UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 27,
2010
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File
No. 001-31353
EMULEX CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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51-0300558
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(State or other
jurisdiction
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(I.R.S. Employer
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of incorporation or
organization)
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Identification No.)
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3333 Susan Street
Costa Mesa, California
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92626
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(Address of principal executive
offices)
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(Zip Code)
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(714) 662-5600
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, Par Value $0.10 Per Share
Preferred Stock Purchase Rights
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New York Stock Exchange
New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
NONE
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in the definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant, based on the closing price of
the registrants common stock on the New York Stock
Exchange on December 24, 2009, which was the last trading
day of the second quarter of fiscal 2010, of $11.00 was
$997,037,723.
As of August 17, 2010, the registrant had
81,540,841 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement
relating to the registrants 2010 Annual Meeting of
Stockholders expected to be held on November 23, 2010, are
incorporated by reference into Part III of this Annual
Report on
Form 10-K.
PART I
All references to years refer to our fiscal years ended
June 27, 2010, June 28, 2009, and June 29, 2008,
as applicable, unless the calendar year is specified. References
contained in this Annual Report on
Form 10-K
to Emulex, the Company, the
Registrant, we, our and
us, refer to Emulex Corporation and its
subsidiaries.
Introduction
and Company History
Emulex Corporation (Emulex or the Company) is a provider of a
broad range of network convergence solutions that intelligently
connect servers, storage, and networks within the data center.
The Companys product portfolio of Host Bus Adapters
(HBAs), Converged Network Adapters (CNAs), Network Interface
Cards (NICs), mezzanine cards for blade servers, application
specific integrated circuits (ASICs), embedded storage bridges,
routers, and switches, Input/Output Controllers (IOCs), and
connectivity management solutions are proven, tested and trusted
by the worlds largest and most demanding Information
Technology (IT) environments.
Emulex was organized as a California corporation in 1979.
Emulexs initial public offering was in 1981. In 1987,
Emulex changed its state of incorporation from California to
Delaware by the formation of a Delaware corporation, which
acquired all of the stock of the California corporation. The
California corporation continues to operate as a wholly owned
subsidiary of a subsidiary of the Delaware corporation. In 1983
and 1999 Emulex completed additional offerings of our common
stock.
Emulexs corporate headquarters are located at 3333 Susan
Street, Costa Mesa, California 92626, and our telephone number
is
(714) 662-5600.
Our Internet address is www.emulex.com. Our periodic and current
reports filed with or furnished to the Securities and Exchange
Commission (SEC) pursuant to the requirements of the Securities
and Exchange Act of 1934 are available free of charge through
our website as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the SEC.
Emulexs Host Server Products (HSP) connect servers and
storage to networks using a variety of industry standard
protocols. Our products support Internet Protocol (IP) and
storage networking, including Transmission Control Protocol
(TCP)/IP, Internet Small Computer System Interface (iSCSI),
Network Attached Storage (NAS), Fibre Channel, and Fibre Channel
over Ethernet (FCoE). HSP include
LightPulse®
HBAs,
OneConnecttm
Universal Converged Network Adapters (UCNAs), custom form factor
solutions for Original Equipment Manufacturer (OEM) blade
servers, and ASICs. These products enable servers to efficiently
connect to local area networks (LANs), storage area networks
(SANs), and network attached storage (NAS) by offloading data
communication processing tasks from the server as information is
delivered and sent to the network.
Our Embedded Storage Products (ESP) include our
InSpeed®,
FibreSpy®,
switch-on-a-chip
(SOC), bridge products, and router products. Embedded storage
switches, bridges, routers, and IOCs are deployed inside storage
arrays, tape libraries, and other storage appliances that
connect storage controllers to storage capacity delivering
improved performance, reliability, and storage connectivity.
Our Other category primarily consists of contract engineering
services, legacy and other products.
During fiscal 2010, most of our revenues were derived from
products based on Fibre Channel technology. Emulexs
products have been selected by many of the worlds leading
server and storage providers, including Cisco Systems, Inc.
(Cisco), Compellent Technologies, Inc. (Compellent), Dell Inc.
(Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu), Groupe
Bull (Bull), Hewlett-Packard Company (Hewlett-Packard), Hitachi
Data Systems (HDS), Hitachi Limited (Hitachi), International
Business Machines Corporation (IBM), LSI Corporation (LSI), NEC
Corporation (NEC), Network Appliance, Inc. (NetApp), Oracle
America, Inc. (Oracle), Quantum Corporation (Quantum), Sun
Microsystems, Inc. (Sun), Unisys Corporation (Unisys), and
Xyratex Ltd. (Xyratex). Our distribution partners include Arrow
ECS Denmark A/S (Arrow), Avnet, Inc. (Avnet), Bell
Microproducts, Ltd. (Bell), Info X Distribution, LLC (Info X),
Ingram Micro Inc. (Ingram Micro), Macnica Networks
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Corporation (Macnica), Netmarks Inc. (Netmarks), Tech Data
Corporation (Tech Data), and Tokyo Electron Device Ltd. (TED).
Industry
Protocols Overview
Fibre
Channel
Beginning in the late 1990s, Fibre Channel emerged as the
first storage networking technology to be widely adopted by the
worlds leading server and storage systems manufacturers
and is now available in two, four, and eight gigabit per second
(Gb/s) solutions. Initially used primarily in the supercomputing
field, Fibre Channel offered the connectivity, distance, and
scalability benefits of networking architectures combined with
the high performance and low latency needed for input/output
(I/O) intensive applications. Its advanced capabilities
enabled new architectures such as SANs which connect multiple
host computers to one or more storage arrays. Additionally,
Fibre Channel has been deployed within storage arrays to provide
internal connectivity for disk drives, enabling enhanced
performance and greater scalability.
A SAN essentially transforms dedicated servers and storage
devices into network resources, greatly improving the
performance and scalability beyond the capabilities of direct
attached enterprise storage. By providing shared server access,
the cost of expensive enterprise servers and storage can be
spread across entire organizations. SANs are deployed to support
a wide range of applications such as local area network (LAN)
free and serverless back up, storage virtualization, and
disaster recovery.
Additionally, NAS appliances have gained acceptance in the
storage marketplace. NAS architecture offers an easily
deployable and scalable storage solution. In high-end
environments characterized by NAS file delivery to servers, a
SAN may be deployed behind a NAS, making NAS and SAN solutions
complementary. The majority of NAS and SAN solutions installed
today are delivered to end users via integrated systems
solutions offered by storage and computer system OEMs.
Internet
SCSI
The iSCSI protocol, ratified by the Internet Engineering Task
Force (IETF) in 2003, brought storage area networks within the
reach of small and midsized businesses. The protocol
encapsulates native Small Computer System Interface (SCSI)
commands using TCP/IP and transmits the packets over the
Ethernet network infrastructure. The range of iSCSI connectivity
solutions spans simple Ethernet Network Interface Cards (NICs),
that are commonly used for Ethernet LAN applications, up to high
performance 10 Gb/s Ethernet (10GbE) NICs that offer full
protocol processing offload from the host computer. The
emergence of 10GbE addresses the issue of bandwidth and
latency issues of one Gb/s Ethernet and is laying the foundation
for more widespread adoption of network convergence in the data
center.
Fibre
Channel Over Ethernet
There are two key standards in the FCoE CNA market, one for
host-based CNAs that has been developed by the International
Committee for Information Technology Standards (INCITS) T11.3
working group and one for 10GbE networking, both of which are
finalized. A complementary standard, DCBX (Data Center
Bridging), which covers multi-hop switching (IEEE 802.1Qaz) is
still going through the approval process at draft level 1.6
and was issued on June 20, 2010. FCoE combines the
efficiency and enterprise hardened features of the Fibre Channel
protocol with the ubiquity of an Ethernet network, while
leveraging the mature storage management software and tools
available with Fibre Channel. FCoE transports native Fibre
Channel frames over a no drop or lossless Ethernet
infrastructure, allowing existing Fibre Channel SAN management
tools, skills, and processes to remain intact. It allows an
evolutionary approach towards I/O consolidation by preserving
all Fibre Channel constructs, maintaining the same latency,
security, and traffic management attributes of Fibre Channel
while preserving investments in Fibre Channel drivers, tools,
training, and SANs. The main value proposition of FCoE is,
therefore, the ability to streamline server connectivity using
lossless Ethernet while protecting the substantial investments
made in Fibre Channel SANs over the past 10 years.
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The emergence of FCoE is accelerating the adoption of Ethernet
as the medium of network convergence. The Emulex OneConnect UCNA
combines the functionality of industry standard NICs with
Emulexs industry leading Fibre Channel HBAs to seamlessly
converge the traffic over a shared lossless Ethernet network.
Emulexs UCNAs deliver the latest stateless offloads and
dynamic bandwidth allocation to maximize performance.
Next
Generation Data Center
Data centers are on the cusp of a major transformation at every
level of the infrastructure. The combination of high bandwidth
demand, increasing server sprawl and the need for more adaptive
networking infrastructure are at the heart of todays
networking challenge. Data center managers are being challenged
to keep pace with unrelenting growth trying to
deliver the applications necessary to run their businesses,
while using a finite amount of resources. The Data center has
transitioned from a single application per server model to a
virtualized server environment with shared applications on a
single physical CPU. It is now evolving into a fully abstracted
model where all IT resources are virtualized and the physical
hardware layer is easily interchanged and upgraded. As IT
services, servers, storage and core data center infrastructure
evolve into adaptive and on-demand paradigms, networking and
connectivity solutions need to evolve and provide seamless
integration across the global enterprise.
In response to these challenges and opportunities, Emulex
introduced its Connectivity
Continuumtm
framework, a strategic architecture for the evolution and
virtualization of connectivity and networking for the next
generation data center. The Connectivity Continuum consolidates
existing LAN and SAN networks into a single converged networking
framework to enable unified and virtualized I/O that forms the
foundation of tomorrows data center. Emulexs
Connectivity Continuum leverages Enhanced Ethernet to
consolidate and unify all classes of connectivity and network
traffic. It provides next generation data centers with
revolutionary business value, operational flexibility, strategic
advantage and the benefits of a staged, evolutionary model for
investment protection.
Emulexs converged networking products fully complement
next generation data center consolidation efforts and improve
the efficiency of overall operations. Leveraging 10GbE to carry
data networking, storage, and clustering traffic simplifies
network infrastructure and reduces the number of cables, switch
ports and adapters which lowers overall power, cooling and space
requirements.
Storage
I/O Interconnects
In recent years, the hard disk drive industry has utilized I/O
interconnects such as Serial Attached SCSI (SAS) and Serial
Advanced Technology Attachment (SATA) for the disk drive I/O
interface. Serial I/O technologies utilize a single wire over
which all control and user data passes, providing higher
performance, expanded connectivity, and lower cost.
SATA has already increased in line speed from
one-and-a-half
Gb/s to three Gb/s and six Gb/s. SAS is designed for the
corporate and enterprise market as a replacement for parallel
SCSI, allowing for much higher speed data transfers than
previously available. Though SAS uses serial communication
instead of the parallel method found in traditional SCSI
devices, it still uses SCSI commands for interacting with SAS
end devices.
Our
Products
We are a leading designer, developer and supplier of HBAs, CNAs,
NICs, mezzanine cards, Pass-Through Modules (PTM), embedded
storage switches, embedded bridges, embedded routers, I/O ASICs,
SOC ASICs, and connectivity management solutions that enhance
access to, and storage of, electronic data and applications. In
fiscal 2004, the acquisition of Vixel Corporation (Vixel)
enabled us to enter the embedded storage market. In fiscal 2006,
the acquisition of Aarohi Communications, Inc. (Aarohi)
facilitated the addition of intelligent data center
infrastructure products such as our CNAs. In fiscal 2007, we
broadened our embedded footprint adding embedded storage bridges
and routers with the acquisition of Sierra Logic, Inc. (Sierra
Logic). In fiscal 2009, we entered into a multi-year partnership
(including a multi-year joint development and supply agreement)
with ServerEngines Corporation (ServerEngines) to deliver
converged networking solutions. On
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August 25, 2010, subsequent to our fiscal 2010, we acquired
ServerEngines. The combination of Emulex and ServerEngines
technology creates a unique offering that delivers a foundation
for converged networking solutions, including adapters,
mezzanine cards and LAN on Motherboard (LOM) solutions.
Host
Server Products
Our Host Server Products include the development of chip level
and board level server-based I/O adapters including HBAs, CNAs,
and mezzanine cards using technologies such as Fibre Channel,
FCoE, iSCSI, and TCP/IP. Our Fibre Channel HBAs, which represent
the vast majority of our product shipments, connect host
computers to a Fibre Channel network. Our adapters support a
wide range of operating systems and host computer system
interfaces, including Peripheral Component Interconnect (PCI)
and PCI Express-based platforms. Our Fibre Channel HBA offerings
include single, dual, and quad port adapters at throughput
speeds of two Gb/s, four Gb/s, and eight Gb/s for use in
enterprise, large, medium, and small-sized organizations.
We recently introduced our OneConnect UCNAs to our Host Server
Products family. The Emulex OneConnect UCNA is a single chip,
high performance 10GbE platform designed to address the key
challenges of evolving data center networks and improve the
overall efficiency of data center operations. Unlike first
generation CNAs that only provide FCoE convergence, the Emulex
OneConnect UCNA provides optimized performance for all protocols
(TCP/IP, FCoE, and, iSCSI) enabling one card for all
applications and all leading server architectures. The Emulex
UCNA platform enables data center managers to consolidate
multiple one Gb/s Ethernet links on to a single 10GbE link. The
use of multiple protocol accelerators/offload engines allows
Emulex OneConnect UCNAs to deliver maximum performance,
regardless of the mix of protocol traffic. This diverse
applicability of the UCNA simplifies server hardware
configurations and reduces server sprawl in the data center.
Emulex HBAs and UCNAs are based upon our internally developed
Fibre Channel IOCs as well as that of our technology partner
ServerEngines. These IOCs can be utilized not only in HBAs and
mezzanine cards, but may also be integrated directly on computer
motherboards in environments where the requirements for
Networking and Fibre Channel connectivity are well defined,
including rack servers, blade servers and mainframes. In
addition, these IOCs are used in embedded I/O environments such
as disk and tape storage arrays and storage appliances. Revenues
from these applications are included in our Embedded Storage
Products.
Embedded
Storage Products
Our Embedded Storage Products include the development of chip
level, board level, and box level array based products that
provide connectivity and protocol emulation functions. This
includes embedded IOCs,
I/O Processors
(IOPs), SOCs, embedded bridges (FC/SATA/SAS), and embedded
routers (FC/SATA/SAS). Emulex offers a complete portfolio of
integrated, embedded storage networking products, providing
customers a complete,
end-to-end
solution set for enterprise storage systems.
The continued demands for increased storage array capacity and
system scalability, and the performance and reliability
deterioration resulting from such demand have emerged as
significant issues facing the storage industry. Our InSpeed
Embedded Storage Switch products are designed to be a cost
effective solution to address these issues.
To help storage system manufacturers address the issues related
to arbitrated loop architectures, we have developed a highly
integrated SOC that incorporates our InSpeed technology. InSpeed
is an advanced switching architecture that results in a single
chip capable of handling multiple Fibre Channel devices
operating at two, four, or eight Gb/s speeds.
Our embedded router and bridge products consist of sophisticated
chip and firmware solutions that emulate Fibre Channel or SAS
devices while using low cost SATA and SAS Hard Disk Drives
(HDDs). These products were added through our acquisition of
Sierra Logic during fiscal 2007. These cost effective solutions
leverage todays existing infrastructure of Fibre Channel
within enterprise storage applications, but allow
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storage OEMs to easily add support for SATA, SAS HDDs, and high
performance SATA and SAS SSDs (Solid State Drives).
Overall
Leveraging our expertise and experience in networking and I/O
technology, we have approached the storage market opportunity
with a networking perspective to maximize the performance and
management capabilities of our solutions. We believe the
performance of our products are among the highest in the
industry. Furthermore, our products support high performance
connectivity features to enhance data integrity. Lastly, our
products offer investment protection for our OEM customers, who
often develop specialized software to interface to our adapters,
as we have maintained a stable application programming interface
(API) since our first generation of HBAs was introduced in 1996.
More recently, we have expanded the functionality in our
products to deliver high availability and remote centralized
management that may be embedded in OEM and independent software
vendors (ISV) SAN management products.
Intellectual
Property
Our ability to compete depends in part upon our ability to
protect our proprietary information through various means,
including ownership of patents, copyrights, trademarks, and
trade secrets, as well as through contractual provisions.
We have a number of issued patents and pending patent
applications in the U.S. and abroad. Most of our issued
patents and pending patent applications relate to our storage
and networking technology or products. We maintain an active
program of obtaining patent protection for our inventions as
development occurs and as new products are introduced. As a
result of the rate of change of technology in our industry, we
believe that the duration of the patent protection available to
us for our products is adequate to cover the expected market
duration for such products.
All of our software, drivers, and firmware, which are embedded
within or provided exclusively for use with our hardware
products, are marked with copyright notices listing our company
as the copyright owner. We have been granted a number of
registrations of trademarks in the U.S. and abroad. We also
have a number of pending trademark registrations in the
U.S. and abroad. We maintain an active practice of marking
our products with trademark notices. We have an active program
of renewing trademarks so that the duration of trademark
protection is maintained for as long as needed. Additionally, we
rely on trade secret law and contractual provisions to protect
unique intellectual property we possess which we have determined
unnecessary or uneconomical to patent or copyright, or which is
not otherwise capable of more formal protection.
Engineering
and Development
At June 27, 2010, we employed 463 engineers, other
technicians, and support personnel engaged in the development of
new products and the improvement of existing products.
Engineering and development expenses were approximately
$126.9 million, $129.8 million and $129.2 million
in 2010, 2009, and 2008, respectively.
Selling
and Marketing
We sell our products worldwide to OEMs, end users, and through
other distribution channels including value added resellers
(VARs), systems integrators, industrial distributors, and
resellers. As the storage networking market is dominated by
OEMs, our focus is to use sales specialists to expand
opportunities with our existing OEMs, as well as to develop new
OEM relationships. However, we are also expanding our
distribution efforts, leveraging worldwide distribution channels
through technical distributors such as VARs and systems
integrators, to complement our core OEM relationships. In some
cases, OEM partners leverage the distribution channel to deliver
solutions to end users, making our distribution efforts
complementary with our OEM focused strategy.
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Seasonality
Our business fluctuates as a result of various factors,
including but not limited to economic conditions, new product
introductions, IT spending, industry demand, and seasonality.
Although we do not consider our business to be highly seasonal,
we do believe that seasonality has and may impact our business.
To the extent that we do experience seasonality in our business,
it would most likely have a negative impact on the sequential
growth rate of our net revenues during the first and third
quarters of our fiscal year.
Order
Backlog
Due to an industry practice that allows customers to cancel or
change orders with limited advance notice prior to shipment, we
do not believe that backlog is a reliable indicator of future
revenue levels. Furthermore, purchase order release lead times
depend upon the scheduling practices of the individual customer,
and the rate of booking new orders fluctuates from month to
month. Therefore, the level of backlog at any one time is not
necessarily indicative of trends in our business nor is it a
meaningful indicator of future long-term revenues.
Concentration
of Customers, Revenue by Product Families and Geographic
Area
See Note 14 in the accompanying notes to consolidated
financial statements included in Part IV, Item 15(a)
of this Annual Report on
Form 10-K
for information regarding concentration of our customers as well
as information regarding our revenue by product family and
geographic area. See also Risk Factors contained
within Part I, Item 1A of this Annual Report on
Form 10-K
for discussion of the risks associated with the concentration of
our customers, as well as the risks associated with our revenue
by product family and geographic area.
Competition
The market for our products remains intensely competitive and is
characterized by frequent new product introductions, rapid
technological change, changing customer preferences, evolving
technology, and industry standards.
One of our largest competitors for HBA and CNA products is
QLogic Corporation (QLogic). In addition, Brocade Communications
Systems, Inc. (Brocade) has entered into the HBA market and more
recently, the CNA market.
In some markets, CNAs face competition from NIC/iSCSI suppliers
that include established Ethernet and Fibre Channel competitors
as well as new entrants, including established Ethernet
suppliers such as Broadcom Corporation (Broadcom), Intel
Corporation (Intel), Chelsio Communications, Inc. (Chelsio),
Mellanox Technologies, Ltd. (Mellanox) and other private and
public companies who have invested in various aspects of data
center networking. Across all storage networking technologies,
we face the threat of potential competition from new entrants
into the storage networking market, including large technology
companies that may develop or acquire differentiating technology
and then apply their resources, including established
distribution channels and brand recognition, to obtain
significant market share.
We believe the competitive factors for our products include
price/performance, interoperability, reliability, scalability,
silicon integration, technical support, time to market, product
roadmap, and extent of installed base. We believe that we
compete favorably with respect to these factors. We also believe
that we have a competitive strength in the alliances we have
built with OEM distribution channels with broad industry
support. Some of our other competitive advantages include our
robust time-proven Fibre Channel drivers, our single chip multi
protocol architecture, our workforce of highly experienced
researchers and designers, and our intellectual property.
Our embedded products, including InSpeed, FibreSpy, bridge and
routers as well as our IOCs and IOPs, compete against embedded
storage products supplied by LSI, Maxim Integrated Products,
Inc. (Maxim), and PMC-Sierra, Inc. (PMC-Sierra). Across all
embedded storage technologies, we face the threat of potential
competition from new entrants into the embedded storage market,
including large technology companies that
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may develop or acquire differentiating technology and then apply
their resources, including established distribution channels and
brand recognition, to obtain significant market share.
We believe that the principal basis of embedded storage products
competition presently includes interoperability, reliability,
scalability, price, silicon integration, performance, ability to
support additional protocols such as Fiber Connectivity (FICON),
technical support, and backwards compatible APIs. We believe
that we compete favorably with respect to these factors. We also
believe that we have a competitive strength in our close
relationships with OEM customers and our OEMs investment
in storage software.
Manufacturing
and Suppliers
Our products include board level assemblies that consist
primarily of electronic component parts assembled on printed
circuit boards (PCBs) and box level products consisting of board
level assemblies, cables, and power sources contained within an
enclosure. Most component parts can be purchased from two or
more sources. However, some key components that we use in our
products (including our ASICs) may only be available from single
sources with which we do not have contracts. In addition, we
design ASICs that are embedded in our assembled products and are
also sold directly to OEM customers. These ASICs are also sole
sourced and manufactured by third party semiconductor foundries.
The majority of our ASICs are manufactured under the direction
of LSI, using a variety of qualified semiconductor, assembly,
and test suppliers. Marvell Technology Group Ltd. (Marvell) is
another major ASIC partner for some of our InSpeed devices and
our FibreSpy products. In fiscal 2009, we entered into a
multi-year joint development and supply agreement partnership
with ServerEngines to deliver converged networking solutions. On
August 25, 2010, subsequent to our fiscal 2010, we acquired
ServerEngines. In addition to hardware, we design software and
firmware, which is provided as embedded programs within our
hardware products.
During fiscal 2010, Benchmark Electronics, Inc. (Benchmark)
manufactured for us at their facility in Ayudhaya, Thailand and
Venture Corporation Limited (Venture) manufactured for us at
their facility in Jahor-Bahru, Malaysia. Through our continuing
strategic relationships with Benchmark and Venture, we believe
we have a strong global manufacturing operation that supports
our growing global customer base and provides us with increased
supply chain efficiency, flexibility, and security.
The assembly operations required by our products are typical of
the electronics industry, and no unusual methods, procedures or
equipment are required. The sophisticated nature of the
products, in most cases, requires extensive testing by
specialized test devices operated by skilled personnel. Our
electronics manufacturing service (EMS) providers provide this
testing. However, we also maintain an internal test-engineering
group for continuing support of test operations. As of
June 27, 2010, we had a total of 70 regular full time
manufacturing employees.
Employees
As of June 27, 2010, we employed 791 employees as
follows: 463 in engineering and development, 130 in selling
and marketing, 128 in general and administrative, and 70 in
manufacturing. None of our employees are represented by a labor
union, and we believe our employee relations are good.
