual Report on
Form 10-K).
43
45
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- ---------------------- -------------
10.4 Second Amendment of Amendment #9 to
Standard Industrial Lease--Net dated
March 29, 1990 between C.J. Segerstrom &
Sons and the Registrant (incorporated by
reference to Exhibit 10.10 to the
Registrant's 1990 Annual Report on Form
10-K).
10.5 1993 Amendment to Standard Industrial
Lease - Net dated April 29, 1993 between
C.J. Segerstrom & Sons and the Registrant
(incorporated by reference to Exhibit 10.9
to the Registrant's 1993 Annual Report of
Form 10-K).
10.6 Distribution Agreement dated as of
January 24, 1994 among Emulex
Corporation, a Delaware corporation,
Emulex Corporation, a California
corporation, and QLogic Corporation
(incorporated by reference to Exhibit 10.10
to the Registrant's 1994 Annual Report of
Form 10-K).
10.7 Form of Tax Sharing Agreement among
Emulex Corporation, a Delaware
corporation, Emulex Corporation, a
California corporation, and QLogic
Corporation (incorporated by reference to
Exhibit 10.11 to the Registrant's 1994
Annual Report of Form 10-K).
10.8 Administrative Services Agreement, dated
as of February 21, 1993, among Emulex
Corporation, a California corporation,
Emulex Corporation, a Delaware
corporation, and QLogic Corporation
(incorporated by reference to Exhibit 10.12
to the Registrant's 1994 Annual Report of
Form 10-K).
10.9 Employee Benefits Allocation Agreement,
dated as of January 24, 1994, among
Emulex Corporation, a Delaware
corporation, Emulex Corporation, a
California corporation, and QLogic
Corporation (incorporated by reference to
Exhibit 10.13 to the Registrant's 1994
Annual Report of Form 10-K).
44
46
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- ---------------------- -------------
10.10 Form of Assignment, Assumption and
Consent Re: Lease among Emulex
Corporation, a California corporation,
QLogic Corporation and C.J. Segerstrom &
Sons, a general partnership (incorporated
by reference to Exhibit 10.14 to the
Registrant's 1994 Annual Report of Form
10-K).
10.11 Intellectual Property Assignment and
Licensing Agreement, dated as of January
24, 1994, between Emulex Corporation, a
California corporation, and QLogic
Corporation (incorporated by reference to
Exhibit 10.15 to the Registrant's 1994
Annual Report of Form 10-K).
10.12 Form of Supplement to Tax Sharing
Agreement among Emulex Corporation, a
Delaware corporation, Emulex
Corporation, a California corporation, and
QLogic Corporation. (incorporated by
reference to Exhibit 10.12 to the
Registrant's 1995 Annual Report of Form
10-K).
10.13 Emulex Corporation Employee Stock
Option Plan as amended November 21,
1996 (incorporated by reference to
Appendix A to the Registrant's Proxy
Statement dated October 21, 1996 for the
Annual Meeting of Stockholders Held on
November 21, 1996.)
10.14 Amended and Restated Loan and Secruity
Agreement dated as of September 18, 1996
between Silicon Valley Bank and Emulex
Corporation, InterConnections, Inc., and
Emulex Europe Limited.
10.15 Collateral Assignment, Patent Mortgage
and Security Agreement dated as of
September 18, 1996 between Digital
House, Ltd. and Silicon Valley Bank.
10.16 Supplement to Collateral Assignment
dated September 18, 1996 by Emulex
Corporation, InterConnections, Inc. and
Emulex Europe Limited in favor of Silicon
Valley Bank.
45
47
PAGE IN SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED COPY
----------- ---------------------- -------------
10.17 Amendment to Loan Agreement dated
September 18, 1997 between Silicon Valley
Bank and Emulex Corporation,
InterConnections, Inc., and Emulex
Europe Limited.
10.18 Supplement to Collateral Assignment
dated as of September 18, 1997 by Emulex
Corporation, InterConnections, Inc. and
Emulex Europe Limited in favor of Silicon
Valley Bank.
21 List of the Registrant's subsidiaries.
23 Independent Auditors' Consent.
27.1 Financial Data Schedule
46