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Executive
Officers of the Registrant
The executive and certain other officers of the Company or its
principal operating subsidiaries as of June 27, 2010 were
as follows:
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Paul F. Folino
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Executive Chairman
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James M. McCluney(1)
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Chief Executive Officer
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Jeffrey W. Benck(2)
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President and Chief Operating Officer
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Michael J. Rockenbach
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Executive Vice President, Chief Financial Officer, Secretary,
and Treasurer
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Steve A. Daheb(3)
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Senior Vice President, Chief Marketing Officer
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Jeffrey L. Hoogenboom(3)
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Senior Vice President, Worldwide Sales
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John J. Warwick(3)
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Senior Vice President, Operations
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Randall G. Wick(4)
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Senior Vice President, General Counsel
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(1) |
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Effective August 24, 2010, Mr. McCluney resigned as
President of the Company. |
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(2) |
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Effective August 24, 2010, Mr. Benck was appointed
President and Chief Operating Officer of the Company. |
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(3) |
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These persons serve in the indicated capacities as SEC
Section 16 officers of the Registrant, but are not officers
of the Registrant or its subsidiaries, and are considered a
significant employee. |
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(4) |
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These persons serve as officers of the Registrants
principal operating subsidiaries; they are not officers of the
Registrant. Also, these persons serve in the indicated
capacities as SEC Section 16 officers of the Registrant. |
Mr. Folino joined the Company in May 1993 as
president and chief executive officer and as a director, in July
2002 was promoted to chairman of the board and chief executive
officer, and in September 2006, became executive chairman. 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. McCluney joined the Company in November 2003 as
president and chief operating officer, was subsequently
appointed to the position of president and chief executive
officer in September 2006, and in August 2010, resigned as
president of the Company. Prior to Emulexs acquisition of
Vixel Corporation (Vixel) in November 2003, Mr. McCluney
had served as Vixels chairman, president and chief
executive officer. From October 1997 to January 1999,
Mr. McCluney served as president and chief operating
officer of Crag Technologies, formerly Ridge Technologies, a
storage system manufacturer. From October 1994 to September
1997, Mr. McCluney served in various positions at Apple
Computer, Inc., including senior vice president of worldwide
operations and vice president of European operations.
Mr. Benck joined the Company in May 2008 as
executive vice president and chief operating officer, and in
August 2010, was appointed president and chief operating officer
of the Company. From April 2007 to March 2008, prior to joining
the Company, Mr. Benck was president and chief operating
officer of QLogic Corporation, a supplier of storage networking
solutions. Prior to joining QLogic Corporation, Mr. Benck
worked for International Business Machines Corporation, a global
leader in information technology and services, for 18 years.
Mr. Rockenbach joined the Company in 1991 and has
served as executive vice president and chief financial officer
since 1997. From 1991 to 1996, Mr. Rockenbach served in
senior finance and accounting positions within the Company.
Prior to joining the Company, Mr. Rockenbach served in
various manufacturing finance and financial planning positions
at Western Digital Corporation.
Mr. Daheb joined the Company in November 2008 as
chief marketing officer and senior vice president of business
development. From January 2005 to November 2008, prior to
joining the Company, Mr. Daheb was senior vice president of
marketing and business development of BlueArc. From July 2003 to
January 2005,
9
prior to joining BlueArc Corporation, Mr. Daheb was vice
president of sales and marketing of Tasman Networks, Inc. From
October 2000 to July 2003, prior to joining Tasman Networks,
Mr. Daheb was senior director of product marketing and
technical marketing of Brocade Communications Systems, Inc. From
April 1999 to October 2000, prior to joining Brocade
Communications, Inc., Mr. Daheb was at Lucent Technologies
Inc. where he served for a period of time as vice president of
product marketing of Lucent Technologies Inc.s WAN Systems
group.
Mr. Hoogenboom joined the Company in January 2009 as
senior vice president of worldwide sales. From January 2008 to
December 2008, prior to joining the Company, Mr. Hoogenboom
was vice president of emerging business sales of Cadence Design
Systems, Inc. From January 2007 to January 2008, prior to
joining Cadence Design Systems, Inc., Mr. Hoogenboom was
executive vice president of sales of LSI Corporation. Prior to
joining LSI Corporation, Mr. Hoogenboom spent 18 years
at Intel Corporation where he held multiple sales and marketing
positions including vice president, general manager of reseller
channel sales and vice president of embedded sales.
Mr. Warwick joined the Company in August 2006 as
senior vice president of operations. From January 2003 to August
2006, prior to joining the Company, Mr. Warwick was senior
vice president of operations for Lantronix Inc. From April 2000
to January 2003, Mr. Warwick was a principal consultant for
Pittiglio, Rabin Todd and McGrath, a management consulting firm
for high technology industries. From January 1997 to April 2000,
Mr. Warwick was senior director of materials at Western
Digital Corporation. Prior to Western Digital Corporation,
Mr. Warwick served in general management and operations
management positions for companies in the personal computer
industry.
Mr. Wick joined the Company in June 2002 and serves
as senior vice president and general counsel. Prior to joining
the Company, Mr. Wick served as vice president, chief
operating officer and general counsel of TelOptics Corporation,
a high technology privately held company, since November 2000.
The prior year, he served as a legal consultant for his own
firm. Previously, Mr. Wick held the positions of vice
president and general counsel for Samsung Electronics America,
Inc. from 1998 to 1999 and AST Research, Inc. from 1990 to 1998.
None of the executive officers of the parent Company or officers
of its principal operating subsidiaries has any family
relationship with any other executive officer of the Company,
other officer of its principal operating subsidiaries, or
director of the Company.
Our
acquisition of ServerEngines Corporation on August 25,
2010, involve numerous risks which may have a material adverse
effect on our business and operating results.
Our acquisition of ServerEngines Corporation (ServerEngines)
involves numerous risks, including, but not limited to:
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complexities in creating and maintaining uniform standards,
controls, procedures, and policies;
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different geographic locations of the principal operations of
Emulex and ServerEngines and difficulties relating to management
of the former ServerEngines operations and personnel in India;
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currency conversion exposure for payroll and other expenses of
ServerEnginess principal product development facility in
Hyderabad, India;
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difficulties with integrating acquired technology into our
existing technology in a timely and efficient manner that would
allow us to fully realize the benefits of this acquisition.
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As a result of these and other difficulties, we may not realize
the anticipated benefits of the acquisition and may encounter
difficulties that could have a material adverse effect on our
business and operating results or cause expectations with
respect to ServerEngines specifically, and the combined
companies to be inaccurate.
10
The
recent economic downturn has resulted in a reduction in
information technology spending in general, or spending on
computer and storage systems in particular, that will adversely
affect our revenues and results of operations in the near term
and possibly beyond.
The demand for our network storage products has been driven by
the demand for high performance storage networking products and
solutions that support enterprise computing applications,
including on-line transaction processing, data mining, data
warehousing, multimedia, and Internet applications. The recent
economic downturn and related disruptions in world credit and
equity markets as well as the related failures of several large
financial institutions have resulted in a global downturn in
spending on information technology. If the downturn in the
economy results in a significant downturn in demand for such
products, solutions, and applications, it will adversely affect
our business, results of operations, and financial condition in
the near term and possibly beyond. The adverse effects of any
sustained downturn in information technology spending on our
operating results may be exacerbated by our research and
development investments, strategic investments and merger and
acquisition activity, as well as customer service and support,
which are expected to continue despite any such downturn.
Our
markets are highly competitive and our business and results of
operations may be adversely affected by entry of new competitors
into the markets, aggressive pricing, and the introduction or
expansion of competitive products and
technologies.
The markets for our products are highly competitive and are
characterized by rapid technological advances, price erosion,
frequent new product introductions, and evolving industry
standards. We expect that our markets will continue to attract
new competition. Our current and potential competition consists
of major domestic and international companies, some of which
have substantially greater financial, technical, marketing, and
distribution resources than we have. Additional companies,
including but not limited to our suppliers, strategic partners,
Original Equipment Manufacturer (OEM) customers, and emerging
companies, may enter the markets for our storage networking
products and new or stronger competitors may emerge as a result
of consolidation in the marketplace. Additionally, our existing
competitors continue to introduce products with improved
price/performance characteristics, and we may have to do the
same to remain competitive. Furthermore, competitors may
introduce new products to the market before we do, and thus
obtain a first to market advantage over us. Increased
competition could result in increased price competition, reduced
revenues, lower profit margins or loss of market share, any of
which could have a material adverse effect on our business,
results of operations, and financial condition.
A
significant portion of our business depends upon the continued
growth of the storage networking market and our business will be
adversely affected if such growth does not occur, occurs more
slowly than we anticipate, or declines.
The size of our potential market is largely dependent on the
overall demand for storage in general and in particular upon the
broadening acceptance of our storage networking technologies. We
believe that our investment in multi protocol solutions that
address the high performance needs of the storage networking
market provides the greatest opportunity for our revenue growth
and profitability for the future. However, the market for
storage networking products may not gain broader acceptance and
customers may choose alternative technologies that we are not
investing in,
and/or
products supplied by other companies. Interest continues for
other storage networking technologies such as Internet Small
Computer Systems Interface (iSCSI), which may satisfy some
Input/Output (I/O) connectivity requirements through
standard Ethernet adapters and software at little to no
incremental cost to end users. These software only iSCSI
solutions compete with our Host Server Products, particularly in
the low end of the market. We have also launched Converged
Network Adapters (CNAs) using Fibre Channel over Ethernet (FCoE)
or iSCSI protocols which may be used by the same customers
impacting our Fibre Channel HBAs and mezzanine card revenues
more than we anticipate. In addition, other technologies such as
port bypass circuits (PBCs) and serial attached SCSI (SAS)
compete with our embedded storage products today, and we may not
be able to develop products fast enough or at a sufficiently low
cost to compete in this market. Furthermore, since our products
are sold as parts of integrated systems, demand for our products
is driven by the demand for these integrated systems,
11
including other companies complementary products. A lack
of demand for the integrated systems or a lack of complementary
products required for these integrated systems to be deployed
could have a material adverse effect on our business, results of
operations, and financial condition. If the storage networking
market does not grow, grows more slowly than we anticipate,
declines, attracts more competitors than we expect as discussed
above, or if our products do not achieve continued market
acceptance, our business, results of operations, and financial
condition could be materially adversely affected.
Because
a significant portion of our revenues is generated from sales to
a limited number of customers, none of which are subject to
exclusive or long-term contracts, the loss of one or more of
these customers, or our customers failure to make timely
payments to us, could adversely affect our
business.
We rely almost exclusively on OEMs and sales through
distribution channels for our revenue. For the fiscal years
ended June 27, 2010 and June 28, 2009, respectively,
we derived approximately 84% and 81% of our net revenues from
sales to OEM customers and approximately 16% and 19% from sales
through distribution. Furthermore, as some of our sales through
distribution channels consist of OEM products,
OEM customers effectively generated approximately 92% of
our revenue for both the fiscal years ended June 27, 2010
and June 28, 2009. Moreover, direct sales to our top five
customers accounted for approximately 57% and 61% of our net
revenues for the fiscal years ended June 27, 2010 and
June 28, 2009, respectively. Direct and indirect sales to
our top five customers (including customer-specific models
purchased or marketed indirectly through distributors, resellers
and other third parties) accounted for approximately 72% and 73%
of our net revenues for the fiscal years ended June 27,
2010 and June 28, 2009, respectively. If we are unable to
retain our current OEM and distributor customers or to recruit
additional or replacement customers, our business, results of
operations, and financial condition could be materially
adversely affected.
Although we have attempted to expand our base of customers, we
believe our revenues in the future will continue to be similarly
derived from a limited number of customers. As a result, to the
extent that sales to any of our significant customers do not
increase in accordance with our expectations or are reduced or
delayed, our business, results of operations, and financial
condition could be materially adversely affected.
As is common in the technology industry, our agreements with
OEMs and distributors are typically non-exclusive, have no
volume commitments, and often may be terminated by either party
without cause. It is increasingly commonplace for our OEM and
distributor customers to utilize or carry competing product
lines. If we were to lose business from one or more significant
OEM or distributor customers to a competitor, our business,
results of operations, and financial condition could be
materially adversely affected. In addition, our OEMs may elect
to change their business practices in ways that affect the
timing of our revenues, which may materially adversely affect
our business, results of operations, and financial condition.
Our
operating results are difficult to forecast and could be
adversely affected by many factors and our stock price may
decline if our results fail to meet expectations.
Our revenues and results of operations have varied on a
quarterly basis in the past and may vary significantly in the
future. Accordingly, we believe that
period-to-period
comparisons of our results of operations are not necessarily
meaningful, and you should not rely on such comparisons as
indications of our future performance. We may be unable to
maintain our current levels of growth or profitability in the
future. Our revenues and results of operations are difficult to
forecast and could be adversely affected by many factors,
including, but not limited to:
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Changes in the size, mix, timing and terms of OEM
and/or other
customer orders;
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Changes in the sales and deployment cycles for our products
and/or
desired inventory levels for our products;
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Acquisitions or strategic investments by our customers,
competitors or us;
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Timing and market acceptance of new or enhanced product
introductions by us, our OEM customers
and/or
competitors;
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Market share losses or difficulty in gaining incremental market
share;
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Fluctuations in product development, procurement, resource
utilization and other operating expenses;
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Reduced demand from our customers if there is a shortage of, or
difficulties in acquiring, components or other products, such as
Fibre Channel or serial advanced technology attachment (SATA)
disk drives and optical modules, used in conjunction with our
products in the deployment of systems;
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Inability of our electronics manufacturing service providers or
suppliers to produce and distribute our products in a timely
fashion;
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Difficulties with updates, changes or additions to our
information technology systems;
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Breaches of our network security, including viruses;
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Changes in general social and economic conditions, including but
not limited to natural disasters, terrorism, public health
crises, slower than expected market growth, reduced economic
activity, delayed economic recovery, loss of consumer
confidence, increased energy costs, adverse business conditions
and liquidity concerns, concerns about inflation or deflation,
recession, and reduced business profits and capital spending,
with resulting changes in customer technology budgeting and
spending; and
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Seasonality.
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As a result of these and other unexpected factors or
developments, future operating results may be, from time to
time, below the expectations of investors or market analysts,
which would have a material adverse effect on our stock price.
A
number of factors including relatively small backlog of unfilled
orders, possible customer delays or deferrals and our tendency
to generate a large percentage of our quarterly sales near the
end of the quarter contribute to possible fluctuations in our
operating results that could have an adverse impact on our
results of operations and stock price.
Historically, we have generally shipped products quickly after
receiving orders, meaning that we do not always have a
significant backlog of unfilled orders, in particular for our
HSP products. As a result, our revenues in a given quarter may
depend substantially on orders received during that quarter.
Alternatively, orders already in backlog may be deferred or
cancelled. As a result of our expense levels being largely based
on our expectations of future sales and continued investment in
research and development, in the event we experience unexpected
decreases in sales, our expenses may be disproportionately large
relative to our revenues, and we may be unable to adjust
spending in a timely manner to compensate for any unexpected
revenue shortfall. A material shortfall in sales in relation to
our quarterly expectations or any delay, deferral, or
cancellation of customer orders would likely have an immediate
and adverse impact on our results of operations and may
adversely affect our stock price.
Our
industry is subject to rapid technological change, thus our
results of operations could be adversely affected if we are
unable to keep pace with the changes to successfully
compete.
The markets for our products are characterized by rapidly
changing technology, evolving industry standards, and the
frequent introduction of new products and enhancements. Our
future success depends in large part on our ability to enhance
our existing products and to introduce new products on a timely
basis to meet changes in customer preferences and evolving
industry standards. Currently, new and proposed technologies
such as eight and 16 Gb/s Fibre Channel solutions; FCoE;
Enhanced Ethernet; 10GbE solutions; low latency Ethernet
solutions; Data Center Ethernet; Infiniband; iSCSI; PCI-X 2.0;
PCI Express Gen one, two, and three; PCI Express Advanced
Switching; SATA; SAS; and Remote Direct Memory Access (RDMA);
are in development by many companies and their ultimate
acceptance and deployment in the market is uncertain. We are
developing some, but not all of these technologies, and we
cannot be sure that the technologies we chose to develop will
achieve market acceptance, or that technologies that we chose
not to develop will be available to purchase or license from
third parties or will be immaterial to our business.
Furthermore, if our products are not available in time for the
qualification cycle at an OEM, we may be forced to wait for the
next
13
qualification cycle, which is typically three years if at all.
In addition, new products and enhancements developed by us may
not be backwards compatible to existing equipment already
installed in the market. If we are unable, for technological or
other reasons, to develop new products, enhance or sell existing
products, or consume raw materials in a timely and cost
effective manner in response to technological and market
changes, our business, results of operations, and financial
condition may be materially adversely affected.
We
have experienced losses in our history and may experience losses
in our future that may adversely affect our financial
condition.
We have experienced losses in our history, which may be caused
by a downturn in the economy or an impairment of long-lived
assets
and/or
goodwill. We may experience losses in the future due to an
impairment of our long-lived assets, goodwill,
and/or
equity investments recorded under the cost method. To the extent
that we are unable to generate positive operating profits or
positive cash flow from operations, our financial condition may
be materially adversely affected.
The
timing of migration of our customers toward newer product
platforms varies and may have a significant adverse
effect.
As our customers migrate from one platform to the enhanced
price/performance of the next platform, we may experience
reduced revenue, gross profit, or gross margin levels associated
with lower average selling prices or higher relative product
costs associated with improved performance. While we regularly
compare forecasted demand for our products against inventory on
hand and open purchase commitments, to the extent that customers
migrate more quickly than anticipated, the corresponding
reduction in demand for older product platforms may result in
excess or obsolete inventory and related charges which could
have a material adverse effect on our financial condition and
results of operations.
The
migration of our customers from purchasing our products through
the distribution channel and toward OEM server manufacturers may
have a significant adverse effect.
As our customers migrate from purchasing our products through
the distribution channel toward purchasing our products through
OEM server manufacturers, which have a lower average selling
price, our financial condition and results of operations may be
materially adversely affected.
Any
failure of our OEM customers to keep up with rapid technological
change and to successfully market and sell systems that
incorporate new technologies could adversely affect our
business.
Our revenues depend significantly upon the ability and
willingness of our OEM customers to commit significant resources
to develop, promote, and deliver products that incorporate our
technology. In addition, if our customers products are not
commercially successful, it would have a materially adverse
effect on our business, results of operations, and financial
condition.
Rapid
changes in the evolution of technology, including the unexpected
extent or timing of the transition from board level solutions to
lower priced ASIC solutions, could adversely affect our
business.
Historically, the electronics industry has developed higher
performance application specific integrated circuits (ASICs)
that create chip level solutions that replace selected board
level or box level solutions at a significantly lower average
selling price. We have previously experienced this trend and
expect it to continue in the future. If this transition is more
abrupt or is more widespread than anticipated, there can be no
assurance that we will be able to modify our business model in a
timely manner, if at all, in order to mitigate the effects of
this transition on our business, results of operations, and
financial position.
If
customers elect to use lower-end HBAs in higher-end environments
or applications, our business and financial condition could be
negatively affected.
We supply three families of HBAs that target separate high-end,
midrange and small to medium sized business user (SMB) markets.
Historically, the majority of our storage networking revenues
has come from our
14
high-end server and storage solutions. In the future, increased
revenues are expected to come from dual channel adapters and
midrange server and storage solutions, which have lower average
selling prices per port. If customers elect to utilize midrange
HBAs in higher-end environments or applications, or migrate to
dual channel adapters faster than we anticipate, our business
and financial condition could be negatively affected.
Advancement
of storage device capacity technology may not allow for
additional revenue growth.
Storage device density continues to improve rapidly and at some
point in the future, the industry may experience a period where
the advancement in technology may increase storage device
capacity to a level that may equal or exceed the need for
digital data storage requirements. This would result in a
situation where the number of units of storage devices required
in the marketplace may level out or even decrease. Our growth in
revenue depends on growth in unit shipments to offset declining
average selling prices. To the extent that growth in storage
device unit demand slows or decreases, our financial condition
and results of operations may be materially adversely affected.
A
decrease in the average unit selling prices or an increase in
the manufactured cost of our products due to inflation or other
factors could adversely affect our revenue, gross margins and
financial performance.
In the past, we have experienced downward pressure on the
average unit selling prices of our products, and we expect this
trend to continue. Furthermore, we may provide pricing discounts
to customers based upon volume purchase criteria, and
achievement of such discounts may reduce our average unit
selling prices. To the extent that growth in unit demand fails
to offset decreases in average unit selling prices, our revenues
and financial performance could be materially adversely
affected. Although we have historically achieved offsetting cost
reductions, to the extent that average unit selling prices of
our products decrease without a corresponding decrease in the
costs of such products, our gross margins and financial
performance could be materially adversely affected. Our gross
margins could also be adversely affected by a shift in the mix
of product sales to lower gross margin products. Furthermore, as
our products are manufactured internationally, cost reductions
would be more difficult to achieve if the value of the
U.S. dollar continues to deteriorate. Moreover, if the
manufactured cost of our products were to increase due to
inflation or other factors and we cannot pass along the increase
in our costs to our customers, our gross margins and financial
performance could be materially adversely affected.
Delays
in product development could adversely affect our
business.
We have experienced delays in product development in the past
and may experience similar delays in the future. Prior delays
have resulted from numerous factors, which may include, but are
not limited to:
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Difficulties in hiring and retaining necessary employees and
independent contractors;
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Difficulties in reallocating engineering resources and other
resource limitations;
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Unanticipated engineering or manufacturing complexity, including
from third party suppliers of intellectual property such as
foundries of our ASICs;
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Undetected errors or failures in our products;
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Changing OEM product specifications;
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Delays in the acceptance or shipment of products by OEM
customers; and
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Changing market or competitive product requirements.
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Given the short product life cycles in the markets for our
products and the relatively long product development cycles, any
delay or unanticipated difficulty associated with new product
introductions or product enhancements could have a material
adverse effect on our business, results of operations, and
financial condition.
15
Our
joint development activities may result in products that are not
commercially successful or that are not available in a timely
fashion.
We have engaged in joint development projects with customers,
companies we have investments in and receivables from, and third
parties in the past and we expect to continue doing so in the
future. Currently, we have investments in, receivables from, and
commitments to various third parties related to these joint
development efforts. Joint development can magnify several risks
for us, including the loss of control over development of
aspects of the jointly developed products and over the timing of
product availability. Accordingly, we face increased risk that
joint development activities will result in products that are
not commercially successful or that are not available in a
timely fashion. Any failure to timely develop commercially
successful products through our joint development activities
could have a material adverse effect on our business, results of
operations, and financial condition.
A
change in our business relationships with our third party
suppliers or our electronics manufacturing service providers
could adversely affect our business.
We rely on third party suppliers for components and the
manufacture of our products, and we have experienced delays or
difficulty in securing components and finished goods in the
past. Delays or difficulty in securing components or finished
goods at reasonable cost may be caused by numerous factors
including, but not limited to:
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Discontinued production by a supplier;
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Required long-term purchase commitments;
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Undetected errors, failures or production quality issues,
including projected failures that may constitute epidemic
failure rates specified in agreements with our customers or that
may require us to make concessions or accommodations for
continuing customer relationships;
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Timeliness of product delivery;
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Sole sourcing and components made by a small number of
suppliers, including the inability to obtain components and
finished goods at reasonable cost from such sources and
suppliers;
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Financial stability and viability of our suppliers and
electronics manufacturing service (EMS) providers;
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Changes in business strategies of our suppliers and EMS
providers;
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Increases in manufacturing costs due to lower volumes or more
complex manufacturing process than anticipated;
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Disruption in shipping channels;
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Natural disasters;
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Inability or unwillingness of our suppliers or EMS providers to
continue their business with us;
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Environmental, tax or legislative changes in the location where
our products are produced or delivered;
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Difficulties associated with international operations; and
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Market shortages.
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There is a risk that we will not be able to retain our current
suppliers or change to alternative suppliers. An interruption in
supply, the cost of shifting to a new supplier or EMS providers,
disputes with suppliers or EMS providers could have a material
adverse effect on our business, results of operations, and
financial condition.
Our EMS providers procure and manage most of the components used
in our board or box level products; therefore, we face third
party risks associated with ensuring product availability.
Further, an adverse inventory management control issue by one or
more of our third party suppliers could have a material adverse
effect on our business, results of operations, and financial
condition. We also purchase ASIC components from sole
16
source suppliers, including LSI Corporation, Marvell Technology
Group Ltd., Intel Corporation, ServerEngines Corporation (which
we acquired on August 25, 2010), and Toshiba Corporation,
who in turn rely on a limited number of their suppliers to
manufacture ASICs, all of which create risks in assuring such
component availability.
Unsolicited
takeover proposals may be disruptive to our business and may
adversely affect our operations; results and our ability to
retain key employees.
On April 21, 2009, we received an unsolicited takeover
proposal from Broadcom Corporation (Broadcom) to acquire all of
our outstanding shares of common stock. While Broadcom has
allowed its tender offer to expire, there can be no assurance
that Broadcom or another third party will not make an
unsolicited takeover proposal in the future. The review and
consideration of any takeover proposal may be a significant
distraction for our management and employees and could require
the expenditure of significant time and resources by us.
Moreover, any unsolicited takeover proposal may create
uncertainty for our employees and this uncertainty may adversely
affect our ability to retain key employees and to hire new
talent. Any such takeover proposal may also create uncertainty
for our customers, suppliers and other business partners, which
may cause them to terminate, or not to renew or enter into,
arrangements with us. The uncertainty arising from unsolicited
takeover proposals and any related costly litigation may disrupt
our business, which could result in an adverse effect on our
operating results. Management and employee distraction related
to any such takeover proposal also may adversely impact our
ability to optimally conduct our business and pursue our
strategic objectives.
We have entered into Key Employee Retention Agreements with four
of our current executive officers, and adopted a Change in
Control Retention Plan, in which currently an additional 20 key
employees participate. The participants of these retention
arrangements may be entitled to severance payments and benefits,
based on a period of between twelve months and two years, upon a
termination of their employment by us without cause or by them
for good reason in connection with a change of control of our
company (each as defined in the applicable agreement or plan).
These retention arrangements may not be adequate to allow us to
retain critical employees during a time when a change in control
is being proposed or is imminent.
If our
intellectual property protections are inadequate, it could
adversely affect our business.
We believe that our continued success depends primarily on
continuing innovation, marketing, and technical expertise, as
well as the quality of product support and customer relations.
At the same time, our success is partially dependent on the
proprietary technology contained in our products. We currently
rely on a combination of patents, copyrights, trademarks, trade
secret laws, and contractual provisions to establish and protect
our intellectual property rights in our products.
We cannot be certain that the steps we take to protect our
intellectual property will adequately protect our proprietary
rights, that others will not independently develop or otherwise
acquire equivalent or superior technology, or that we can
maintain such technology as trade secrets. In addition, the laws
of some of the countries in which our products are or may be
developed, manufactured, or sold may not protect our products
and intellectual property rights to the same extent as the laws
of the United States, or at all. Furthermore, we enter into
various development projects and arrangements with other
companies. In some cases, these arrangements allow for the
sharing or use of our intellectual property. Our failure to
protect our intellectual property rights could have a material
adverse effect on our business, results of operations, and
financial condition. We attempt to mitigate this risk by
obtaining indemnification from others, where possible.
Certain of our software (as well as that of our customers) may
be derived from open source software that is
generally made available to the public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License
(GPL), which impose certain obligations on us in the event we
were to distribute derivative works of the open source software.
These obligations may require us to make source code for the
derivative works available to the public, or license such
derivative works under a particular type of license, rather than
the forms of licenses customarily used to protect our
intellectual property. In the event the copyright holder of any
open source
17
software were to successfully establish in court that we had not
complied with the terms of a license for a particular work, we
could be required to release the source code of that work to the
public
and/or stop
distribution of that work.
Third
party claims of intellectual property infringement could
adversely affect our business.
We believe that our products and technology do not infringe on
the intellectual property rights of others or upon intellectual
property rights that may be granted in the future pursuant to
pending applications. We occasionally receive communications
from third parties alleging patent infringement, and there is
always the chance that third parties may assert infringement
claims against us. Any such claims, with or without merit, could
result in costly litigation, cause product shipment delays,
require us to indemnify customers, or require us to enter into
royalty or licensing agreements, which may or may not be
available. Furthermore, we have in the past obtained, and may be
required in the future to obtain, licenses of technology owned
by other parties. We cannot be certain that the necessary
licenses will be available or that they can be obtained on
commercially reasonable terms. If we were to fail to obtain such
royalty or licensing agreements in a timely manner and on
reasonable terms, our business, results of operations, and
financial condition could be materially adversely affected.
Broadcom has filed a patent infringement suit against us
alleging that we are infringing 12 Broadcom patents covering
certain data and storage networking technologies. Ongoing
lawsuits, such as the action brought by Broadcom, present
inherent risks, any of which could have a material adverse
effect on our business, financial condition, or results of
operations. Such potential risks include continuing expenses of
litigation, risk of loss of patent rights, risk of injunction
against the sale of products incorporating the technology in
question, counterclaims, attorneys fees, and diversion of
managements attention from other business matters. See
Legal Proceedings in Item 1, Part I of
this Annual Report on
Form 10-K.
The
inability or increased cost of attracting, motivating, or
retaining key managerial and technical personnel could adversely
affect our business.
Our success depends to a significant degree upon the performance
and continued service of key managers, as well as engineers
involved in the development of our storage networking
technologies and technical support of our storage networking
products and customers. Competition for such highly skilled
employees in the communities in which we operate, as well as our
industry, is intense, and we cannot be certain that we will be
successful in recruiting, training, and retaining such
personnel. In addition, employees may leave us and subsequently
compete against us, and there may be costs relating to their
departure. Also, many of these key managerial and technical
personnel receive stock options or unvested stock as part of our
employee retention initiatives. The number of shares authorized
under stock based plans may be insufficient and shareholders may
not approve to increase the number of authorized shares. New
regulations, volatility in the stock market, and other factors
could diminish the value of our stock options or unvested stock,
putting us at a competitive disadvantage and forcing us to use
more cash compensation. If we are unable to attract new
managerial and technical employees, or are unable to retain and
motivate our current key managerial and technical employees, or
are forced to use more cash compensation to retain or replace
key personnel, our business, results of operations, and
financial condition could be materially adversely affected.
Our
international business activities subject us to risks that could
adversely affect our business.
For the fiscal years ended June 27, 2010 and June 28,
2009, respectively, sales in the United States accounted for
approximately 33% and 38% of our total net revenues, sales in
Asia Pacific accounted for approximately 35% and 29% of our
total net revenues, sales in Europe, Middle East, and Africa
accounted for approximately 31% and 32%, and sales in the rest
of the world accounted for approximately 1% of our total net
revenues based on billed-to address. We expect that our sales
will continue to increase outside of the United States as our
customers are migrating towards using contract manufacturers
located internationally, predominantly in Asia Pacific. However,
because we sell to OEMs and distributors who ultimately resell
our products to their customers, the geographic mix of our sales
may not be reflective of the geographic mix of end-user demand
or installations. All of our sales are currently denominated in
U.S. dollars. As a result, if the
18
value of the U.S. dollar increases relative to foreign
currencies, our products could become less competitive in
international markets. In addition, an increasing amount of our
expenses will be incurred in currencies other than
U.S. dollars and as a result, we will be required from time
to time to convert currencies to meet our obligations.
Additionally, our suppliers are increasingly located outside of
the U.S., and a significant portion of our products is produced
at our EMS providers production facilities in Thailand and
Malaysia. Furthermore, in connection with the reorganization of
our international subsidiaries, we established a company in
Ireland, and a significant portion of our sales and operations
will now also occur in countries outside of the U.S. As a
result, we are subject to the risks inherent in international
operations. Our international business activities could be
affected, limited or disrupted by a variety of factors,
including, but not limited to:
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Imposition of or changes in governmental controls, taxes,
tariffs, trade restrictions, and regulatory requirements to our
current or future operations;
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Costs and risks of localizing products for international
countries;
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Longer accounts receivable payment cycles;
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Changes in the value of local currencies relative to our
functional currency;
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Fluctuations in freight costs and potential disruptions in the
transportation infrastructure for our products and components;
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Import and export restrictions;
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Loss of tax benefits or increases in tax expenses;
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General economic and social conditions within international
countries;
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Taxation in multiple jurisdictions;
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Difficulty maintaining management oversight and control of
remote locations;
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Potential restrictions on transferring funds between countries
and difficulties associated with repatriating cash generated or
held outside of the U.S. in a tax-efficient manner;
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The increased travel, infrastructure, accounting, and legal
compliance costs associated with multiple international
locations; and
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Political instability, war, or terrorism.
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All of these factors could harm future sales of our products to
international customers or production of our products outside of
the United States, and have a material adverse effect on our
business, results of operations, and financial condition.
Potential
acquisitions or strategic investments may become more costly or
less profitable than originally anticipated and may adversely
affect the price of our common stock.
We may pursue other acquisitions or strategic investments,
including loans to private companies, that could provide new
technologies, products, or service offerings. Acquisitions or
strategic investments may negatively impact our results of
operations as a result of operating losses incurred by the
acquired entity, the use of significant amounts of cash,
potentially dilutive issuances of equity or equity-linked
securities, incurrence of debt, amortization of intangible
assets with determinable lives, or impairment of intangible
assets. Furthermore, we may incur significant expenses pursuing
acquisitions or strategic investments that ultimately may not be
completed. Moreover, to the extent that any proposed acquisition
or strategic investment that is not favorably received by
stockholders, analysts and others in the investment community,
the price of our stock could be adversely affected. In addition,
acquisitions or strategic investments involve numerous risks,
including, but not limited to:
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Difficulties in the assimilation of the operations,
technologies, products, and personnel of the acquired company;
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19
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Purchased technology that is not adopted by customers in the way
or the time frame we anticipated;
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Diversion of managements attention from other business
concerns;
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Risks of entering markets in which we have limited or no prior
experience;
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Risks associated with assuming the legal obligations of the
acquired company;
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Losses incurred by our strategic investments that may be
required to be reflected in our results;
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Risks related to the effect that the acquired companys
internal control processes might have on our financial reporting
and managements report on our internal controls over
financial reporting;
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Potential loss of key employees of the company we invested in or
acquired;
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Risks related to companies we invest in not being able to secure
additional funding, obtain favorable investment terms for future
financings, or to take advantage of liquidity events such as
initial public offerings, mergers, and private sales; and
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There may exist unknown defects of an acquired companys
products or assets that may not be identified due to the
inherent limitations involved in the due diligence process of an
acquisition.
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In the event that an acquisition or strategic investment does
occur and we are unable to obtain anticipated profits or
successfully integrate operations, technologies, products, or
personnel or acquire assets that later become worthless, our
business, results of operations, and financial condition could
be materially adversely affected.
Our
stock price is volatile, which has and may result in lawsuits
against us and our officers and directors.
The stock market in general and the stock prices in technology
based companies in particular, have experienced extreme
volatility that often has been unrelated to the operating
performance of any specific public company. The market price of
our common stock has fluctuated in the past and is likely to
fluctuate in the future as well. For example, during calendar
year 2010 through June 27, 2010, the closing sales price of
our common stock ranged from a low of $9.45 per share to a high
of $14.28 per share. Factors that could have a significant
impact on the market price of our stock include, but are not
limited to, the following:
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Quarterly variations in customer demand and operating results;
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Announcements of new products by us or our competitors;
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The gain or loss of significant customers or design wins;
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Changes in analysts earnings estimates;
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Changes in analyst recommendations, price targets, or other
parameters that may not be related to earnings estimates;
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Rumors or dissemination of false information;
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Pricing pressures;
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Short selling of our common stock;
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General conditions in the computer, storage, or communications
markets;
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Events affecting other companies that investors deem to be
comparable to us; and
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Offers to buy us or a competitor for a premium over recent
trading price.
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In addition, Broadcoms initiation and subsequent
abandonment of its unsolicited takeover proposal to acquire all
of the shares of our common stock has resulted in volatility in
the price of our common stock. Any other takeover proposal by
any third party to acquire the outstanding shares of our common
stock may result in further volatility in the price of our
common stock. If a takeover does not occur following
announcement of
20
a takeover proposal, for any reason, the market price of our
common stock may decline. In addition, our stock price may
decline as a result of the fact that we have been required to
incur, and will continue to be required to incur, significant
expenses related to the Broadcom unsolicited takeover proposal.
In the past, companies, including us, that have experienced
volatility in the market price of their stock have been subject
to securities class action litigation. If we were to be the
subject of similar litigation in the future or experience
unfavorable outcomes in any of our pending litigation, as
discussed in Note 11 in the accompanying notes to our
consolidated financial statements contained elsewhere herein, it
could have a material adverse effect on our business, results of
operations, and financial condition. Such litigation would also
divert managements attention from other business matters.
Terrorist
activities and resulting military and other actions could
adversely affect our business.
The continued threat of terrorism, military action, and
heightened security measures in response to the threat of
terrorism may cause significant disruption to commerce in some
of the geographic areas in which we operate. Additionally, it is
uncertain what impact the reactions to such events by various
governmental agencies and security regulators worldwide will
have on shipping costs. To the extent that such disruptions
result in delays or cancellations of customer orders, delays in
collecting cash, a general decrease in corporate spending on
information technology, or our inability to effectively market,
manufacture, or ship our products, our business, financial
condition, and results of operations could be materially and
adversely affected. We are unable to predict whether the threat
of terrorism or the responses thereto will result in any
long-term commercial disruptions or if such activities or
responses will have any long-term material adverse effect on our
business, results of operations, or financial condition.
Our
corporate offices and principal product development facilities
are located in regions that are subject to earthquakes and other
natural disasters.
Our California and Washington facilities, including our
corporate offices and principal product development facilities,
are located near major earthquake faults. Any disruption in our
business activities, personal injury, or damage to the
facilities in excess of our currently insured amounts as a
result of earthquakes or other such natural disasters, could
have a material adverse effect on our business, results of
operations, and financial condition.
We currently do not carry earthquake insurance. However, we do
carry various other lines of insurance that may or may not be
adequate to protect our business.
Our
certificate of incorporation, provisions of Delaware law, and
any shareholders rights plan could adversely affect the
performance of our stock.
Provisions of our certificate of incorporation and Delaware
General Corporation Law could make it more difficult for a third
party to acquire us, even if doing so would be beneficial to our
shareholders. In addition, although we have recently terminated
our shareholders rights plan, it is possible that we may adopt a
new shareholders rights plan in the future should general
business, market and other conditions, opportunities and risks
arise. The provisions of our certificate of incorporation,
Delaware law, and any shareholders rights plan are generally
intended to encourage potential acquirers to negotiate with us
and allow our board of directors the opportunity to consider
alternative proposals in the interest of maximizing shareholder
value. However, such provisions may also discourage acquisition
proposals or delay or prevent a change in control, which could
harm our stock price.
Our
system of internal controls may be inadequate.
We maintain a system of internal controls in order to ensure we
are able to collect, process, summarize, and disclose the
information required by the Securities and Exchange Commission
within the time periods specified. Any system of controls,
however well designed and operated, can provide only reasonable,
and not absolute, assurance that the objectives of the system
are met. In addition, the design of any control system is based
in part upon certain assumptions about the likelihood of future
events. Due to these and other inherent
21
limitations of control systems, there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
Additionally, public companies in the United States are required
to review their internal controls under the Sarbanes-Oxley Act
of 2002. If the internal controls put in place by us are not
adequate or fail to perform as anticipated, we may be required
to restate our financial statements, receive an adverse audit
opinion on the effectiveness of our internal controls,
and/or take
other actions that will divert significant financial and
managerial resources, as well as be subject to fines
and/or other
government enforcement actions. Furthermore, the price of our
stock could be adversely affected.
Changes
in laws, regulations, and financial accounting standards may
affect our reported results of operations.
New laws, regulations and accounting standards, as well as
changes to and varying interpretations of currently accepted
accounting practices in the technology industry might adversely
affect our reported financial results, which could have an
adverse effect on our stock price.
The
final determination of our income tax liability may be
materially different from our income tax provisions and accruals
and our tax liabilities may be adversely affected by changes in
applicable tax laws.
We are subject to income taxes in both the United States and
international jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions
where the ultimate tax determination is uncertain. Additionally,
our calculations of income taxes are based on our
interpretations of applicable tax laws in the jurisdictions in
which we file.
We have adopted transfer-pricing procedures between our
subsidiaries to regulate intercompany transfers. Our procedures
call for the licensing of intellectual property, the provision
of services, and the sale of products from one subsidiary to
another at prices that we believe are equivalent to arms
length negotiated pricing. We have established these procedures
due to the fact that some of our assets, such as intellectual
property, developed in the U.S., will be utilized among other
affiliated companies. If the U.S. Internal Revenue Service
or the taxing authorities of any other jurisdiction were to
successfully require changes to our transfer pricing practices,
we could become subject to higher taxes and our earnings would
be adversely affected. Any determination of income reallocation
or modification of transfer pricing laws can result in an income
tax assessment on the portion of income deemed to be derived
from the U.S. or other taxing jurisdiction.
Although we believe our tax estimates are reasonable, there is
no assurance that the final determination of our income tax
liability will not be materially different than what is
reflected in our income tax provisions and accruals. Should
additional taxes be assessed as a result of new legislation, an
audit or litigation, or determined in connection with
finalization of our tax returns, or if our effective tax rate
should change as a result of changes in federal, international
or state and local tax laws or their interpretations, or if we
were to change the locations where we operate or if we elect or
are required to transfer funds between jurisdictions, there
could be a material adverse effect on our income tax provision
and net income in the period or periods in which that
determination is made, and potentially to future periods as well.
Changes
in our provision for income taxes or adverse outcomes resulting
from examination of our income tax returns could adversely
affect our results
Our provision for income taxes is subject to volatility and
could be adversely affected by numerous factors including:
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Earnings being lower than anticipated in countries that have
lower tax rates and higher than anticipated in countries that
have higher tax rates;
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22
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Changes in domestic and foreign tax laws including possible
U.S. changes to the taxation of earnings of foreign
subsidiaries, the deductibility of expenses attributable to
foreign income and changes to foreign tax credit rules;
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Expiration or lapses of federal and state research credits;
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Unfavorable results from income tax audits;
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Changes in transfer pricing regulations;
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Changes in allocation of income and expenses related to cost
sharing arrangements, including adjustments related to changes
in the corporate structure, acquisitions or law changes;
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Tax effects of increases in nondeductible compensation;
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Changes in accounting rules or principles, including the
potential adoption of international financial reporting
standards (IFRS) and changes in the valuation of deferred tax
assets and liabilities.
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Significant judgment is required to determine the recognition
and measurement attribute prescribed in the accounting guidance
for uncertainty in income taxes. The accounting guidance for
uncertainty in income taxes applies to all income tax positions,
including the potential recovery of previously paid taxes, which
if settled unfavorably could adversely impact our provision for
income taxes. In addition, we are subject to the continuous
examination of our income tax returns by the Internal Revenue
Service (IRS) and other foreign, state and local tax
authorities. We are currently under audit by the Internal
Revenue Service for tax returns for fiscal years 2008 and 2009.
We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our
provision for income taxes. There can be no assurance that the
outcomes from these continuous examinations will not have an
adverse effect on our operating results and financial condition.
We may
need additional capital in the future and such additional
financing may not be available on favorable terms.
While we believe we have adequate working capital to meet our
expected cash requirements for the next 12 months, we may
need to raise additional funds through public or private debt or
equity financings in order to, without limitation:
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Take advantage of unanticipated opportunities, including more
rapid international expansion or acquisitions of complementary
businesses or technologies;
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Develop new products or services;
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Repay outstanding indebtedness; and
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Respond to unanticipated competitive pressures.
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Any additional financing we may need may not be available on
terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, we may not
be able to take advantage of business opportunities, develop new
products or services, or otherwise respond to unanticipated
competitive pressures. In any such case, our business, results
of operations, and financial condition could be materially
adversely affected.
Global
warming issues may cause us to alter the way we conduct our
business.
The general public is becoming more aware of global warming
issues and as a result, governments around the world are
beginning to focus on addressing this issue. This may result in
new environmental regulations that may unfavorably impact us,
our suppliers, and our customers in how we conduct our business
including the design, development, and manufacturing of our
products. The cost of meeting these requirements may have an
adverse impact on our results of operations and financial
condition.
23
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Item 1B.
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Unresolved
Staff Comments.
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None.
Our corporate offices and principal product development
facilities are currently located in approximately
180,000 square feet of buildings in Costa Mesa, California.
We lease facilities in California, Colorado, Massachusetts,
Texas, Washington, and Bangalore, India primarily for
engineering and development and approximately 9 other remote
offices throughout the world, primarily for sales.
Our future facilities requirements will depend upon our
business, but we believe additional space, if required, may be
obtained on reasonable terms.
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Item 3.
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Legal
Proceedings.
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The information set forth under Note 11 in the notes to the
consolidated financial statements under the caption
Litigation is incorporated herein by reference.
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Item 4.
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Submission
of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of the security holders of
the Company during the fourth quarter of 2010.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity
Securities.
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Principal
Market and Prices
The Companys common stock is traded on the New York Stock
Exchange under the symbol ELX. The following table sets forth
the high and low per share sales prices for our common stock for
the indicated periods, as reported on the New York Stock
Exchange.
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High
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Low
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2010
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Fourth Quarter
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$
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13.90
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$
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8.69
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Third Quarter
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14.34
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10.80
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Second Quarter
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12.33
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9.42
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First Quarter
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11.00
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7.94
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2009
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Fourth Quarter
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$
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11.44
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$
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4.82
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Third Quarter
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7.75
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4.53
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Second Quarter
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11.00
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6.08
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First Quarter
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14.32
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9.77
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Number of
Common Stockholders
The approximate number of holders of record of our common stock
as of August 17, 2010 was 481.
Dividends
We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our earnings for the development
of our business.
24
On January 14, 2009, the Board of Directors declared a
dividend distribution of one preferred stock purchase right for
each share of common stock. The rights were distributed on
January 24, 2009 to the stockholders of record on the close
of business on that date.
Issuer
Purchases of Equity Securities
On December 5, 2006, we announced that our Board of
Directors had authorized the repurchase of up to
$150.0 million of our outstanding common stock over the
next two years. The repurchases under this plan were completed
in the first quarter of fiscal 2009.
In early August 2008, our Board of Directors authorized a new
plan to repurchase up to $100.0 million of our outstanding
common stock. In April 2009, upon receipt of an unsolicited
takeover proposal and related tender offer from Broadcom
Corporation to acquire us, our Board of Directors elected to
temporarily suspend any activity under the share repurchase
plan. In light of Broadcom allowing its tender offer to expire
on July 14, 2009, Emulexs Board of Directors elected
to reactivate the $100.0 million share repurchase plan
effective July 15, 2009. From June 29, 2009 through
June 27, 2010, the Company has repurchased 2.0 million
shares of its common stock for an aggregate purchase price of
approximately $18.2 million or an average of $9.12 per
share under this plan. We may repurchase shares from
time-to-time
in open market purchases or privately negotiated transactions.
The share repurchases will be financed by available cash
balances and cash from operations. Subsequent to fiscal year
ended June 27, 2010, we repurchased 495,200 shares of
our common stock under this program for an aggregate purchase
price of approximately $4.4 million for an average of $8.93
per share.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
That May
|
|
|
|
|
|
|
Average
|
|
|
as Part of
|
|
|
Yet Be
|
|
|
|
Total
|
|
|
Price
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
Number
|
|
|
Paid
|
|
|
Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
per
|
|
|
Plans
|
|
|
Plans
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
or Programs
|
|
|
or Programs
|
|
|
March 29, 2010 - April 25, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,760,136
|
|
April 26, 2010 - May 23, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,760,136
|
|
May 24, 2010 - June 27, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,760,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,760,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of
Unregistered Securities
There were no sales of unregistered securities for the three
months ended June 27, 2010.
Equity
Compensation Plan Information
See Part III, Item 12 Security
Ownership of Certain Beneficial Owners and Management for
certain information regarding our equity compensation plans.
25
Stock
Performance Graph
The graph below compares the cumulative total stockholder return
on the Companys common stock with the cumulative total
return on the Standard & Poors 500 Index and the
S&P 500 Computer Storage and Peripherals Index for the
period of five fiscal years commencing July 4, 2005 and
ended June 27, 2010.
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
EMULEX CORPORATION COMMON STOCK, S&P 500 INDEX AND
S&P 500 COMPUTER STORAGE AND PERIPHERALS INDEX
|
|
|
* |
|
Assumes the value of the investment in the Companys common
stock and each index was $100 on July 4, 2005. |
26
|
|
Item 6.
|
Selected
Financial Data.
|
The following table summarizes certain selected consolidated
financial data. On May 1, 2006, we completed the
acquisition of Aarohi Communications, Inc. (Aarohi), and on
October 2, 2006, we completed the acquisition of Sierra
Logic, Inc. (Sierra Logic).
Selected
Consolidated Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 27,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2010
|
|
|
2009(2)
|
|
|
2008(2)
|
|
|
2007(2)
|
|
|
2006(1)(2)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Host Server Products
|
|
$
|
288,437
|
|
|
$
|
284,099
|
|
|
$
|
352,687
|
|
|
$
|
357,279
|
|
|
$
|
340,566
|
|
Embedded Storage Products
|
|
|
110,283
|
|
|
|
93,559
|
|
|
|
134,858
|
|
|
|
107,578
|
|
|
|
59,203
|
|
Other
|
|
|
430
|
|
|
|
564
|
|
|
|
756
|
|
|
|
5,330
|
|
|
|
3,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
399,150
|
|
|
|
378,222
|
|
|
|
488,301
|
|
|
|
470,187
|
|
|
|
402,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
152,458
|
|
|
|
146,465
|
|
|
|
187,077
|
|
|
|
195,579
|
|
|
|
163,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
246,692
|
|
|
|
231,757
|
|
|
|
301,224
|
|
|
|
274,608
|
|
|
|
238,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development
|
|
|
126,850
|
|
|
|
129,795
|
|
|
|
129,232
|
|
|
|
117,833
|
|
|
|
89,669
|
|
Selling and marketing
|
|
|
56,554
|
|
|
|
53,460
|
|
|
|
57,946
|
|
|
|
47,870
|
|
|
|
36,169
|
|
General and administrative
|
|
|
50,454
|
|
|
|
41,888
|
|
|
|
38,531
|
|
|
|
31,416
|
|
|
|
23,680
|
|
Amortization of other intangible assets
|
|
|
6,792
|
|
|
|
5,337
|
|
|
|
9,260
|
|
|
|
12,082
|
|
|
|
10,944
|
|
Impairment of other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,001
|
|
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,225
|
|
|
|
17,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
240,650
|
|
|
|
230,480
|
|
|
|
234,969
|
|
|
|
230,427
|
|
|
|
177,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6,042
|
|
|
|
1,277
|
|
|
|
66,255
|
|
|
|
44,181
|
|
|
|
61,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
286
|
|
|
|
4,362
|
|
|
|
11,672
|
|
|
|
20,000
|
|
|
|
21,150
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(29
|
)
|
|
|
(27
|
)
|
|
|
(1,179
|
)
|
|
|
(2,494
|
)
|
Other income (expense), net
|
|
|
23
|
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
(3,919
|
)
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating income, net
|
|
|
302
|
|
|
|
4,329
|
|
|
|
11,662
|
|
|
|
14,902
|
|
|
|
18,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,344
|
|
|
|
5,606
|
|
|
|
77,917
|
|
|
|
59,083
|
|
|
|
79,915
|
|
Income tax (benefit) provision
|
|
|
(17,276
|
)
|
|
|
(1,938
|
)
|
|
|
84,988
|
|
|
|
29,649
|
|
|
|
39,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
23,620
|
|
|
$
|
7,544
|
|
|
$
|
(7,071
|
)
|
|
$
|
29,434
|
|
|
$
|
40,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.34
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.34
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,097
|
|
|
|
80,770
|
|
|
|
82,323
|
|
|
|
84,545
|
|
|
|
83,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
81,282
|
|
|
|
81,113
|
|
|
|
82,323
|
|
|
|
88,781
|
|
|
|
91,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net revenues have been reclassified into Host Server Products,
Embedded Storage Products, and Other categories. |
|
(2) |
|
EPS data for all periods presented were adjusted to conform to
the authoritative guidance issued by the FASB in fiscal year
2010. |
27
Selected
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 27,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Total current assets
|
|
$
|
416,551
|
|
|
$
|
406,553
|
|
|
$
|
457,047
|
|
|
$
|
399,054
|
|
|
$
|
707,554
|
|
Total current liabilities
|
|
|
60,430
|
|
|
|
52,240
|
|
|
|
87,605
|
|
|
|
70,529
|
|
|
|
302,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
356,121
|
|
|
|
354,313
|
|
|
|
369,442
|
|
|
|
328,525
|
|
|
|
404,990
|
|
Total assets
|
|
|
689,450
|
|
|
|
658,918
|
|
|
|
699,056
|
|
|
|
659,477
|
|
|
|
860,157
|
|
Convertible subordinated notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,177
|
|
Accumulated deficit
|
|
|
(372,450
|
)
|
|
|
(396,070
|
)
|
|
|
(403,614
|
)
|
|
|
(401,982
|
)
|
|
|
(431,416
|
)
|
Total stockholders equity
|
|
|
591,182
|
|
|
|
569,444
|
|
|
|
575,839
|
|
|
|
581,907
|
|
|
|
556,913
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Forward-Looking
Statements
Certain statements contained in this
Form 10-K
may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
We may also make forward-looking statements in other reports
filed with the Securities and Exchange Commission, in materials
delivered to stockholders and in press releases. In addition,
our representatives may from time to time make oral
forward-looking statements. Forward-looking statements provide
current expectations of future events based on certain
assumptions and include any statement that does not directly
relate to any historical or current fact. Words such as
anticipates, in the opinion,
believes, intends, expects,
may, will, should,
could, plans, forecasts,
estimates, predicts,
projects, potential,
continue, and similar expressions may be intended to
identify forward-looking statements.
Actual future results could differ materially from those
described in the forward-looking statements as a result of a
variety of factors, including those discussed in
Managements Discussion and Analysis of Financial Condition
and Results of Operations set forth below, and, in particular,
those in the section entitled Risk Factors in
Part I, Item 1A of the Annual Report on
Form 10-K
included elsewhere herein. We expressly disclaim any obligation
or undertaking to release publicly any updates or changes to
these forward-looking statements that may be made to reflect any
future events or circumstances. We wish to caution readers that
a number of important factors could cause actual results to
differ materially from those in the forward-looking statements.
The fact that the economy generally, and the technology and
storage segments specifically, have been in a state of
uncertainty makes it difficult to determine if past experience
is a good guide to the future and makes it impossible to
determine if markets will grow or shrink in the short term. The
recent economic downturn and the resulting economic uncertainty
for our customers and the storage networking market as a whole
has and could continue to adversely affect our revenues and
results of operations. Furthermore, the effect of any actual or
potential unsolicited offers to acquire us may have an adverse
effect on our operations. As a result of this uncertainty, we
are unable to predict with any accuracy what future results
might be. Other factors affecting these forward-looking
statements include but are not limited to the following: slower
than expected growth of the storage networking market or the
failure of our Original Equipment Manufacturer (OEM) customers
to successfully incorporate our products into their systems; our
dependence on a limited number of customers and the effects of
the loss of, or decrease or delays in orders by, any such
customers, or the failure of such customers to make payments;
the emergence of new or stronger competitors as a result of
consolidation movements in the market; the timing and market
acceptance of our or our OEM customers new or enhanced
products; the variability in the level of our backlog and the
variable and seasonal procurement patterns of our customers;
impairment charges, including but not limited to goodwill,
intangible assets, and equity investments recorded under the
cost method; changes in tax rates or legislation; the effects of
acquisitions; the effects of terrorist activities, natural
disasters and any resulting political or economic instability;
the highly competitive nature of the markets for our products as
well as pricing pressures that may result from such competitive
conditions; the effect of rapid migration of customers towards
newer, lower cost
28
product platforms; possible transitions from board or box level
to application specific computer chip solutions for selected
applications; a shift in unit product mix from higher-end to
lower-end or mezzanine card products; a decrease in the average
unit selling prices or an increase in the manufactured cost of
our products; delays in product development; our reliance on
third-party suppliers and subcontractors for components and
assembly; any inadequacy of our intellectual property protection
or the potential that third-party claims of infringement and any
related indemnity obligations could adversely affect our
operations or financial condition; our ability to attract and
retain key technical personnel; our ability to benefit from our
research and development activities; our dependence on
international sales and internationally produced products;
changes in accounting standards; and the potential effects of
global warming and any resulting regulatory changes on our
business. These and other factors could cause actual results to
differ materially from those in the forward-looking statements
and are discussed elsewhere in this Annual Report on
Form 10-K,
in our other filings with the Securities and Exchange Commission
or in materials incorporated therein by reference.
Executive
Overview
Emulex creates enterprise-class products that connect storage,
servers and networks. We are a leading supplier of a broad range
of advanced storage networking convergence solutions. The
worlds leading server and storage providers depend on our
products to help build high performance, highly reliable, and
scalable storage networking solutions. Our products and
technologies leverage flexible multi protocol architectures that
extend from deep within the storage array to the server edge of
storage area networks (SANs).
Our Company operates within a single business segment that has
two market focused product lines Host Server
Products (HSP) and Embedded Storage Products (ESP). HSP connect
servers and storage to networks using a variety of industry
standard protocols that support Internet Protocol (IP) and
storage networking, including Transmission Control Protocol
(TCP)/IP, Internet Small Computer System Interface (iSCSI),
Network Attached Storage (NAS) and Fibre Channel over Ethernet
(FCoE). Our Ethernet based products include OneConnect Universal
Converged Network Adapters (UCNAs) that enable network
convergence. Our Fibre Channel based products include
LightPulse®
HBAs, custom form factor solutions for OEM blade servers
and application specific integrated circuits (ASICs). These
products enable servers to efficiently connect to local area
networks (LANs), SANs, and NAS by offloading data communication
processing tasks from the server as information is delivered and
sent to the storage network.
ESP includes our InSpeed,
FibreSpy®,
Input/Output Controllers (IOC) solutions,
switch-on-a-chip
(SOC), bridge products, and router products. Embedded storage
switches, bridges, routers, and IOCs are deployed inside storage
arrays, tape libraries, and other storage appliances, connect
storage controllers to storage capacity delivering improved
performance, reliability, and storage connectivity.
Our Other category primarily consists of contract engineering
services, legacy and other products.
We rely almost exclusively on OEMs and sales through
distribution channels for our revenue. Our OEM customers include
the worlds leading server and storage providers, including
Dell Inc. (Dell), EMC Corporation (EMC), Fujitsu Ltd. (Fujitsu),
Groupe Bull (Bull), Hewlett-Packard Company (Hewlett-Packard),
Hitachi Data Systems (HDS), Hitachi Limited (Hitachi),
International Business Machines Corporation (IBM), LSI
Corporation (LSI), NEC Corporation (NEC), Network Appliance,
Inc. (NetApp), Oracle America, Inc. (Oracle), Quantum
Corporation (Quantum), Sun Microsystems, Inc. (Sun), Unisys
Corporation (Unisys), and Xyratex Ltd. (Xyratex). Our
distribution partners include Arrow ECS Denmark A/S (Arrow),
Avnet, Inc. (Avnet), Bell Microproducts, Ltd. (Bell), Info X
Distribution, LLC (Info X), Ingram Micro Inc. (Ingram Micro),
Macnica Networks Corporation (Macnica), Netmarks Inc.
(Netmarks), Tech Data Corporation (Tech Data), and Tokyo
Electron Device Ltd. (TED). The market for storage networking
infrastructure solutions is concentrated among large OEMs, and
as such, a significant portion of our revenues are generated
from sales to a limited number of customers.
As of June 27, 2010, we had a total of 791 employees.
Our corporate headquarters are located at 3333 Susan Street,
Costa Mesa, California 92626. Our periodic and current reports
filed with, or furnished to, the Securities and Exchange
Commission pursuant to the
29
requirements of the Securities and Exchange Act of 1934 are
available free of charge through our website (www.emulex.com) as
soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and
Exchange Commission. References contained herein to
Emulex, the Company, the
Registrant, we, our, and
us refer to Emulex Corporation and its subsidiaries.
Global
Initiatives
As part of our global initiatives, we created an Irish
subsidiary to expand our international operations by providing
local customer service and support to our customers outside of
the United States in the fourth quarter of fiscal 2008. In
addition, Emulex granted an intellectual property license and
entered into a research and development cost sharing agreement
with its subsidiary in the Isle of Man. The terms of the license
require that the subsidiary make prepayments of expected
royalties to a U.S. subsidiary, the first of which was paid
before the end of fiscal 2008 in the amount of approximately
$131.0 million, for expected royalties relating to fiscal
2009 through 2015. In the fourth quarter of fiscal 2010, the
subsidiary made the second prepayment of approximately
$6.5 million for expected royalties relating to fiscal 2011
through 2015. These global initiatives are expected to continue
to reduce our effective tax rate.
Our cash balances and investments are held in numerous locations
throughout the world. The cash and investments held outside of
the U.S. are expected to increase, primarily in our Isle of
Man and Ireland subsidiaries. Substantially all of the amounts
held outside of the U.S. will be available for repatriation
at any time, but under current law, repatriated funds would be
subject to U.S. federal income taxes, less applicable
foreign tax credits.
Business
Combination
On August 25, 2010, subsequent to our fiscal 2010, we
acquired ServerEngines Corporation (ServerEngines) for
consideration including approximately $103.0 million in
cash, subject to reduction for ServerEngines debt
outstanding at the close of the acquisition and other
adjustments, and approximately 12.0 million shares of our
common stock, of which approximately 4.0 million shares are
issuable upon achievement of two post-closing milestones. The
combination of Emulex and ServerEngines technology would
create a unique offering to deliver a foundation for converged
networking solutions, including adapters, mezzanine cards and
LAN on Motherboard (LOM) solutions.
Results
of Operations for Emulex Corporation and Subsidiaries
The following discussion and analysis should be read in
conjunction with the selected consolidated financial data set
forth in Item 6 Selected Consolidated
Financial Data, and our Consolidated Financial Statements
and notes thereto included elsewhere in this Annual Report on
Form 10-K.
All references to years refer to our fiscal years ended
June 27, 2010, June 28, 2009, and June 29, 2008,
as applicable, unless the
30
calendar year is specified. The following table sets forth
certain financial data for the years indicated as a percentage
of net revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Net Revenues
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Host Server Products
|
|
|
72
|
%
|
|
|
75
|
%
|
|
|
72
|
%
|
Embedded Storage Products
|
|
|
28
|
|
|
|
25
|
|
|
|
28
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
38
|
|
|
|
39
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
62
|
|
|
|
61
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development
|
|
|
32
|
|
|
|
34
|
|
|
|
26
|
|
Selling and marketing
|
|
|
14
|
|
|
|
14
|
|
|
|
12
|
|
General and administrative
|
|
|
12
|
|
|
|
11
|
|
|
|
8
|
|
Amortization of other intangible assets
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
60
|
|
|
|
61
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating income, net
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2
|
|
|
|
1
|
|
|
|
16
|
|
Income tax (benefit) provision
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2010 versus Fiscal 2009
Net Revenues. Net revenues for fiscal 2010
increased approximately $20.9 million, or 6%, to
approximately $399.2 million, compared to approximately
$378.2 million in fiscal 2009.
Net
Revenues by Product Line
The following chart details our net revenues by product line for
fiscal years 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Line
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2010
|
|
|
Net Revenues
|
|
|
2009
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Host Server Products
|
|
$
|
288,437
|
|
|
|
72
|
%
|
|
$
|
284,099
|
|
|
|
75
|
%
|
|
$
|
4,338
|
|
|
|
2
|
%
|
Embedded Storage Products
|
|
|
110,283
|
|
|
|
28
|
|
|
|
93,559
|
|
|
|
25
|
|
|
|
16,724
|
|
|
|
18
|
%
|
Other
|
|
|
430
|
|
|
|
|
|
|
|
564
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
399,150
|
|
|
|
100
|
%
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
20,928
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSP primarily consists of HBAs, mezzanine cards, input/output
(I/O) ASICs, and UCNAs. For fiscal 2010, our Fibre Channel
based products accounted for most of our HSP revenues. The
increase in our HSP net
31
revenue for fiscal 2010 compared to fiscal 2009 was primarily
due to an increase of approximately 10% in units shipped
partially offset by a decrease of approximately 8% in average
selling price.
ESP primarily consists of our
InSpeed®,
FibreSpy®,
I/O controller solutions, and bridge and router products. The
increase in our ESP net revenue for fiscal 2010 compared to
fiscal 2009 was primarily due to an increase of approximately
24% in units shipped partially offset by a decrease of
approximately 5% in average selling price.
Our Other category primarily consists of contract engineering
services, legacy and other products.
Net
Revenues by Major Customers
In addition to direct sales, some of our larger OEM customers
purchase or market products indirectly through distributors,
resellers or other third parties. If these indirect sales are
purchases of customer-specific models, we are able to track
these sales. However, if these indirect sales are purchases of
our standard models, we are not able to distinguish them by OEM
customer. Customers whose direct net revenues, or total direct
and indirect net revenues (including customer-specific models
purchased or marketed indirectly through distributors, resellers
and other third parties), exceeded 10% of our current fiscal
year net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Major Customers
|
|
|
|
|
Total Direct
|
|
|
Direct
|
|
and Indirect
|
|
|
Revenues
|
|
Revenues(2)
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Net revenue percentage(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
|
|
|
|
|
|
|
|
|
|
|
12
|
%
|
|
|
14
|
%
|
Hewlett-Packard
|
|
|
13
|
%
|
|
|
17
|
%
|
|
|
14
|
%
|
|
|
17
|
%
|
IBM
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
31
|
%
|
|
|
31
|
%
|
|
|
|
(1) |
|
Amounts less than 10% are not presented. |
|
(2) |
|
Customer-specific models purchased or marketed indirectly
through distributors, resellers, and other third parties are
included with the OEMs revenues in these columns rather
than as revenue for the distributors, resellers or other third
parties. |
Direct sales to our top five customers accounted for
approximately 57% and 61% of total net revenues for fiscal years
2010 and 2009, respectively. Direct and indirect sales to our
top five customers accounted for approximately 72% and 73% of
total net revenues for fiscal years 2010 and 2009, respectively.
Our net revenues from customers can be significantly impacted by
changes to our customers business and their business
models.
Net
Revenues by Sales Channel
Net revenues by sales channel were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Sales Channel
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2010
|
|
|
Net Revenues
|
|
|
2009
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
OEM
|
|
$
|
335,122
|
|
|
|
84
|
%
|
|
$
|
306,032
|
|
|
|
81
|
%
|
|
$
|
29,090
|
|
|
|
10
|
%
|
Distribution
|
|
|
63,681
|
|
|
|
16
|
%
|
|
|
71,894
|
|
|
|
19
|
%
|
|
|
(8,213
|
)
|
|
|
(11
|
)%
|
Other
|
|
|
347
|
|
|
|
|
|
|
|
296
|
|
|
|
|
|
|
|
51
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
399,150
|
|
|
|
100
|
%
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
20,928
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
The increase in OEM net revenues as a percentage of total net
revenues was mainly due to end users migrating from purchasing
our products through the distribution channel toward purchasing
our products through OEM server manufacturers. We believe that
our net revenues are being generated primarily as a result of
product certifications and qualifications with our OEM
customers, which take products directly and indirectly through
distribution and contract manufacturers. We view product
certifications and qualifications as an important indicator of
future revenue opportunities and growth for the Company.
However, product certifications and qualifications do not
necessarily ensure continued market acceptance of our products
by our OEM customers. It is also very difficult to determine the
future impact, if any, of product certifications and
qualifications on our revenues.
Net
Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to
location were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Territory
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2010
|
|
|
Net Revenues
|
|
|
2009
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Asia Pacific
|
|
$
|
141,105
|
|
|
|
35
|
%
|
|
$
|
107,914
|
|
|
|
29
|
%
|
|
$
|
33,191
|
|
|
|
31
|
%
|
United States
|
|
|
130,511
|
|
|
|
33
|
%
|
|
|
144,201
|
|
|
|
38
|
%
|
|
|
(13,690
|
)
|
|
|
(9
|
)%
|
Europe, Middle East, and Africa
|
|
|
121,757
|
|
|
|
31
|
%
|
|
|
120,260
|
|
|
|
32
|
%
|
|
|
1,497
|
|
|
|
1
|
%
|
Rest of the world
|
|
|
5,777
|
|
|
|
1
|
%
|
|
|
5,847
|
|
|
|
1
|
%
|
|
|
(70
|
)
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
399,150
|
|
|
|
100
|
%
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
20,928
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe the decrease in United States net revenues and
increase in Asia Pacific net revenues as a percentage of total
net revenues in fiscal 2010 compared to fiscal 2009 was
primarily due to our OEM customers migrating towards using
contract manufacturers located internationally, predominantly in
Asia Pacific. However, as we sell to OEMs and distributors who
ultimately resell our products to their customers, the
geographic mix of our net revenues may not be reflective of the
geographic mix of end-user demand or installations.
Gross Profit. Gross profit consists of net
revenues less cost of sales. Our gross profit for fiscal 2010
and fiscal 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$246,692
|
|
62%
|
|
$231,757
|
|
61%
|
|
$14,935
|
|
1%
|
Cost of sales includes the cost of producing, supporting, and
managing our supply of quality finished products. Cost of sales
also included approximately $18.9 million of amortization
of technology intangible assets for both fiscal years 2010 and
2009. Approximately $1.3 million and $1.4 million of
share-based compensation expense were included in cost of sales
in fiscal years 2010 and 2009, respectively. Gross margin
increased slightly during fiscal 2010 primarily due to the
consumption of previously reserved excess inventories, a
favorable mix of higher margin legacy ESP products, and
efficiencies resulting from higher manufacturing volume.
Although gross margin increased slightly in fiscal 2010 compared
to fiscal 2009, we anticipate gross margin will trend downward
over time as faster growing, lower gross margin products become
a larger portion of our business.
Engineering and Development. Engineering and
development expenses consisted primarily of salaries and related
expenses for personnel engaged in the design, development, and
support of our products. These expenses included third-party
fees paid to consultants, prototype development expenses, and
computer service
33
costs related to supporting computer tools used in the design
process. Expenses for fiscal 2010 and fiscal 2009 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Engineering and Development
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$126,850
|
|
32%
|
|
$129,795
|
|
34%
|
|
$(2,945)
|
|
(2)%
|
Engineering and development expenses for fiscal 2010 compared to
fiscal 2009 decreased approximately $2.9 million, or 2%.
Approximately $7.3 million and $10.2 million of
share-based compensation expense was included in engineering and
development costs for fiscal 2010 and fiscal 2009, respectively.
During fiscal 2009, we implemented organizational changes and
reduced engineering and development headcount to 448, incurring
severance and related charges of approximately
$1.9 million. During fiscal 2010, the reduced headcount
resulted in a decrease of approximately $1.2 million in
salary and related expenses compared to the same period in the
prior year, offset by an increase in performance based
compensation of approximately $2.0 million. Towards the end
of fiscal 2010, engineering and development headcount increased
to 463, primarily due to employees hired in connection with the
purchase of a business from a privately-held storage networking
company. The remaining change in engineering and development
expenses was primarily due to an increase in new product
development of approximately $5.9 million, partially offset
by a decrease in depreciation expense of approximately
$1.3 million, a decrease in software expenses of
approximately $2.0 million, and a decrease in information
technology expenses of approximately $1.9 million. We will
continue to invest in engineering and development activities and
anticipate expenditures will increase in this area with the
recent acquisition of ServerEngines.
Selling and Marketing. Selling and marketing
expenses consisted primarily of salaries, commissions, and
related expenses for personnel engaged in the marketing and
sales of our products, as well as trade shows, product
literature, promotional support costs, and other advertising
related costs. Expenses for fiscal 2010 and fiscal 2009 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$56,554
|
|
14%
|
|
$53,460
|
|
14%
|
|
$3,094
|
|
%
|
Selling and marketing expenses for fiscal 2010 compared to
fiscal 2009 increased approximately $3.1 million, or 6%.
Approximately $4.0 million and $4.1 million of
share-based compensation expense was included in selling and
marketing costs for fiscal 2010 and 2009, respectively. During
fiscal 2009, we implemented organizational changes and recorded
approximately $1.6 million in severance and related charges
related to sales and marketing. Towards the end of fiscal 2010,
selling and marketing headcount increased to 130 compared to 125
at the end of fiscal 2009. The increase in headcount resulted in
an increase of approximately $0.2 million in salary and
related expenses compared to the same period in fiscal 2009. The
remaining change in selling and marketing expenses was due to an
increase in performance based compensation of approximately
$3.2 million, an increase in travel and related expenses of
approximately $0.9 million, an increase in outside services
of approximately $0.8 million, and an increase in corporate
sponsorship of approximately $0.2 million, partially offset
by a decrease in rent expense of approximately
$0.9 million. We will continue to closely manage and target
advertising, market promotions, and heighten brand awareness of
our new and existing products in an effort to provide overall
revenue growth.
General and Administrative. Ongoing general
and administrative expenses consisted primarily of salaries and
related expenses for executives, financial accounting support,
human resources, administrative services, professional fees, and
other corporate expenses. Expenses for fiscal 2010 and fiscal
2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$50,454
|
|
12%
|
|
$41,888
|
|
11%
|
|
$8,566
|
|
1%
|
34
General and administrative expenses for fiscal 2010 compared to
fiscal 2009 increased approximately $8.6 million, or 20%.
Approximately $5.5 million and $7.3 million of
share-based compensation expense was included in general and
administrative costs for fiscal 2010 and 2009, respectively.
General and administrative headcount decreased slightly to 128
at the end of fiscal 2010 compared to 132 at the end of fiscal
2009. During fiscal 2009, we implemented organizational changes
and recorded approximately $0.6 million in severance and
related charges related to general administration. The decrease
in headcount resulted in a decrease of approximately
$0.8 million in salary and related expenses compared to the
same period in fiscal 2009, offset by an increase in performance
based compensation of approximately $2.4 million. The
remaining change in general and administrative expenses was
primarily due an increase of approximately $8.9 million in
costs related to the Broadcom unsolicited takeover proposal and
related litigation and an increase in acquisition related costs
of approximately $2.5 million, partially offset by a
decrease in facilities expenses of approximately
$0.8 million, a decrease in outside services of
approximately $0.6 million, and a decrease in information
technology expenses of approximately $0.5 million.
Amortization of Other Intangible
Assets. Amortization of other intangible assets
consisted of amortization of intangible assets such as patents,
customer relationships, and tradenames with estimable lives. Our
amortization of expense for fiscal 2010 and fiscal 2009 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortization of Other Intangible Assets
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$6,792
|
|
2%
|
|
$5,337
|
|
1%
|
|
$1,455
|
|
1%
|
Amortization of other intangible assets for fiscal 2010 compared
to fiscal 2009 increased approximately $1.5 million, or
27%. The increase was primarily due to amortization expense
related to a patent licensing agreement entered into in the
fiscal 2010 partially offset by a lower unamortized balance of
intangibles at the beginning of the current fiscal year.
Nonoperating Income, net. Nonoperating income,
net, consisted primarily of interest income, interest expense,
and other non-operating income and expense items. Our
nonoperating income, net for fiscal 2010 and fiscal 2009 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nonoperating Income, Net
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$302
|
|
%
|
|
$4,329
|
|
1%
|
|
$(4,027)
|
|
(1)%
|
Our nonoperating income, net, for fiscal 2010 compared to fiscal
2009 decreased approximately $4.0 million, or 93%. The net
decrease was primarily due to a lower balance of investments
combined with lower interest rates on investments.
Income taxes. Income taxes (benefits) for
fiscal 2010 and fiscal 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2010
|
|
Net Revenues
|
|
2009
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$(17,276)
|
|
(4)%
|
|
$(1,938)
|
|
(1)%
|
|
$(15,338)
|
|
(3)%
|
Income taxes for fiscal 2010 compared to fiscal 2009 decreased
approximately $15.3 million, or 791%. Our effective tax
rate was a benefit of approximately 272% for fiscal 2010
compared to a benefit of approximately 35% for fiscal 2009. The
decrease in income taxes for fiscal 2010 compared to fiscal 2009
was primarily due to a benefit of approximately
$10.2 million resulting from lower taxable income combined
with a change in the geographic mix of taxable income between
domestic and foreign jurisdictions, a tax benefit related to
domestic production activities deductions for tax years 2005
through 2007 of approximately $5.7 million, an increase in
tax benefits related to share-based compensation of
approximately $1.1 million, a tax benefit of approximately
$4.0 million related to the option exchange program,
partially offset by a decrease in tax benefits related to lower
Federal research credits of approximately $3.3 million and
a decrease in tax benefits related to a release of liabilities
for uncertain tax positions as a result of an expiration of
statute of
35
limitations of approximately $1.4 million. Tax benefits
from Federal research credits were lower during fiscal 2010
compared to fiscal 2009 due to the expiration of the Federal
research credit on December 31, 2009 and the retroactive
extension of the Federal research credit in October 2008 as part
of the Emergency Economic Stabilization Act of 2008.
Fiscal
2009 versus Fiscal 2008
Net Revenues. Net revenues for fiscal 2009
decreased approximately $110.1 million, or 23%, to
approximately $378.2 million, compared to approximately
$488.3 million in fiscal 2008. We believe the decrease in
net revenues for fiscal 2009 compared to fiscal 2008 was
primarily due to a global economic slowdown that has resulted in
decreased spending in general, and in the technology sector
specifically.
Net
Revenues by Product Line
The following chart details our net revenues by product line for
fiscal years 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Product Line
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2009
|
|
|
Net Revenues
|
|
|
2008
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Host Server Products
|
|
$
|
284,099
|
|
|
|
75
|
%
|
|
$
|
352,687
|
|
|
|
72
|
%
|
|
$
|
(68,588
|
)
|
|
|
(19
|
)%
|
Embedded Storage Products
|
|
|
93,559
|
|
|
|
25
|
|
|
|
134,858
|
|
|
|
28
|
|
|
|
(41,299
|
)
|
|
|
(31
|
)%
|
Other
|
|
|
564
|
|
|
|
|
|
|
|
756
|
|
|
|
|
|
|
|
(192
|
)
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
488,301
|
|
|
|
100
|
%
|
|
$
|
(110,079
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HSP primarily consists of HBAs, mezzanine cards, input/output
(I/O) ASICs, and UCNAs. For fiscal 2009, our Fibre Channel
based products were the vast majority of our HSP revenues. The
decrease in our HSP net revenue for fiscal 2009 compared to
fiscal 2008 was primarily due to a decrease of approximately 12%
in average selling price combined with a decrease of
approximately 9% in units shipped.
ESP primarily consists of our
InSpeed®,
FibreSpy®,
I/O controller solutions, and bridge and router products. The
decrease in our ESP net revenue for fiscal 2009 compared to
fiscal 2008 was primarily due to a decrease in average selling
price of approximately 17% combined with a decrease in units
shipped of approximately 16%.
Our Other category primarily consists of contract engineering
services, legacy and other products.
Net
Revenues by Major Customers
In addition to direct sales, some of our larger OEM customers
purchase or market products indirectly through distributors,
resellers or other third parties. If these indirect sales are
purchases of customer-specific models, we are able to track
these sales. However, if these indirect sales are purchases of
our standard models, we are not able to distinguish them by OEM
customer. Customers whose direct net revenues, or total direct
and indirect net revenues (including customer-specific models
purchased or marketed indirectly through
36
distributors, resellers and other third parties), exceeded 10%
of our current fiscal year net revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Major Customers
|
|
|
|
|
Total Direct
|
|
|
Direct
|
|
and Indirect
|
|
|
Revenues
|
|
Revenues(2)
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Net revenue percentage(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OEM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMC
|
|
|
|
|
|
|
|
|
|
|
14
|
%
|
|
|
18
|
%
|
Hewlett-Packard
|
|
|
17
|
%
|
|
|
15
|
%
|
|
|
17
|
%
|
|
|
15
|
%
|
IBM
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
31
|
%
|
|
|
28
|
%
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Info X
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts less than 10% are not presented. |
|
(2) |
|
Customer-specific models purchased or marketed indirectly
through distributors, resellers, and other third parties are
included with the OEMs revenues in these columns rather
than as revenue for the distributors, resellers or other third
parties. |
Direct sales to our top five customers accounted for
approximately 61% of total net revenues for both fiscal years
2009 and 2008. Direct and indirect sales to our top five
customers accounted for approximately 73% of total net revenues
for both fiscal years 2009 and 2008. Our net revenues from
customers can be significantly impacted by changes to our
customers business and their business models.
Net
Revenues by Sales Channel
Net revenues by sales channel for fiscal years 2009 and 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Sales Channel
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2009
|
|
|
Net Revenues
|
|
|
2008
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
OEM
|
|
$
|
306,032
|
|
|
|
81
|
%
|
|
$
|
366,717
|
|
|
|
75
|
%
|
|
$
|
(60,685
|
)
|
|
|
(17
|
)%
|
Distribution
|
|
|
71,894
|
|
|
|
19
|
%
|
|
|
121,044
|
|
|
|
25
|
%
|
|
|
(49,150
|
)
|
|
|
(41
|
)%
|
Other
|
|
|
296
|
|
|
|
|
|
|
|
540
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
(45
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
488,301
|
|
|
|
100
|
%
|
|
$
|
(110,079
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in OEM net revenues as a percentage of total net
revenues was mainly due to end users migrating from purchasing
our products through the distribution channel toward purchasing
our products through OEM server manufacturers. We believe that
our net revenues are being generated primarily as a result of
product certifications and qualifications with our OEM
customers, which take products directly and indirectly through
distribution and contract manufacturers. We view product
certifications and qualifications as an important indicator of
future revenue opportunities and growth for the Company.
However, product certifications and qualifications do not
necessarily ensure continued market acceptance of our products
by our OEM customers. It is also very difficult to determine the
future impact, if any, of product certifications and
qualifications on our revenues.
37
Net
Revenues by Geographic Territory
Our net revenues by geographic territory based on billed-to
location for fiscal years 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Territory
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
Percentage of
|
|
|
Increase/
|
|
|
Percentage
|
|
|
|
2009
|
|
|
Net Revenues
|
|
|
2008
|
|
|
Net Revenues
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
United States
|
|
$
|
144,201
|
|
|
|
38
|
%
|
|
$
|
197,063
|
|
|
|
40
|
%
|
|
$
|
(52,862
|
)
|
|
|
(27
|
)%
|
Europe, Middle East, and Africa
|
|
|
120,260
|
|
|
|
32
|
%
|
|
|
160,386
|
|
|
|
33
|
%
|
|
|
(40,126
|
)
|
|
|
(25
|
)%
|
Asia Pacific
|
|
|
107,914
|
|
|
|
29
|
%
|
|
|
125,392
|
|
|
|
26
|
%
|
|
|
(17,478
|
)
|
|
|
(14
|
)%
|
Rest of the world
|
|
|
5,847
|
|
|
|
1
|
%
|
|
|
5,460
|
|
|
|
1
|
%
|
|
|
387
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
488,301
|
|
|
|
100
|
%
|
|
$
|
(110,079
|
)
|
|
|
(23
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We believe the decrease, as a percentage of net revenues, in
United States net revenues and international net revenues for
fiscal 2009 compared to fiscal 2008 was primarily due to an
increase in products being sourced by our customers to locations
outside of the United States combined with a global economic
slowdown that has resulted in decreased spending in general, and
in the technology sector specifically. However, as we sell to
OEMs and distributors who ultimately resell our products to
their customers, the geographic mix of our net revenues may not
be reflective of the geographic mix of end-user demand or
installations.
Gross Profit. Gross profit consists of net
revenues less cost of sales. Our gross profit for fiscal 2009
and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$231,757
|
|
61%
|
|
$301,224
|
|
62%
|
|
$(69,467)
|
|
%
|
Cost of sales includes the cost of producing, supporting, and
managing our supply of quality finished products. Cost of sales
also included approximately $18.9 million and
$23.0 million of amortization of technology intangible
assets for fiscal years 2009 and 2008 respectively. The decrease
in amortization of technology intangible assets was primarily
due to various core and developed technology intangible assets
from prior acquisitions being fully amortized. Approximately
$1.4 million and $1.3 million of share-based
compensation expense were included in cost of sales in fiscal
years 2009 and 2008, respectively. Gross margin decreased during
fiscal 2009 primarily due to the loss of efficiencies resulting
from lower manufacturing volume combined with a decline in
average sales prices.
Engineering and Development. Engineering and
development expenses consisted primarily of salaries and related
expenses for personnel engaged in the design, development, and
support of our products. These expenses included third-party
fees paid to consultants, prototype development expenses, and
computer service costs related to supporting computer tools used
in the engineering and design process. Expenses for fiscal 2009
and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Engineering and Development
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$129,795
|
|
34%
|
|
$129,232
|
|
26%
|
|
$563
|
|
8%
|
Engineering and development expenses for fiscal 2009 compared to
fiscal 2008 increased approximately $0.6 million, or less
than 1%. Approximately $10.2 million and $12.0 million
of share-based compensation expense was included in engineering
and development costs for fiscal 2009 and fiscal 2008,
respectively. During fiscal 2009, we implemented organizational
changes and recorded approximately $1.9 million in
severance and related charges related to engineering. As a
result, engineering and development headcount decreased to 448
at June 28, 2009 from 493 at June 29, 2008. The
decrease in headcount resulted in a net
38
decrease of approximately $4.1 million in salary and
related expenses as compared to the same period in fiscal 2008.
The remaining change was primarily due to an increase in
facilities and depreciation expense of approximately
$4.9 million primarily related to new engineering
facilities in San Jose, California, and Bangalore, India,
combined with a full years depreciation of the facilities
in Roseville, California, and an increase in new product
development costs of approximately $0.8 million, partially
offset by a decrease in travel and related expenses of
approximately $1.2 million. The increase in engineering and
development expenses as a percentage of revenues was primarily
due to the relatively fixed amount of such expenses being spread
over a lower net revenue base.
Selling and Marketing. Selling and marketing
expenses consisted primarily of salaries, commissions, and
related expenses for personnel engaged in the marketing and
sales of our products, as well as trade shows, product
literature, promotional support costs, and other advertising
related costs. Our selling and marketing expense for fiscal 2009
and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Selling and Marketing
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$53,460
|
|
14%
|
|
$57,946
|
|
12%
|
|
$(4,486)
|
|
2%
|
Selling and marketing expenses for fiscal 2009 compared to
fiscal 2008 decreased approximately $4.5 million, or 8%.
Approximately $4.1 million and $5.6 million of
share-based compensation expense was included in selling and
marketing costs for fiscal 2009 and 2008, respectively. During
fiscal 2009, we implemented organizational changes and recorded
approximately $1.6 million in severance and related charges
related to sales and marketing. As a result, selling and
marketing headcount decreased to 125 fiscal 2009 from 145 for
fiscal 2008. The net decrease in headcount resulted in a net
decrease in salary and related expenses of approximately
$1.1 million. The remaining change in selling and marketing
expenses was due to a decrease in advertising expense of
approximately $2.7 million, and a decrease in travel and
related expenses of approximately $2.1 million, partially
offset by an increase in expenses related to our international
sales and marketing offices of approximately $1.3 million.
The increase in selling and marketing expenses as a percentage
of revenues was primarily due to the relatively fixed amount of
such expenses being spread over a lower net revenue base.
General and Administrative. Ongoing general
and administrative expenses consisted primarily of salaries and
related expenses for executives, financial accounting support,
human resources, administrative services, professional fees, and
other corporate expenses. Our general and administrative expense
for fiscal 2009 and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$41,888
|
|
11%
|
|
$38,531
|
|
8%
|
|
$3,357
|
|
3%
|
General and administrative expenses for fiscal 2009 compared to
fiscal 2008 increased approximately $3.4 million, or 9%.
Approximately $7.3 million and $10.1 million of
share-based compensation expense was included in general and
administrative costs for fiscal 2009 and 2008, respectively.
General and administrative headcount increased slightly to 132
at the end of fiscal 2009 compared to 130 at the end of fiscal
2008. The remaining change in general and administrative
expenses was primarily due to approximately $11.2 million
in costs related to the Broadcom unsolicited takeover proposal
and related litigation costs, partially offset by approximately
$2.8 million in insurance recovery for litigation related
costs, and an increase in patent related expenses of
approximately $1.2 million, partially offset by a decrease
in outside services of approximately $3.3 million.
Amortization of Other Intangible
Assets. Amortization of other intangible assets
consisted of amortization of intangible assets such as patents,
customer relationships, tradenames, and covenants
not-to-compete
39
with estimable lives. Our amortization of expense for fiscal
2009 and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortization of Other Intangible Assets
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$5,337
|
|
1%
|
|
$9,260
|
|
2%
|
|
$(3,923)
|
|
%
|
Amortization of other intangible assets for fiscal 2009 compared
to fiscal 2008 decreased approximately $3.9 million, or
42%. The decrease was due primarily to a lower unamortized
balance of intangibles at the beginning of the current fiscal
year.
Nonoperating Income, net. Nonoperating income,
net, consisted primarily of interest income, interest expense,
and other non-operating income and expense items. Our
nonoperating income, net for fiscal 2009 and fiscal 2008 were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nonoperating Income, Net
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$4,329
|
|
1%
|
|
$11,662
|
|
2%
|
|
$(7,333)
|
|
(1)%
|
Our nonoperating income, net, for fiscal 2009 compared to fiscal
2008 decreased approximately $7.3 million, or 63%. The net
decrease was primarily due to a lower balance of investments
combined with lower interest rates on investments.
Income taxes. Income taxes (benefits) for
fiscal 2009 and fiscal 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
Percentage of
|
|
|
|
Percentage of
|
|
Increase/
|
|
Percentage
|
2009
|
|
Net Revenues
|
|
2008
|
|
Net Revenues
|
|
(Decrease)
|
|
Points Change
|
|
$(1,938)
|
|
(1)%
|
|
$84,988
|
|
17%
|
|
$(86,926)
|
|
(18)%
|
Income taxes for fiscal 2009 compared to the fiscal 2008
decreased approximately $86.9 million, or 102%. Our
effective tax rate was a benefit of approximately 35% for fiscal
2009 compared to an expense of approximately 109% for fiscal
2008. The decrease in income taxes for fiscal 2009 compared to
fiscal 2008 was primarily due to the decrease in income before
taxes for fiscal 2009 compared to the prior year, an increase in
tax benefits related to a release of liabilities for uncertain
tax positions as a result of an expiration of statute of
limitations of approximately $2.6 million, an increase in
tax credits related to qualifying research expenditures of
approximately $3.1 million, and a decrease in tax resulting
from the incremental tax expense of approximately
$58.5 million for the prepayment of royalty made in fiscal
2008.
Critical
Accounting Policies
The preparation of the consolidated financial statements
requires estimation and judgment that affect the reported
amounts of net revenues, expenses, assets, and liabilities in
accordance with accounting principles generally accepted in the
United States. We base our estimates on historical experience
and on various other assumptions that we believe to be
reasonable under the circumstances and which form the basis for
making judgments about the carrying values of assets and
liabilities. Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties.
We believe the following are critical accounting policies and
require us to make significant judgments and estimates in the
preparation of our consolidated financial statements: revenue
recognition; warranty; allowance for doubtful accounts;
intangible assets and other long-lived assets; inventories;
goodwill; income taxes; stock-based compensation; and litigation
costs. Changes in judgments and uncertainties could potentially
result in materially different results under different
assumptions and conditions. If these estimates differ
significantly from actual results, the impact to the
consolidated financial statements may be material.
Revenue Recognition. We generally recognize
revenue at the time of shipment when title and risk of loss have
passed, evidence of an arrangement has been obtained, pricing is
fixed or determinable, and
40
collectibility has been reasonably assured (Basic Revenue
Recognition Criteria). We make certain sales through two tier
distribution channels and have various distribution agreements
with selected distributors and Master Value Added Resellers
(collectively, the Distributors). These distribution agreements
may be terminated upon written notice by either party.
Additionally, these Distributors are generally given privileges
to return a portion of inventory and to participate in price
protection and cooperative marketing programs. Therefore, we
recognize revenue on our standard products sold to our
Distributors based on data received from the Distributors and
managements estimates to approximate the point that these
products have been resold by the Distributors. OEM-specific
models sold to our Distributors are governed under the related
OEM agreements rather than under these distribution agreements.
We recognize revenue at the time of shipment for OEM specific
products shipped to the Distributors when the Basic Revenue
Recognition Criteria have been met. Additionally, we maintain
accruals and allowances for price protection and various other
marketing programs. We classify the costs of these incentive
programs based on the benefit received, if applicable, as either
a reduction of revenue, a cost of sale, or an operating expense.
Our early adoption of the new guidance related to multiple
deliverable revenue arrangements and certain revenue
arrangements that include software elements during fiscal 2010
with retroactive application to the beginning of the fiscal year
did not impact our revenue recognized during the year.
Warranty. We provide a warranty of between one
and five years on our products. We record a provision for
estimated warranty related costs at the time of sale based on
historical product return rates and managements estimates
of expected future costs to fulfill our warranty obligations. We
evaluate our ongoing warranty obligation on a quarterly basis.
Allowance for Doubtful Accounts. We maintain
an allowance for doubtful accounts based upon historical
write-offs as a percentage of net revenues and managements
review of outstanding accounts receivable. Amounts due from
customers are charged against the allowance for doubtful
accounts when management believes that collectibility of the
amount is unlikely. Although we have not historically
experienced significant losses on accounts receivable, our
accounts receivable are concentrated with a small number of
customers. Consequently, any write-off associated with one of
these customers could have a significant impact on our allowance
for doubtful accounts and results of operations.
Intangible Assets and Other Long-Lived
Assets. Intangible assets resulting from
acquisitions or licensing agreements are carried at cost less
accumulated amortization and impairment charges, if any. For
assets with determinable useful lives, amortization is computed
using the straight-line method over the estimated economic lives
of the respective intangible assets, ranging from five to seven
years. Furthermore, we assess whether our long-lived assets,
including intangible assets and equity investment in a
privately-held company recorded under the cost method, should be
tested for recoverability periodically and whenever events or
circumstances indicate that their carrying value may not be
recoverable. The amount of impairment, if any, is measured based
on fair value, which is determined using projected discounted
future operating cash flows. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
selling costs.
Inventories. Inventories are stated at the
lower of cost, on a
first-in,
first-out basis, or market. We use a standard cost system to
determine cost. The standard costs are adjusted periodically to
represent actual cost. We regularly compare forecasted demand
and the composition of the forecast against inventory on hand
and open purchase commitments in an effort to ensure that the
carrying value of inventory does not exceed net realizable
value. Accordingly, we may have to reduce the carrying value of
excess and obsolete inventory if forecasted demand decreases.
Goodwill. Goodwill is not amortized, but
instead is tested at least annually for impairment, or more
frequently when events or changes in circumstances indicate that
goodwill might be impaired. Management considers our business as
a whole to be its reporting unit for purposes of testing for
impairment. This impairment test is performed annually during
the fourth fiscal quarter. As of the date of the fiscal 2010
annual impairment test, the fair value of the reporting unit
substantially exceeded its carrying value.
A two-step test is used to identify the potential impairment and
to measure the amount of goodwill impairment, if any. The first
step is to compare the fair value of the reporting unit with its
carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill is
considered
41
not impaired; otherwise, goodwill is impaired and the loss is
measured by performing step two. Under step two, the impairment
loss is measured by comparing the implied fair value of the
reporting unit goodwill with the carrying amount of goodwill. As
of the date of the fiscal 2010 annual impairment test, the fair
value of the reporting unit substantially exceeded its carrying
value; therefore, we were not at risk of failing the first step
of the two-step test for potential impairment.
There may be additional goodwill to be recorded in connection
with our recent acquisition of ServerEngines, although the
purchase price allocation has not yet been determined. We will
continue to monitor for potential indicators of impairment.
Income Taxes. We account for income taxes
using the asset and liability method, under which we recognize
deferred tax assets and liabilities for the future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for net operating
loss and tax credit carryforwards. Tax positions that meet a
more-likely-than-not recognition threshold are recognized in the
financial statements.
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. 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. As a multinational corporation, we
are subject to complex tax laws and regulations in various
jurisdictions. The application of tax laws and regulations is
subject to legal and factual interpretation, judgment, and
uncertainty. Tax laws themselves are subject to change as a
result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the
actual liability for U.S. or foreign taxes may be
materially different from our estimates, which could result in
the need to record additional liabilities or potentially to
reverse previously recorded tax liabilities.
Stock-Based Compensation. We account for our
stock-based awards to employees and non-employees using the fair
value method. Stock-based compensation cost is measured at grant
date, based on the fair value of the award, and is recognized as
expense over the requisite service period. The fair value of
each unvested stock award is determined based on the closing
price of our common stock at grant date. For stock options, the
measurement of stock-based compensation cost is based on several
criteria including, but not limited to, the valuation model used
and associated input factors such as expected term, stock price
volatility, dividend rate, risk free interest rate, and award
forfeiture rate. The input factors used in the valuation model
are based on subjective future expectations combined with
management judgment. If there is a difference between the
forfeiture assumptions used in determining stock-based
compensation costs and the actual forfeitures, which become
known over time, we may change the assumptions used in
determining stock-based compensation costs. These changes may
materially impact our results of operations in the period such
changes are made. See Note 12 in the accompanying notes to
consolidated financial statements contained elsewhere herein for
additional information and related disclosures.
Litigation Costs. We record a charge equal to
at least the minimum estimated liability for a loss contingency
when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements and (ii) the range of loss can
be reasonably estimated. Legal and other litigation related
costs are recognized as the services are provided. We record
insurance recoveries for litigation costs for which both
conditions are met: (i) the recovery is probable and
(ii) collectability is reasonably assured. The insurance
recoveries recorded are only to the extent the litigation costs
have been incurred and recognized in the financial statements;
however, it is reasonably possible that the actual recovery may
be significantly different from our estimates. There are many
uncertainties associated with any litigation, and we cannot
provide assurance that any actions or other third party claims
against us will be resolved without costly litigation or
substantial settlement charges. If any of those events were to
occur, our business, financial condition and results of
operations could be materially and adversely affected.
42
Recently
Adopted and Recently Issued Accounting Standards
See Note 1 in the accompanying notes to consolidated
financial statements for a description of the recently adopted
accounting standards.
Liquidity
and Capital Resources
At June 27, 2010, we had approximately $356.1 million
in working capital and approximately $294.8 million in cash
and cash equivalents and current investments. At June 28,
2009, we had approximately $354.3 million in working
capital and approximately $302.4 million in cash and cash
equivalents and current investments. We maintain an investment
portfolio of various security holdings, types, and maturities.
We invest in instruments that meet credit quality standards in
accordance with our investment guidelines. We limit our exposure
to any one issuer or type of investment with the exception of
U.S. Government issued or U.S. Government sponsored
entity securities. Our investments were virtually all
U.S. Government issued or U.S. Government sponsored
entity securities as of June 27, 2010 and we did not hold
any auction rate securities or direct investments in
mortgage-backed securities. We have primarily funded our cash
needs from continuing operations. As part of our global
initiatives, we currently plan to continue our strategic
investment in research and development, sales and marketing,
capital equipment, and facilities. We may also consider internal
and external investment opportunities in order to achieve our
growth and market leadership goals, including licensing and
joint-development agreements with our suppliers, customers, and
other third parties. Subsequent to year-end, on August 25,
2010, we acquired ServerEngines for consideration including
approximately $103.0 million in cash, subject to reduction
for ServerEngines debt outstanding at the close of the
acquisition and other adjustments, and approximately
12.0 million shares of the Companys common stock, of
which approximately 4.0 million shares are issuable upon
achievement of two post-closing milestones.
In addition, in December 2006, we announced our Board of
Directors had authorized the repurchase of up to
$150.0 million of our outstanding common stock over the
next two years. In early August 2008, our Board of Directors
approved approximately $39.9 million of common stock
repurchases, which was the remaining amount available under the
December 2006 plan. During fiscal 2009, we repurchased the
remaining amount under the December 2006 plan for an average of
$13.81 per share. In early August 2008, our Board of Directors
authorized a new plan to repurchase up to $100.0 million of
our outstanding common stock. In April 2009, upon receipt
of an unsolicited takeover proposal and related tender offer of
Broadcom Corporation to acquire us, our Board of Directors
elected to temporarily suspend any activity under the share
repurchase plan. In light of Broadcom allowing its tender offer
to expire on July 14, 2009, Emulexs Board of
Directors elected to reactivate the $100.0 million share
repurchase plan effective July 15, 2009. From June 29,
2009 through June 27, 2010, the Company has repurchased
2.0 million shares of its common stock for an aggregate
purchase price of approximately $18.2 million or an average
of $9.12 per share under this plan. Subsequent to fiscal year
ended June 27, 2010, we repurchased 495,200 shares of
our common stock under this program for an aggregate purchase
price of approximately $4.4 million for an average of $8.93
per share.
We believe that our existing cash and cash equivalents, current
investments, and anticipated cash flows from operating
activities will be sufficient to support our working capital
needs and capital expenditure requirements for at least the next
12 months. We currently do not have any outstanding lines
of credit or other borrowings.
Cash provided by operating activities during fiscal 2010 was
approximately $62.0 million compared to approximately
$34.0 million for fiscal 2009. The current period cash
provided by operating activities was primarily due to net income
of approximately $23.6 million before adjustments for
amortization of intangible assets of approximately
$25.7 million, depreciation and amortization of
approximately $20.9 million, and share-based compensation
expense of approximately $18.1 million, partially offset by
an increase in deferred income taxes of approximately
$14.3 million, an increase in accounts and other
receivables of approximately $7.0 million, and an increase
in prepaid expenses and other assets of approximately
$8.5 million.
Cash used in investing activities during fiscal 2010 was
approximately $91.1 million compared to cash provided by
investing activities during fiscal 2009 of approximately
$78.6 million. The current period usage of cash for
investing activities was primarily due to purchases of
investments of approximately $120.4 million,
43
partially offset by maturities of investments of approximately
$82.7 million. The remaining usage of cash was due to
additions of intangible assets of approximately
$21.2 million, investment in and loans to privately-held
companies of approximately $12.0 million, additions to
property and equipment of approximately $11.6 million, and
a purchase of a business from a privately-held company of
approximately $8.8 million in cash. Other assets including
approximately $2.0 million in notes receivable were
cancelled and approximately $2.0 million in equity
investment were returned in connection with the acquisition of
the business from the privately-held company. The acquisition of
ServerEngines on August 25, 2010 will impact investing
activities in the near future.
Cash used in financing activities for fiscal 2010 was
approximately $15.8 million compared to approximately
$35.4 million for fiscal 2009. The current period usage of
cash was primarily due to the purchase of treasury stock of
approximately $18.2 million partially offset by cash
received from the issuances of common stock under stock plans of
approximately $6.1 million. Subsequent to fiscal year ended
June 27, 2010, we repurchased 495,000 shares of our
common stock for an aggregate purchase price of approximately
$4.4 million for an average of $8.93 per share.
We have disclosed outstanding legal proceedings in Note 11
in the accompanying consolidated financial statements.
Currently, we believe the final resolution of outstanding
litigation will not have a material adverse effect on the
Companys liquidity or capital resources.
The following summarizes our contractual obligations as of
June 27, 2010, and the effect such obligations are expected
to have on our liquidity in future periods. The estimated
payments reflected in this table are based on managements
estimates and assumptions about these obligations. Because these
estimates and assumptions are necessarily subjective, the actual
cash outflows in future periods will vary, possibly materially,
from those reflected in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Leases(1)
|
|
$
|
11,599
|
|
|
$
|
6,036
|
|
|
$
|
3,966
|
|
|
$
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase commitments
|
|
|
41,157
|
|
|
|
41,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other commitments(2)
|
|
|
14,819
|
|
|
|
13,890
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,575
|
|
|
$
|
61,083
|
|
|
$
|
4,895
|
|
|
$
|
1,597
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Lease payments include common area maintenance (CAM) charges. |
|
(2) |
|
Consists primarily of commitments for professional services of
approximately $8.0 million and non-recurring engineering
services of approximately $4.4 million but excludes
approximately $33.6 million of liabilities for uncertain
tax positions for which we cannot make a reasonably reliable
estimate of the period of payment. See Note 13 in the
accompanying notes to consolidated financial statements |
|
|
Item 7A.
|
Qualitative
and Quantitative Disclosures about Market
Risk.
|
Interest
Rate Sensitivity
Our cash and cash equivalents are not subject to significant
interest rate risk due to their short terms to maturity. As of
June 27, 2010, the carrying value of our cash and cash
equivalents approximated fair value.
As of June 27, 2010, our investment portfolio consisted
primarily of fixed income securities of approximately
$46.0 million. We have the positive intent and ability to
hold these securities to maturity. We did not hold any auction
rate securities or direct investments in mortgage-backed
securities as of June 27, 2010.
The fair market value of our investment portfolio is subject to
interest rate risk and would decline in value if market interest
rates increased. If market interest rates were to increase
immediately and uniformly by 10% from the levels existing as of
June 27, 2010, the decline in the fair value of the
portfolio would not be material to our financial position,
results of operations and cash flows. However, if interest rates
decreased and
44
securities within our portfolio were re-invested in securities
with lower interest rates, interest income would decrease in the
future.
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
The information required by this Item is included herein as part
of Part IV Item 15(a) Financial Statements
and Schedules of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
|
|
Item 9A.
|
Controls
and Procedures.
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
The Company maintains disclosure controls and procedures to
ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of
1934, as amended (Exchange Act) is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Our
management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures, as such
term is defined under
Rule 13a-15(e)
promulgated under the Exchange Act, to ensure that information
required to be disclosed is accumulated and communicated to our
management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding
required disclosure. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded
that our disclosure controls and procedures were effective as of
June 27, 2010.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rule 13a-15(f)
promulgated under the Exchange Act. Internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management evaluated the effectiveness of our internal
control over financial reporting using the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control Integrated
Framework. Based on our evaluation, our management concluded
that our internal control over financial reporting was effective
as of June 27, 2010.
The independent registered public accounting firm that audited
the consolidated financial statements included in this annual
report has issued an audit report on managements
assessment of our internal control over financial reporting. See
page 51 herein.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial
reporting, as defined in
Rule 13a-15(f)
promulgated under the Exchange Act, that occurred during the
fourth quarter of fiscal 2010 that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information.
|
None.
45
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance.
|
There is incorporated herein by reference the information
required by this Item in the Companys definitive proxy
statement for the 2010 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the year ended
June 27, 2010. See Part I, Item 1
Executive Officers of the Registrant for information
regarding the executive and certain other officers of the
Company or its principal operating subsidiaries.
We have adopted the Emulex Corporation Business Ethics and
Confidentiality Policy (the Code of Ethics), a code of ethics
that applies to all of our directors and officers, including our
Chief Executive Officer, Chief Financial Officer, Corporate
Controller, and other finance organization employees. This Code
of Ethics is publicly available on our website at
www.emulex.com. If we make any substantive amendments to the
Code of Ethics or grant any waiver, including any implicit
waiver, from a provision of the Code of Ethics to our Chief
Executive Officer, Chief Financial Officer or Corporate
Controller, we will disclose the nature of such amendment or
waiver on that website or in a report on
Form 8-K.
|
|
Item 11.
|
Executive
Compensation.
|
There is incorporated herein by reference the information
required by this Item in our definitive proxy statement for the
2010 Annual Meeting of Stockholders that will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 27, 2010.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management.
|
There is incorporated herein by reference the information
required by this Item in our definitive proxy statement for the
2010 Annual Meeting of Stockholders that will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 27, 2010.
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table gives information about our common stock
that may be issued upon the exercise of options, warrants and
rights under all of our equity compensation plans as of
June 27, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
Number of Securities
|
|
|
|
|
|
for Future Issuance
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Related in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensations plans approved by security holders(1)
|
|
|
7,018,020
|
|
|
$
|
21.53
|
|
|
|
8,036,382
|
(4)
|
Employee stock purchase plan approved by security holders(2)
|
|
|
|
|
|
|
|
|
|
|
678,085
|
|
Equity compensations plans not approved by security holders(3)
|
|
|
513,075
|
|
|
$
|
9.78
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,531,095
|
|
|
$
|
20.73
|
|
|
|
8,714,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of the Emulex Corporation Employee Stock Option Plan,
the Emulex Corporation 2005 Equity Incentive Plan, the Emulex
Corporation 2004 Employee Stock Incentive Plan, and the Emulex
Corporation 1997 Stock Option Plan for Non-Employee Directors. |
46
|
|
|
(2) |
|
The Emulex Employee Stock Purchase Plan enables employees to
purchase our common stock at a 15% discount to the lower of
market value at the beginning or end of each six month offering
period. As such, the number of shares that may be issued during
a given six month period and the purchase price of such shares
cannot be determined in advance. See Note 12 in the
accompanying notes to consolidated financial statements. |
|
(3) |
|
Consists of the Sierra Logic, Inc. (Sierra Logic) 2001 Stock
Option Plan, Aarohi Communications Inc. (Aarohi) 2001 Stock
Option Plan, the Vixel Corporation (Vixel) 2000 Non-Officer
Equity Incentive Plan, the Vixel Corporation 1999 Equity
Incentive Plan, the Vixel Corporation Amended and Restated 1995
Stock Option Plan, and the Giganet, Inc. (Giganet) 1995 Stock
Option Plan. Options issued under these plans were converted
into options to purchase Emulex Corporation common stock as a
result of the acquisitions of Sierra Logic, Aarohi, Vixel, and
Giganet. |
|
(4) |
|
Includes net unvested stock granted of 3,437,741 shares
that are not deemed issued for accounting purposes until vested. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions.
|
There is incorporated herein by reference the information
required by this Item in our definitive proxy statement for the
2010 Annual Meeting of Stockholders that will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 27, 2010.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
There is incorporated herein by reference the information
required by this Item in our definitive proxy statement for the
2010 Annual Meeting of Stockholders that will be filed with the
Securities and Exchange Commission no later than 120 days
after the close of the fiscal year ended June 27, 2010.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules.
|
(a) Financial Statements and Schedules
1. Consolidated Financial Statements
The consolidated financial statements listed in the accompanying
Index to Consolidated Financial Statements and Schedule are
filed as part of this report.
2. Financial Statement Schedule
The financial statement schedule listed in the accompanying
Index to Consolidated Financial Statements and Schedule is filed
as part of this report.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
See Exhibit Index attached to this report and incorporated
herein by this reference.
47
EMULEX
CORPORATION AND SUBSIDIARIES
ANNUAL REPORT
FORM 10-K
Items 8, 15(a)(1) and 15(a)(2)
Index to Consolidated Financial Statements and Schedule
June 27, 2010, June 28, 2009, and June 29,
2008
(With Report of Independent Registered Public Accounting Firm
Thereon)
|
|
|
|
|
|
|
Page Number
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
49
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
Schedule
|
|
|
|
|
|
|
|
86
|
|
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.
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Emulex Corporation:
We have audited the accompanying consolidated balance sheets of
Emulex Corporation and subsidiaries as of June 27, 2010 and
June 28, 2009, and the related consolidated statements of
operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the years in the three-year
period ended June 27, 2010. In connection with our audits
of the consolidated financial statements, we also have audited
the financial statement schedule of valuation and qualifying
accounts listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the
responsibility of the Companys 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 the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Emulex Corporation and subsidiaries as of
June 27, 2010 and June 28, 2009, and the results of
their operations and their cash flows for each of the years in
the three-year period ended June 27, 2010, in conformity
with U.S. 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.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
uncertainties in income taxes in fiscal 2008, its method for
accounting for business combinations, and its method of
presenting earnings per share in fiscal 2010, due to the
adoption of new accounting pronouncements.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Emulex Corporations internal control over financial
reporting as of June 27, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated August 26, 2010, expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
Irvine, California
August 26, 2010
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Emulex Corporation:
We have audited Emulex Corporations internal control over
financial reporting as of June 27, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Emulex
Corporations management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting appearing under Item 9A. Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Emulex Corporation maintained, in all material
respects, effective internal control over financial reporting as
of June 27, 2010, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Emulex Corporation and
subsidiaries as of June 27, 2010 and June 28, 2009,
and the related consolidated statements of operations,
stockholders equity and comprehensive income (loss), and
cash flows for each of the years in the three-year period ended
June 27, 2010, and our report dated August 26, 2010,
expressed an unqualified opinion on those consolidated financial
statements.
Irvine, California
August 26, 2010
50
EMULEX
CORPORATION AND SUBSIDIARIES
June 27,
2010 and June 28, 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
248,813
|
|
|
$
|
294,136
|
|
Investments
|
|
|
45,990
|
|
|
|
8,289
|
|
Accounts and other receivables, net of allowance for doubtful
accounts of $1,653 and $1,553 at June 27, 2010 and
June 28, 2009, respectively
|
|
|
58,479
|
|
|
|
51,566
|
|
Inventories
|
|
|
13,465
|
|
|
|
10,665
|
|
Prepaid income taxes
|
|
|
17,563
|
|
|
|
17,083
|
|
Prepaid expenses and other current assets
|
|
|
12,799
|
|
|
|
8,021
|
|
Deferred income taxes
|
|
|
19,442
|
|
|
|
16,793
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
416,551
|
|
|
|
406,553
|
|
Property and equipment, net
|
|
|
64,341
|
|
|
|
74,794
|
|
Goodwill
|
|
|
93,976
|
|
|
|
87,840
|
|
Intangible assets, net
|
|
|
44,497
|
|
|
|
42,990
|
|
Deferred income taxes
|
|
|
27,658
|
|
|
|
16,002
|
|
Other assets
|
|
|
42,427
|
|
|
|
30,739
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
689,450
|
|
|
$
|
658,918
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
31,377
|
|
|
$
|
28,786
|
|
Accrued liabilities
|
|
|
29,053
|
|
|
|
23,454
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
60,430
|
|
|
|
52,240
|
|
Other liabilities
|
|
|
4,287
|
|
|
|
5,826
|
|
Accrued taxes
|
|
|
33,551
|
|
|
|
31,408
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
98,268
|
|
|
|
89,474
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
Subsequent events (Notes 2, 8, 11, 12)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 1,000,000 shares
authorized (150,000 shares designated as Series A
Junior Participating Preferred Stock); none issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par value; 240,000,000 shares
authorized; 91,217,793 and 89,668,255 issued at June 27,
2010 and June 28, 2009, respectively
|
|
|
9,122
|
|
|
|
8,967
|
|
Additional paid-in capital
|
|
|
1,123,365
|
|
|
|
1,106,990
|
|
Accumulated deficit
|
|
|
(372,450
|
)
|
|
|
(396,070
|
)
|
Accumulated comprehensive loss
|
|
|
(615
|
)
|
|
|
(443
|
)
|
Treasury stock, at cost; 10,550,971 and 8,550,971 shares at
June 27, 2010 and June 28, 2009, respectively
|
|
|
(168,240
|
)
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
591,182
|
|
|
|
569,444
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
689,450
|
|
|
$
|
658,918
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
51
EMULEX
CORPORATION AND SUBSIDIARIES
Years
Ended June 27, 2010, June 28, 2009, and June 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenues
|
|
$
|
399,150
|
|
|
$
|
378,222
|
|
|
$
|
488,301
|
|
Cost of sales
|
|
|
152,458
|
|
|
|
146,465
|
|
|
|
187,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
246,692
|
|
|
|
231,757
|
|
|
|
301,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development
|
|
|
126,850
|
|
|
|
129,795
|
|
|
|
129,232
|
|
Selling and marketing
|
|
|
56,554
|
|
|
|
53,460
|
|
|
|
57,946
|
|
General and administrative
|
|
|
50,454
|
|
|
|
41,888
|
|
|
|
38,531
|
|
Amortization of other intangible assets
|
|
|
6,792
|
|
|
|
5,337
|
|
|
|
9,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
240,650
|
|
|
|
230,480
|
|
|
|
234,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6,042
|
|
|
|
1,277
|
|
|
|
66,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating income, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
286
|
|
|
|
4,362
|
|
|
|
11,672
|
|
Interest expense
|
|
|
(7
|
)
|
|
|
(29
|
)
|
|
|
(27
|
)
|
Other income (expense), net
|
|
|
23
|
|
|
|
(4
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating income, net
|
|
|
302
|
|
|
|
4,329
|
|
|
|
11,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,344
|
|
|
|
5,606
|
|
|
|
77,917
|
|
Income tax (benefit) provision
|
|
|
(17,276
|
)
|
|
|
(1,938
|
)
|
|
|
84,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
23,620
|
|
|
$
|
7,544
|
|
|
$
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
80,097
|
|
|
|
80,770
|
|
|
|
82,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
81,282
|
|
|
|
81,113
|
|
|
|
82,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Stock-
|
|
|
|
Out-
|
|
|
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Income/
|
|
|
Treasury
|
|
|
holders
|
|
|
|
standing
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance at July 1, 2007
|
|
|
83,317,262
|
|
|
$
|
8,691
|
|
|
$
|
1,045,221
|
|
|
$
|
(401,982
|
)
|
|
$
|
64
|
|
|
$
|
(70,087
|
)
|
|
$
|
581,907
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,071
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
(3,095
|
)
|
|
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
2,344
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
29,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,008
|
|
Stock awards vested
|
|
|
450,836
|
|
|
|
45
|
|
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock withheld for taxes
|
|
|
(150,417
|
)
|
|
|
(15
|
)
|
|
|
(2,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,682
|
)
|
Exercise of stock options
|
|
|
594,542
|
|
|
|
59
|
|
|
|
5,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,894
|
|
Tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
1,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,965
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
311,821
|
|
|
|
31
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,531
|
|
Purchase of treasury stock
|
|
|
(2,071,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 29, 2008
|
|
|
82,452,985
|
|
|
|
8,811
|
|
|
|
1,080,722
|
|
|
|
(403,614
|
)
|
|
|
7
|
|
|
|
(110,087
|
)
|
|
|
575,839
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
7,544
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
23,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,095
|
|
Stock awards vested
|
|
|
805,379
|
|
|
|
81
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock withheld for taxes
|
|
|
(267,789
|
)
|
|
|
(27
|
)
|
|
|
(2,854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,881
|
)
|
Exercise of stock options
|
|
|
364,405
|
|
|
|
37
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,929
|
|
Tax shortfall from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(854
|
)
|
Issuance of common stock under employee stock purchase plan
|
|
|
652,938
|
|
|
|
65
|
|
|
|
5,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,135
|
|
Purchase of treasury stock
|
|
|
(2,890,634
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,913
|
)
|
|
|
(39,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 28, 2009
|
|
|
81,117,284
|
|
|
|
8,967
|
|
|
|
1,106,990
|
|
|
|
(396,070
|
)
|
|
|
(443
|
)
|
|
|
(150,000
|
)
|
|
|
569,444
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,620
|
|
|
|
|
|
|
|
|
|
|
|
23,620
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(172
|
)
|
|
|
|
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
18,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,152
|
|
Stock awards vested
|
|
|
1,206,210
|
|
|
|
121
|
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock withheld for taxes
|
|
|
(419,792
|
)
|
|
|
(42
|
)
|
|
|
(4,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,329
|
)
|
Exercise of stock options
|
|
|
128,745
|
|
|
|
13
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
703
|
|
Tax shortfall from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
(3,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,366
|
)
|
Issuance of common stock under employee stock purchase plan
|
|
|
634,375
|
|
|
|
63
|
|
|
|
5,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,370
|
|
Purchase of treasury stock
|
|
|
(2,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,240
|
)
|
|
|
(18,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 27, 2010
|
|
|
80,666,822
|
|
|
$
|
9,122
|
|
|
$
|
1,123,365
|
|
|
$
|
(372,450
|
)
|
|
$
|
(615
|
)
|
|
$
|
(168,240
|
)
|
|
$
|
591,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
EMULEX
CORPORATION AND SUBSIDIARIES
June 27,
2010, June 28, 2009, and June 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
23,620
|
|
|
$
|
7,544
|
|
|
$
|
(7,071
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment
|
|
|
20,915
|
|
|
|
22,322
|
|
|
|
19,113
|
|
Share-based compensation expense
|
|
|
18,114
|
|
|
|
23,108
|
|
|
|
29,002
|
|
Amortization of intangible assets
|
|
|
25,694
|
|
|
|
24,257
|
|
|
|
32,302
|
|
Accrued interest income, net
|
|
|
35
|
|
|
|
556
|
|
|
|
(437
|
)
|
Loss on disposal of assets, net
|
|
|
512
|
|
|
|
102
|
|
|
|
128
|
|
Deferred income taxes
|
|
|
(14,304
|
)
|
|
|
(6,521
|
)
|
|
|
(3,167
|
)
|
Excess tax benefits from share-based compensation
|
|
|
(658
|
)
|
|
|
(310
|
)
|
|
|
(1,411
|
)
|
Impairment of intangible assets
|
|
|
|
|
|
|
|
|
|
|
3,097
|
|
Foreign currency adjustments
|
|
|
51
|
|
|
|
42
|
|
|
|
(28
|
)
|
Provision for losses on accounts and other receivables
|
|
|
100
|
|
|
|
(200
|
)
|
|
|
(149
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and other receivables, net
|
|
|
(7,011
|
)
|
|
|
10,260
|
|
|
|
6,044
|
|
Inventories
|
|
|
(2,764
|
)
|
|
|
8,685
|
|
|
|
9,632
|
|
Prepaid expenses and other assets
|
|
|
(8,541
|
)
|
|
|
(4,833
|
)
|
|
|
(2,656
|
)
|
Accounts payable, accrued liabilities, and other liabilities
|
|
|
7,829
|
|
|
|
4,863
|
|
|
|
325
|
|
Accrued taxes
|
|
|
2,143
|
|
|
|
(571
|
)
|
|
|
11,670
|
|
Income taxes payable and prepaid income taxes
|
|
|
(3,744
|
)
|
|
|
(55,326
|
)
|
|
|
45,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
61,991
|
|
|
|
33,978
|
|
|
|
142,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from sale of property and equipment
|
|
|
261
|
|
|
|
176
|
|
|
|
85
|
|
Additions to property and equipment
|
|
|
(11,637
|
)
|
|
|
(24,673
|
)
|
|
|
(27,748
|
)
|
Investment in and loans to privately-held companies
|
|
|
(12,000
|
)
|
|
|
(20,932
|
)
|
|
|
(5,000
|
)
|
Additions to intangibles
|
|
|
(21,200
|
)
|
|
|
|
|
|
|
|
|
Cash disbursed for business acquisition
|
|
|
(8,817
|
)
|
|
|
|
|
|
|
|
|
Other purchases of investments
|
|
|
(120,425
|
)
|
|
|
(97,715
|
)
|
|
|
(794,960
|
)
|
Maturities of investments
|
|
|
82,689
|
|
|
|
221,741
|
|
|
|
864,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(91,129
|
)
|
|
|
78,597
|
|
|
|
36,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock under stock plans
|
|
|
6,073
|
|
|
|
7,064
|
|
|
|
10,425
|
|
Repurchase of common stock
|
|
|
(18,240
|
)
|
|
|
(39,913
|
)
|
|
|
(40,000
|
)
|
Tax withholding payments reimbursed by common stock
|
|
|
(4,329
|
)
|
|
|
(2,881
|
)
|
|
|
(2,682
|
)
|
Excess tax benefits from share-based compensation
|
|
|
658
|
|
|
|
310
|
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(15,838
|
)
|
|
|
(35,420
|
)
|
|
|
(30,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
(347
|
)
|
|
|
(36
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(45,323
|
)
|
|
|
77,119
|
|
|
|
147,981
|
|
Cash and cash equivalents at beginning of year
|
|
|
294,136
|
|
|
|
217,017
|
|
|
|
69,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
248,813
|
|
|
$
|
294,136
|
|
|
$
|
217,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
EMULEX
CORPORATION AND SUBSIDIARIES
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Description
of Business
Emulex Corporation (Emulex or the Company), a Delaware
corporation, creates enterprise-class products that connect
storage, servers and networks. Emulex supplies a broad range of
advanced storage networking infrastructure solutions. The
Companys products and technologies leverage flexible multi
protocol architectures that extend from deep within the storage
array to the server edge of storage area networks (SANs).
Emulexs storage networking offerings include host bus
adapters (HBAs), mezzanine cards for blade servers, Universal
Converged Network Adapters (UCNAs), embedded storage bridges,
routers, and switches, storage Input/Output controllers (IOCs),
and data center networking solutions. HBAs and mezzanine cards
are the data communication products that enable servers to
connect to storage networks by offloading communication
processing tasks as information is delivered and sent to the
storage network. Embedded storage bridges, routers, switches,
and IOCs are deployed inside storage arrays, tape libraries and
other storage appliances.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Emulex Corporation, and its wholly owned subsidiaries and do not
include any noncontrolling interests. All intercompany balances
and transactions have been eliminated in consolidation.
Basis
of Presentation
The Companys fiscal year ends on the Sunday nearest
June 30. Fiscal years 2010, 2009, and 2008 were comprised
of 52 weeks and ended on June 27, 2010, June 28,
2009, and June 29, 2008, respectively. All references to
years in these notes to consolidated financial statements
represent fiscal years unless otherwise noted.
Certain reclassifications have been made to prior year amounts
to conform to current years presentation.
Use of
Estimates
The preparation of the consolidated financial statements, notes,
and related disclosures in conformity with U.S. generally
accepted accounting principles requires management to make a
number of estimates and assumptions relating to the reported
amount of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Estimates are used for,
but not limited to, revenue recognition and cost of sales; the
useful life and carrying amount of property and equipment and
intangibles; carrying amount of goodwill; deferred taxes and any
associated valuation allowances; tax uncertainties; allowances
for doubtful accounts and product returns; inventory valuation;
stock-based compensation; warranty and other accrued
liabilities; cost of an acquired entity and allocation of
purchase price; and litigation costs. Actual results could
differ materially from managements estimates.
Foreign
Currency Translation
Assets and liabilities are translated into U.S. dollars at
the exchange rate at the balance sheet date, whereas revenues
and expenses are translated into U.S. dollars at the
average exchange rate for the reporting period. Translation
adjustments are included in accumulated other comprehensive
(loss) income and realized transaction gains and losses are
recorded in the results of operations.
55
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
Equivalents
The Company classifies highly liquid debt instruments, excluding
corporate bonds and commercial paper, with original maturities
of three months or less and deposits in money market funds, as
cash equivalents. The carrying amounts of cash and cash
equivalents approximate their fair values.
Additionally, not all investments that qualify as cash
equivalents are required to be treated as cash equivalents.
Pursuant to the Companys investment policy, the Company
classifies all corporate bonds and commercial paper with
original maturities of three months or less as short-term
investments.
Investments
The Company determines the appropriate balance sheet
classification of its investments in debt securities based on
maturity date at the time of purchase and evaluates the
classification at each balance sheet date. Debt securities are
classified as held to maturity as the Company has the positive
intent and ability to hold the securities to maturity. Held to
maturity securities are stated at amortized cost plus accrued
interest. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity
value. Such amortization and accretion are included in interest
income.
Equity
Investments in Privately-Held Companies
From time to time, the Company makes equity investments in
non-publicly traded companies, where the Company is unable to
exercise significant influence over the investee. These
investments are accounted for under the cost method. Under the
cost method, investments are carried at cost and are adjusted
for
other-than-temporary
declines in fair value, distributions of earnings, or additional
investments. The Company monitors its investments for impairment
on a quarterly basis and makes appropriate reductions in
carrying values when such impairments are determined to be
other-than-temporary.
Impairment charges are included in other (expense) income, net
in the consolidated statements of operations. Factors used in
determining an impairment include, but are not limited to, the
current business environment including competition and
uncertainty of financial condition; going concern considerations
such as the rate at which the investee utilizes cash, and the
investees ability to obtain additional financing. As of
June 27, 2010 and June 28, 2009, the carrying values
of the Companys equity investments in non-publicly traded
companies were approximately $9.2 million and
$11.2 million, respectively, and were included in Other
assets in the accompanying consolidated balance sheets. In
fiscal 2008, the Company made an investment of approximately
$5.0 million in a privately-held company in the storage
networking industry and in fiscal 2009, the Company made an
additional investment of approximately $6.2 million in the
same privately-held company. Towards the end of fiscal 2010, the
Company purchased a business from the privately-held storage
network company for approximately $13.0 million in cash and
other consideration, including cancellation of notes receivable
and a partial return of the Companys equity investment in
the privately-held company.
Accounts
Receivable
Accounts receivable are recorded at the invoiced amount and do
not bear interest. Amounts collected on accounts receivable are
included in net cash provided by operating activities in the
accompanying consolidated statements of cash flows. The Company
maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of the Companys
customers to make requested payments based upon historical
write-offs as a percentage of net revenues and managements
review of outstanding accounts receivable. Amounts due from
customers are charged against the allowance for doubtful
accounts when management believes the collectibility of the
amount is unlikely. Although the Company has not experienced
significant losses on accounts receivable historically, its
accounts receivable are concentrated with a small number of
customers. Consequently, any write off associated with one of
these customers could have a significant impact on the
Companys allowance for doubtful accounts.
56
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories are stated at the lower of cost on a
first-in,
first-out basis or market. The Company uses a standard cost
system for purposes of determining cost. The standards are
adjusted periodically to approximate actual cost. The Company
regularly compares forecasted demand and the composition of the
forecast for its products against inventory on hand and open
purchase commitments to ensure the carrying value of inventories
does not exceed net realizable value. Accordingly, the Company
may have to record reductions to the carrying value of excess
and obsolete inventories if forecasted demand decreases. Cash
flows related to the sale of inventory are included in net cash
provided by operating activities in the accompanying
consolidated statements of cash flows.
Property
and Equipment
Property and equipment are stated at cost. Depreciation is
calculated using the straight-line method over estimated useful
lives of 1 to 39 years for buildings, building improvements
and land improvements, 1 to 7 years for production and test
equipment, and 1 to 10 years for furniture and fixtures.
Leasehold improvements are amortized using the straight-line
method over the shorter of remaining lease term or estimated
useful life of the asset. Depreciation expense related to
property and equipment used in the production process is
recorded in cost of sales. Depreciation expense related to
property and equipment used in all other activities is recorded
in operating expense.
Goodwill
Goodwill is not amortized but instead is tested at least
annually for impairment, or more frequently when events or
changes in circumstances indicate that the assets might be
impaired. Management considers the Companys business as a
whole to be its reporting unit for purposes of testing for
impairment. This impairment test is performed annually during
the fiscal fourth quarter.
A two-step test is used to identify the potential impairment and
to measure the amount of goodwill impairment, if any. The first
step is to compare the fair value of the reporting unit with its
carrying amount, including goodwill. If the fair value of the
reporting unit exceeds its carrying amount, goodwill is
considered not impaired; otherwise, goodwill is impaired and the
loss is measured by performing step two. Under step two, the
impairment loss is measured by comparing the implied fair value
of the reporting unit goodwill with the carrying amount of
goodwill. As of the date of the fiscal 2010 annual impairment
test, the fair value of the reporting unit substantially
exceeded its carrying value, therefore, the Company was not at
risk of failing the first step of the two-step test for
potential impairment.
There may be additional goodwill to be recorded in connection
with the Companys recent acquisition of ServerEngines,
although the purchase price allocation has not yet been
determined. The Company will continue to monitor for potential
indicators of impairment.
Long-Lived
Assets
The recoverability of long-lived assets, including property and
equipment, is assessed by determining whether the carrying value
of an asset can be recovered through projected undiscounted
future operating cash flows over its remaining life whenever
events or changes in circumstances indicate that the Company may
not be able to recover the assets carrying value. The
amount of impairment, if any, is measured based on fair value,
which is determined using projected discounted future operating
cash flows. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less selling costs.
57
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets, Net
Intangibles resulting from the acquisitions are carried at cost
less accumulated amortization. For assets with determinable
useful lives, amortization is computed using the straight-line
method over the estimated economic lives of the respective
intangible assets, ranging from two to seven years.
Periodically, the Company assesses whether its long-lived assets
including intangibles, should be tested for recoverability
whenever events or circumstances indicate that their carrying
value may not be recoverable.
Revenue
Recognition
The Company generally recognizes revenue at the time of shipment
when title and risk of loss have passed, evidence of an
arrangement has been obtained, pricing is fixed or determinable,
and collectibility has been reasonably assured (Basic Revenue
Recognition Criteria). The Company makes certain sales through
two tier distribution channels and have various distribution
agreements with selected distributors and Master Value Added
Resellers (collectively, the Distributors). These distribution
agreements may be terminated upon written notice by either
party. Additionally, these Distributors are generally given
privileges to return a portion of inventory and to participate
in price protection and cooperative marketing programs.
Therefore, the Company recognizes revenue on its standard
products sold to its Distributors based on data received from
the Distributors and managements estimates to approximate
the point that these products have been resold by the
Distributors. OEM-specific models sold to the Companys
Distributors are governed under the related OEM agreements
rather than under these distribution agreements. The Company
recognizes revenue at the time of shipment for most OEM specific
products shipped to the Distributors when the Basic Revenue
Recognition Criteria have been met. Additionally, the Company
maintains accruals and allowances for price protection and
various other marketing programs. The Company classifies the
costs of these incentive programs based on the benefit received,
if applicable, as either a reduction of revenue, a cost of sale,
or an operating expense.
The Company elected to early adopt the new guidance related to
multiple deliverable revenue arrangements and certain revenue
arrangements that include software elements during fiscal year
2010 with retroactive application to the beginning of the fiscal
year. Early adoption of the new guidance did not impact revenue
recognized during the year.
Warranty
The Company provides a warranty of between one and five years on
its products. The Company records a provision for estimated
warranty related costs at the time of sale based on historical
product return rates and managements estimates of expected
future costs to fulfill the Companys warranty obligations.
The Company evaluates its ongoing warranty obligation on a
quarterly basis.
Research
and Development
Research and development costs, including costs related to the
development of new products and process technology, are expensed
as incurred.
Advertising
Expenses
Advertising costs are expensed as incurred. Advertising expenses
amounted to approximately $5.3 million, $5.1 million,
and $7.8 million for fiscal years 2010, 2009, and 2008,
respectively.
Income
Taxes
The Company accounts for income taxes using the asset and
liability method, under which it recognizes deferred tax assets
and liabilities for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases and for
58
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
net operating loss and tax credit carryforwards. In accordance
with the Financial Accounting Standards Boards (FASB)
authoritative guidance on accounting for uncertainties in income
taxes, which the Company adopted on July 2, 2007, tax
positions that meet a more-likely-than-not recognition threshold
are recognized in the financial statements. Previously
recognized income tax positions that fail to meet the
recognition threshold in a subsequent period should be
derecognized in that period. Differences between actual results
and the Companys assumptions, or changes in its
assumptions in future periods, are recorded in the period they
become known. The Company recognizes potential accrued interest
and penalties in income tax expense including interest and
penalties related to unrecognized tax benefits.
Deferred income taxes are recognized for the future tax
consequences of temporary differences using enacted statutory
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Temporary differences include the difference between
the financial statement carrying amounts and the tax bases of
existing assets and liabilities and operating loss and tax
credit carryforwards. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes
the enactment date. The Company assesses the likelihood that its
deferred tax assets will be recovered from future taxable
income. To the extent management believes that recovery is more
likely than not, the Company does not establish a valuation
allowance.
Litigation
Costs
The Company records a charge equal to at least the minimum
estimated liability for a loss contingency when both of the
following conditions are met: (i) information available
prior to issuance of the financial statements indicates that it
is probable that an asset had been impaired or a liability had
been incurred at the date of the financial statements and
(ii) the range of loss can be reasonably estimated. Legal
and other litigation related costs are recognized as the
services are provided. The Company records insurance recoveries
for litigation costs when both of the following conditions are
met: (i) the recovery is probable and
(ii) collectability is reasonably assured. The insurance
recoveries recorded are only to the extent the litigation costs
have been incurred and recognized in the financial statements;
however, it is reasonably possible that the actual recovery may
be significantly different from our estimates. As of
June 27, 2010, the Company has recorded an insurance
recovery of approximately $2.4 million. There are many
uncertainties associated with any litigation, and the Company
cannot provide assurance that these actions or other third party
claims against the Company will be resolved without costly
litigation
and/or
substantial settlement charges. If any of those events were to
occur, the Companys business, financial condition and
results of operations could be materially and adversely affected.
Net
Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per
share is computed by dividing adjusted net income (loss) by the
weighted average number of common shares outstanding during the
period increased to include, if dilutive, the number of
additional common shares that would be outstanding if the
dilutive potential common shares and unvested stock from stock
option plans and convertible subordinated notes had been issued.
The dilutive effect of outstanding stock options and unvested
stock is reflected in diluted net income (loss) per share by
application of the treasury stock method.
59
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Cash Flow Information
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Interest
|
|
$
|
7
|
|
|
$
|
35
|
|
|
$
|
27
|
|
Income taxes
|
|
$
|
4,668
|
|
|
$
|
63,000
|
|
|
$
|
32,853
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional goodwill resulting from escrow release as required by
the Sierra Logic, Inc. acquisition agreement
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,277
|
|
Purchases of property and equipment not paid, net
|
|
$
|
1,104
|
|
|
$
|
156
|
|
|
$
|
1,874
|
|
Settlement of other assets in conjunction with business
acquisition
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
|
|
Comprehensive
Income (Loss)
Comprehensive income (loss) represents the net change in
stockholders equity during a period from sources other
than transactions with stockholders and, as such, includes net
income (loss) and other specified components. For the Company,
the only component of comprehensive income (loss), other than
net income (loss), is the change in the cumulative foreign
currency translation adjustments recognized in
stockholders equity.
Stock-Based
Compensation
The Companys stock-based awards are measured and
recognized at fair value. The fair value of each stock option is
estimated on the date of grant using the Black-Scholes-Merton
option pricing model (Black-Scholes model) based on the market
price of the underlying common stock as of the date of grant,
the expected term, stock price volatility, and expected
risk-free interest rates. Expected volatilities are based on
methodologies utilizing equal weighting involving both
historical periods equal to the expected term and implied
volatilities based on traded options to buy the Companys
shares. The fair value of each unvested stock award is based on
the market price as of the date of the grant.
Fair
Value of Financial Instruments
The Companys financial instruments consist primarily of
cash and cash equivalents, current investments, note receivable,
equity investment in privately-held company, and insurance
recovery receivable. The fair values of cash and cash
equivalents and current investments are determined based on
Level 1 inputs, consisting of quoted prices in
active markets for identical assets. The Company believes the
carrying value of its insurance recovery receivable approximates
its current fair value due to its nature and relatively short
duration. The fair value of the Companys equity investment
in a privately-held company was based on the income approach.
The fair value of the Companys notes receivable from the
privately-held company was based on management judgment and
market-based interest rates and was believed to approximate the
carrying value. The fair values are determined based on
Level 3 inputs which require the use of inputs
that are both unobservable and significant to the fair value
measurements.
Business
and Credit Concentration
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments, and accounts receivable.
Cash, cash equivalents, and investments, are primarily
maintained at three major financial institutions in the United
States. Deposits held with banks may exceed the amount of
insurance provided on such deposits, if any. The Company
principally invests in U.S. Government issued securities,
U.S. Government sponsored entity securities and corporate
bonds and with the exception of the U.S. Government issued
or U.S. Government sponsored entity securities, limits the
amount of credit exposure to any one entity.
60
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company sells its products to OEMs and distributors in the
computer storage and server industry. Consequently, the
Companys net revenues and accounts receivable are
concentrated. Direct sales to the Companys top 5 customers
accounted for 57%, 61% and 61% of total net revenues in fiscal
years 2010, 2009, and 2008, respectively. The level of sales to
any single customer may vary and the loss of any one of these
customers, or a decrease in the level of sales to any one of
these customers, could have a material adverse impact on the
Company. Furthermore, although the Company sells to customers
throughout the world, sales in the United States and Asia
Pacific accounted for approximately 68%, 67%, and 66% of the
Companys net revenues in fiscal years 2010, 2009, and
2008, respectively and the Company expects for the foreseeable
future, these sales will account for the substantial majority of
the Companys revenues. Sales to customers are denominated
in U.S. dollars. Consequently, the Company believes its
foreign currency risk is minimal. The Company performs ongoing
credit evaluations of its customers financial condition
and generally requires no collateral from its customers. The
Company maintains an allowance for doubtful accounts.
Historically, the Company has not experienced significant losses
on accounts receivable.
Additionally, the Company currently relies on single and limited
supply sources for several key components used in the
manufacturing of its products. Also, the Company relies on two
Electronics Manufacturing Services (EMS) providers for the
manufacturing of its products. The inability or unwillingness of
any single and limited source suppliers or the inability or
unwillingness of any of the Companys EMS provider sites to
fulfill supply and production requirements, respectively, could
materially impact future operating results.
Segment
Information
The Company operates in one operating segment, networking
products.
Recently
Adopted Accounting Standards
In October 2009, the FASB amended the accounting standards for
revenue arrangements with multiple deliverables. In the absence
of vendor-specific objective evidence (VSOE) or other third
party evidence (TPE) of the selling price for the deliverables
in certain multiple-element arrangements, companies are required
to use an estimated selling price for the individual
deliverables. Companies shall apply the relative-selling price
model for allocating an arrangements total consideration
to its individual elements. Under this model, the estimated
selling price is used for both the delivered and undelivered
elements that do not have VSOE or TPE of the selling price. The
Company elected to early adopt this guidance during the three
months ended March 28, 2010 with retroactive application to
the beginning of fiscal 2010. As of March 28, 2010, the
Company had not entered into revenue arrangements with multiple
deliverables that were impacted by this guidance, thus, there
was no financial statement impact of the Companys early
adoption of this guidance.
In October 2009, the FASB amended the accounting standards for
certain revenue arrangements that include software elements
amending previous guidance on software revenue recognition to
exclude from its scope tangible products that contain both
software and non-software components that function together to
deliver a products essential functionality. The Company
elected to early adopt this guidance during the three months
ended March 28, 2010 with retroactive application to the
beginning of fiscal 2010. The Company believes the software
embedded within its products either is incidental to the product
as a whole or functions together to deliver the products
essential functionality, thus, there was no financial statement
impact of the Companys early adoption of this guidance.
In December 2007, the FASB issued authoritative guidance for
business combinations changing the accounting for business
combinations in a number of areas including the treatment of
contingent consideration, contingencies, acquisition costs,
in-process research and development, and restructuring costs. In
addition, changes in deferred tax asset valuation allowances and
acquired income tax uncertainties in a business
61
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
combination after the measurement period will impact income
taxes. In April 2009, the FASB amended the December 2007
guidance related to the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for
assets and liabilities arising from contingencies assumed in
business combinations. The April 2009 guidance eliminates the
distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement
criteria and instead carries forward most of the provisions in
place before the December 2007 guidance was issued. The December
2007 and April 2009 guidance was effective prospectively for the
Companys fiscal year beginning June 29, 2009, and
impacts the accounting for any business combinations entered
into after the effective date. Transaction costs are now being
accounted for under this new guidance and in process research
and development (IPR&D) of approximately $6.0 million
acquired in a business combination during the year was
capitalized and will be expensed over its estimated useful life
once the related research and development project is complete or
abandoned.
In June 2008, the FASB issued authoritative guidance for
determining whether instruments granted in share-based payment
transactions are participating securities. The Company adopted
this guidance in fiscal 2010. See Note 15.
In June 2009, the FASB issued ASC 105, Generally
Accepted Accounting Principles (GAAP), amending the GAAP
hierarchy established under Statement of Financial Accounting
Standards (SFAS) No. 162. On July 1, 2009, the FASB
launched the FASB Accounting Standards Codification, superseding
all existing non-SEC accounting and reporting standards.
ASC 105 was effective in the first interim and annual
periods ending after September 15, 2009, or the
Companys first quarter of fiscal year 2010 ended
September 27, 2009. Following this statement, the FASB will
issue new standards in the form of Accounting Standards Updates
(ASUs). The Companys adoption of ASC 105 in fiscal
2010 had no financial statement impact other than the specific
references to U.S. GAAP.
In January 2010, the FASB issued ASU
2010-06,
Improving Disclosures about Fair Value Measurements
amending ASC 820, Fair Value Measurements and
Disclosures requiring additional disclosure and clarifying
existing disclosure requirements about fair value measurements.
ASU 2010-06
requires entities to provide fair value disclosures by each
class of assets and liabilities, which may be a subset of assets
and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure
regarding the amounts and reasons for significant transfers in
and out of Level 1 and 2 of the fair value hierarchy and
separate presentation of purchases, sales, issuances and
settlements of items within Level 3 of the fair value
hierarchy. The guidance clarifies existing disclosure
requirements regarding the inputs and valuation techniques used
to measure fair value for measurements that fall in either
Level 2 or Level 3 of the hierarchy. ASU
2010-06 was
effective for interim and annual reporting periods beginning
after December 15, 2009, or the third quarter of the
Companys 2010 fiscal year, except for the disclosures
about purchases, sales, issuances and settlements which is
effective for fiscal years beginning after December 15,
2010, or the Companys 2012 fiscal year, and for interim
periods within those fiscal years. There was no impact of the
Companys adoption of this guidance and management is
currently assessing the impact of the disclosure guidance
effective in fiscal 2012.
In February 2010, the FASB issued ASU
2010-09,
Subsequent Events Amendments to Certain
Recognition and Disclosure Requirements, no longer
requiring entities that file or furnish financial statements
with the SEC to disclose the date through which subsequent
events have been evaluated in originally issued and reissued
financial statements. Other entities would continue to be
required to disclose the date through which subsequent events
have been evaluated; however, disclosures about the date through
which subsequent events have been evaluated in reissued
financial statements would be required only in financial
statements revised because of an error correction or
retrospective application of U.S. GAAP. This consensus is
effective upon issuance. The Companys adoption of ASU
2010-09 had
no financial statement impact.
62
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recently
Issued Accounting Standards
In December 2009, the FASB issued ASU
2009-17,
Improvements to Financial Reporting by Enterprises with
Variable Interest Entities, requiring the primary
beneficiary of a variable interest entity (VIE) be identified as
the party that both (a) has the power to direct the
activities of a VIE that most significantly impact its economic
performance and (b) has an obligation to absorb losses or a
right to receive benefits that could potentially be significant
to the VIE. This guidance is effective in fiscal years beginning
after November 15, 2009, or the Companys 2011 fiscal
year. The Company is currently assessing the impact of this
guidance.
|
|
Note 2
|
Business
Combinations
|
Acquisition
in Fiscal 2010
In May 2010, the Company purchased a business from a
privately-held company in the storage networking industry. Total
consideration was approximately $13.0 million consisting of
cash, cancellation of loans receivable, and a partial return of
the Companys equity investment in the privately-held
company. The transaction was accounted for as a business
acquisition. The purchase consideration was allocated to the
tangible and intangible assets acquired, including IPR&D,
based on their estimated fair values. The Company recorded
approximately $6.0 million IPR&D, approximately
$6.1 million in goodwill, and approximately
$0.9 million in fixed assets related to this acquisition.
Pro forma results of operations have not been presented as the
acquisition was not material to the Companys consolidated
financial statements.
Acquisition
Subsequent to Year-End
On August 25, 2010, the Company acquired ServerEngines
Corporation (ServerEngines) for consideration including
approximately $103.0 million in cash, subject to reduction
for ServerEngines debt outstanding at the close of the
acquisition and other adjustments, and approximately
12.0 million shares of the Companys common stock, of
which approximately 4.0 million shares are issuable upon
achievement of two post-closing milestones. The combination of
Emulex and ServerEngines technology would create a unique
offering to deliver a foundation for converged networking
solutions, including adapters, mezzanine cards and LAN on
Motherboard (LOM) solutions.
|
|
Note 3
|
Fair
Value of Financial Instruments
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used
to measure fair value must maximize the use of observable inputs
and minimize the use of unobservable inputs. The fair value
hierarchy is based on three levels of inputs, of which the first
two are considered observable and the last unobservable, that
may be used to measure fair value. A description of the three
levels of inputs is as follows:
Level 1 Quoted prices in active markets
for identical assets or liabilities;
Level 2 Observable inputs other than
Level 1 prices, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities; and
Level 3 Unobservable inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
63
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial instruments measured at fair value on a recurring
basis as of June 27, 2010 and June 28, 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
June 27, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
248,813
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
248,813
|
|
Municipal bonds
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Term deposits
|
|
|
3,237
|
|
|
|
|
|
|
|
|
|
|
|
3,237
|
|
U.S. Government securities
|
|
|
23,008
|
|
|
|
|
|
|
|
|
|
|
|
23,008
|
|
U.S. Government sponsored entity securities
|
|
|
19,648
|
|
|
|
|
|
|
|
|
|
|
|
19,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
294,807
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
294,136
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
294,136
|
|
Municipal bonds
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
152
|
|
U.S. Government securities
|
|
|
4,097
|
|
|
|
|
|
|
|
|
|
|
|
4,097
|
|
U.S. Government sponsored entity securities
|
|
|
4,058
|
|
|
|
|
|
|
|
|
|
|
|
4,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
302,443
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
302,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys other financial instruments consist primarily
of notes receivable, equity investment in privately-held
company, and insurance recovery receivable. The Company believes
the carrying value of its insurance recovery receivable
approximates its current fair value due to its nature and
relatively short duration. The fair value of the Companys
equity investment in a privately-held company was based on the
income approach. The fair value of the Companys notes
receivable from the privately-held company was based on
management judgment and market-based interest rates and was
believed to approximate the carrying value. The fair values are
determined based on Level 3 inputs requiring
the use of inputs that are both unobservable and significant to
the fair value measurements.
|
|
Note 4
|
Cash,
Cash Equivalents, and Investments
|
At June 27, 2010, the Company had approximately
$248.8 million in cash and cash equivalents and
$46.0 million in investments.
64
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys portfolio of cash, cash equivalents, and
held-to-maturity
investments consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
June 27, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
54,691
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
54,691
|
|
Money market funds
|
|
|
194,122
|
|
|
|
|
|
|
|
|
|
|
|
194,122
|
|
Municipal bonds
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Term deposits
|
|
|
3,238
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
3,237
|
|
U.S. Government securities
|
|
|
23,006
|
|
|
|
2
|
|
|
|
|
|
|
|
23,008
|
|
U.S. Government sponsored entity securities
|
|
|
19,645
|
|
|
|
3
|
|
|
|
|
|
|
|
19,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
294,803
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
$
|
294,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
42,516
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,516
|
|
Money market funds
|
|
|
251,620
|
|
|
|
|
|
|
|
|
|
|
|
251,620
|
|
Municipal bonds
|
|
|
151
|
|
|
|
1
|
|
|
|
|
|
|
|
152
|
|
U.S. Government securities
|
|
|
4,097
|
|
|
|
|
|
|
|
|
|
|
|
4,097
|
|
U.S. Government sponsored entity securities
|
|
|
4,041
|
|
|
|
17
|
|
|
|
|
|
|
|
4,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
302,425
|
|
|
$
|
18
|
|
|
$
|
|
|
|
$
|
302,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments were classified as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
248,813
|
|
|
$
|
294,136
|
|
Short-term investments (maturities less than one year)
|
|
|
45,990
|
|
|
|
8,289
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
294,803
|
|
|
$
|
302,425
|
|
|
|
|
|
|
|
|
|
|
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
2,717
|
|
|
$
|
4,330
|
|
Finished goods
|
|
|
10,748
|
|
|
|
6,335
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,465
|
|
|
$
|
10,665
|
|
|
|
|
|
|
|
|
|
|
65
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6
|
Property
and Equipment
|
Components of property and equipment, net, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Equipment
|
|
$
|
92,044
|
|
|
$
|
89,661
|
|
Furniture and fixtures
|
|
|
44,219
|
|
|
|
42,992
|
|
Buildings and improvements
|
|
|
41,518
|
|
|
|
41,893
|
|
Land
|
|
|
12,532
|
|
|
|
12,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,313
|
|
|
|
187,078
|
|
Less: accumulated depreciation and amortization
|
|
|
(125,972
|
)
|
|
|
(112,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,341
|
|
|
$
|
74,794
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
|
Goodwill
and Intangible Assets, net
|
Goodwill relates to the purchase of Sierra Logic, Inc. on
October 2, 2006, and the purchase of a business from a
privately-held storage networking company towards the end of
fiscal 2010. The purchase was accounted for as a business
acquisition.
The activity in goodwill during the twelve months ended
June 27, 2010 is as follows:
|
|
|
|
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Goodwill, as of June 28, 2009
|
|
$
|
87,840
|
|
Goodwill from acquisition during the period
|
|
|
6,136
|
|
|
|
|
|
|
Goodwill, as of June 27, 2010
|
|
$
|
93,976
|
|
|
|
|
|
|
Intangible assets, net, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Core technology and patents
|
|
$
|
73,345
|
|
|
$
|
92,228
|
|
Accumulated amortization, core technology and patents
|
|
|
(53,050
|
)
|
|
|
(82,381
|
)
|
Developed technology
|
|
|
68,500
|
|
|
|
77,312
|
|
Accumulated amortization, developed technology
|
|
|
(51,375
|
)
|
|
|
(46,488
|
)
|
Customer relationships
|
|
|
3,200
|
|
|
|
38,670
|
|
Accumulated amortization, customer relationships
|
|
|
(2,398
|
)
|
|
|
(37,227
|
)
|
Tradename
|
|
|
4,639
|
|
|
|
4,639
|
|
Accumulated amortization, tradename
|
|
|
(4,364
|
)
|
|
|
(3,763
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
|
38,497
|
|
|
|
42,990
|
|
In process research and development
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
44,497
|
|
|
$
|
42,990
|
|
|
|
|
|
|
|
|
|
|
It is the Companys policy to write off amortizable
intangibles once fully amortized. Accordingly, during fiscal
2010, approximately $48.9 million in core and developed
technology and approximately $35.5 million in customer
relationships and related accumulated amortization was removed
from the balance sheet. During
66
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiscal 2010, the Company entered into a patent licensing
agreement with a third party for approximately
$20.0 million and acquired patents for approximately
$1.2 million.
During fiscal 2010, the Company recorded approximately
$6.0 million for IPR&D as part of the purchase of a
business from a privately-held storage networking company.
IPR&D is capitalized at fair value as an intangible asset
with an indefinite life and assessed for impairment thereafter.
Upon completion of the development of the underlying marketable
products, the capitalized IPR&D asset will be amortized
over its estimated useful life.
During fiscal 2009, the Company recorded an impairment charge of
approximately $3.1 million related to a developed
technology intangible asset acquired from Aarohi. The initial
value ascribed to this developed technology intangible asset was
based primarily on forecasted revenues from products which the
Company decided, during fiscal 2009, to no longer produce. The
Company recorded the impairment charge to reduce the carrying
value of this developed technology intangible asset to the
estimated fair value of zero. This impairment charge was
recorded in cost of sales in the accompanying consolidated
statements of operations.
During fiscal 2008, the Company recorded an impairment charge of
approximately $2.0 million related to the customer
relationships intangible asset from the Aarohi acquisition. The
initial value ascribed to this customer relationship was based
primarily on forecasted revenues from McDATA Corporation
(McDATA). Subsequent to this initial valuation, Brocade
Communications Systems, Inc. (Brocade) completed its acquisition
of McDATA in January 2007. Following completion of the
acquisition, Brocade informed the Company of its intent to
terminate certain projects that included the Companys
products. As a result of this triggering event, impairment
testing was deemed necessary and the Company wrote down the
asset to its estimated fair value of zero. This impairment
charge was recorded in the line item impairment of other
intangible assets in the consolidated statements of operations.
Aggregated amortization expense for intangible assets for fiscal
year 2010, 2009, and 2008, was approximately $25.7 million,
$24.3 million, and $32.3 million respectively, of
which approximately $18.9 million, $18.9 million, and
$23.0 million of amortization expense related to core
technology and developed technology, respectively, has been
included in cost of sales within the consolidated statements of
operations.
The following table presents the estimated aggregated
amortization expense of intangible assets for the next five full
fiscal years (in thousands):
|
|
|
|
|
2011
|
|
$
|
21,951
|
|
2012
|
|
|
7,826
|
|
2013
|
|
|
4,240
|
|
2014
|
|
|
4,240
|
|
2015
|
|
|
240
|
|
|
|
|
|
|
|
|
$
|
38,497
|
|
|
|
|
|
|
Components of other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Notes receivable
|
|
$
|
24,256
|
|
|
$
|
15,000
|
|
Equity investment in privately-held company
|
|
|
9,184
|
|
|
|
11,184
|
|
Other
|
|
|
8,987
|
|
|
|
4,555
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,427
|
|
|
$
|
30,739
|
|
|
|
|
|
|
|
|
|
|
67
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The notes receivable bear simple interest at 5.0% per annum and
mature on December 31, 2010 or upon certain defined events
such as consummation of financing, change in control, or
default. The notes receivable are collateralized by
substantially all of the assets of the borrower. Subsequent to
the fiscal year ended June 27, 2010, the notes receivable
were settled in connection with the Companys acquisition
of ServerEngines.
The Companys equity investment in a privately-held company
is accounted for under the cost method. Under the cost method,
investments are carried at cost and are adjusted for
other-than-temporary
declines in fair value, distributions of earnings, or additional
investments. The Company monitors its investment for impairment
on a quarterly basis and makes appropriate reductions in
carrying values when such impairments are determined to be
other-than-temporary.
Impairment charges are included in other (expense) income, net
in the consolidated statements of operations. Factors used in
determining an impairment include, but are not limited to, the
current business environment including competition; uncertainty
of financial condition; technology and product prospects;
results of operations; and current financial position including
any going concern considerations such as the rate at which the
investee utilizes cash and the investees ability to obtain
additional financing. The Company has determined that there is
no impairment as of June 27, 2010; however, it is
considered reasonably possible that the Companys
determination that there is no impairment could change within
the next twelve months if the current business environment
deteriorates, if the investees financial condition
worsens, or the investee is unable to secure adequate financing
to support its business plan and operations.
|
|
Note 9
|
Accrued
Liabilities
|
Components of accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Payroll and related costs
|
|
$
|
14,387
|
|
|
$
|
11,410
|
|
Warranty liability
|
|
|
1,637
|
|
|
|
2,462
|
|
Deferred revenue and accrued rebates
|
|
|
4,169
|
|
|
|
3,499
|
|
Other
|
|
|
8,860
|
|
|
|
6,083
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,053
|
|
|
$
|
23,454
|
|
|
|
|
|
|
|
|
|
|
The Company provides a warranty of between one to five years on
its products. The Company records a provision for estimated
warranty related costs at the time of sale based on historical
product return rates and the Companys estimates of
expected future costs of fulfilling its warranty obligations.
Changes to the warranty liability in 2010 and 2009 were:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
2,462
|
|
|
$
|
4,174
|
|
Accrual for warranties issued
|
|
|
542
|
|
|
|
1,030
|
|
Changes to pre-existing warranties (including changes in
estimates)
|
|
|
(737
|
)
|
|
|
(982
|
)
|
Settlements made (in cash or in kind)
|
|
|
(630
|
)
|
|
|
(1,760
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,637
|
|
|
$
|
2,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10
|
Employee
Retirement Savings Plans
|
The Company has a pretax savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code (IRC) (the
Plan) for substantially all domestic employees. Under the Plan,
eligible employees are able to contribute up to 15% of their
compensation not to exceed the maximum IRC deferral amount. In
addition, Company
68
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discretionary contributions match up to 4% of a
participants compensation. Company discretionary
contributions to the 401(k) plan were suspended in March 2009
due to the downturn in the economy. Effective in February 2010,
the Company discretionary contributions match was reinstated to
50% of the first 4% of a participants eligible
compensation. The Companys contributions under this plan
were approximately $0.6 million, $1.9 million, and
$3.0 million in fiscal years 2010, 2009, and 2008,
respectively.
The Company also maintains similar retirement plans in certain
international locations. The total expense and total obligation
of the Company for these plans were not material to the
accompanying consolidated financial statements for all periods
presented.
|
|
Note 11
|
Commitments
and Contingencies
|
Leases
The Company leases certain facilities and equipment under
long-term noncancelable operating lease agreements, which expire
at various dates through 2013. Rent expense for the Company
under operating leases, including
month-to-month
rentals, totaled approximately $5.2 million,
$5.8 million and $4.9 million in fiscal years 2010,
2009, and 2008, respectively. The Company has recorded rent
expense on a straight-line basis based on contractual lease
payments. Allowances from lessors for tenant improvements have
been included in the straight-line rent expense for the
applicable locations.
Future minimum noncancelable operating lease commitments are as
follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Fiscal year:
|
|
|
|
|
2011
|
|
$
|
5,998
|
|
2012
|
|
|
3,952
|
|
2013
|
|
|
1,595
|
|
2014
|
|
|
|
|
2015
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
11,545
|
|
|
|
|
|
|
Litigation
On November 15, 2001, prior to the Companys
acquisition of Vixel Corporation, a securities class action was
filed in the United States District Court in the Southern
District of New York as Case No. 01 CIV. 10053 (SAS),
Master File No. 21 MC92 (SAS) against Vixel and two of its
officers and directors (one of which is James M. McCluney, the
Companys current Chief Executive Officer) and certain
underwriters who participated in the Vixel initial public
offering in late 1999. The amended complaint alleged violations
under Section 10(b) of the Exchange Act and Section 11
of the Securities Act and sought unspecified damages on behalf
of persons who purchased Vixel stock during the period
October 1, 1999 through December 6, 2000. On
April 2, 2009, the parties signed a Stipulation and
Agreement of Settlement (the 2009 Settlement) to the District
Court for preliminary approval. The District Court granted the
plaintiffs motion for preliminary approval and
preliminarily certified the settlement classes on June 10,
2009. The settlement fairness hearing was held on
September 10, 2009. On October 6, 2009, the District
Court entered an opinion granting final approval to the
settlement and directing that the Clerk of the District Court
close these actions. The 2009 Settlement provides for a
settlement amount of $586 million, and Emulex has no
obligation to pay any part of that amount. Notices of appeal of
the opinion granting final approval have been filed by six
groups of appellants.
69
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On January 27, 2009, a patent infringement lawsuit was
filed in the United States District Court in the Central
District of California as Case
No. CV09-00605
R (JWJx) against Emulex by Microprocessor Enhancement
Corporation and Michael H. Branigin. The complaint alleges
infringement of U.S. Patent No. 5,471,593, and seeks a
judgment for damages, injunctive relief, and an award of
attorneys fees and costs. On March 25, 2009, Emulex
filed an answer to the complaint denying allegations and
asserting affirmative defenses. Emulex joined a summary judgment
motion by Texas Instruments in a related lawsuit. On
July 1, 2010, the Court granted summary judgment of
noninfringement to Emulex based on prosecution history estoppel
of the patent, and the Court subsequently entered final judgment
in favor of Emulex on July 13, 2010.
On April 27, 2009, Reid Middleton filed a lawsuit in the
Court of Chancery of the State of Delaware on behalf of himself
and all other similarly situated stockholders of the Company and
derivatively on behalf of the Company. The original complaint
named the members of the Board as defendants and the Company as
a nominal defendant. The complaint asserted a claim for breach
of fiduciary duty on behalf of a putative class of holders of
shares of the Companys common stock (the Shares) and a
derivative claim for devaluation of the Company stemming from
the Companys January 2009 amendments to its Bylaws,
adoption of a new stockholder rights plan to replace its
expiring rights plan, and amendments to its Key Employee
Retention Agreements, and actions in response to Broadcoms
announcement of its unsolicited April 21, 2009 takeover
proposal to acquire the Company. The original complaint sought
declaratory and injunctive relief, compensatory damages,
interest and costs, including attorneys and expert fees.
On May 6, 2009, Jim Robbins filed a lawsuit in the Superior
Court of the State of California, County of Orange, on behalf of
himself and all other similarly situated stockholders of the
Company (the California Litigation). The complaint names the
members of the Board and the Company as defendants. The
complaint asserts a claim for breach of fiduciary duty on behalf
of a putative class of holders of Shares relating to the
Companys January 2009 amendments to its Bylaws, adoption
of a new stockholder rights plan to replace its expiring rights
plan, and amendments to its Key Employee Retention Agreements,
and actions in response to Broadcoms announcement of its
proposal to acquire the Company. The complaint seeks declaratory
and injunctive relief, a constructive trust upon any benefits
improperly received as a result of the alleged wrongful conduct
and breach of any duty owed to the holders of Shares, and costs,
including attorneys and expert fees. This lawsuit was
dismissed without prejudice on December 15, 2009.
On May 7, 2009, Kamwai Fred Chan filed a lawsuit in the
Court of Chancery of the State of Delaware on behalf of himself
and all other similarly situated stockholders of the Company.
The complaint names the members of the Board and the Company as
defendants. The complaint asserts a claim for breach of
fiduciary duty on behalf of a putative class of holders of
Shares relating to the Companys January 2009 amendments to
its Bylaws, adoption of a new stockholder rights plan to replace
its expiring rights plan, and amendments to its Key Employee
Retention Agreements, and actions in response to Broadcoms
announcement of its proposal to acquire the Company. The
complaint seeks declaratory and injunctive relief, compensatory
damages, interest and costs, including attorneys and
expert fees.
On May 11, 2009, the Court of Chancery of the State of
Delaware granted plaintiff Reid Middletons motion to
expedite proceedings and set a trial date in the Delaware
lawsuits beginning on July 8, 2009. On July 6, 2009,
the Court of Chancery continued the July 8, 2009 trial date
indefinitely.
On May 11, 2009, Pipefitters Local No. 636 Defined
Benefit Plan filed a lawsuit in the Court of Chancery of the
State of Delaware on behalf of itself and all other similarly
situated stockholders of the Company and derivatively on behalf
of the Company. The original complaint named the members of the
Companys Board as defendants and the Company as a nominal
defendant. The complaint asserted a claim for breach of
fiduciary duty on behalf of a putative class of holders of
Shares relating to the Companys January 2009 amendments to
its Bylaws, adoption of a new shareholder rights plan to replace
its expiring rights plan, amendments to its Key Employee
Retention Agreements, and actions in response to Broadcoms
announcement of its proposal to acquire the Company. The
original complaint also asserted a derivative claim for breach
of
70
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiduciary duty based on the same actions. The original complaint
sought declaratory and injunctive relief, including mandatory
injunctive relief, and costs, including attorneys and
expert fees.
On May 12, 2009, Norfolk County Retirement System filed a
lawsuit in the Court of Chancery of the State of Delaware on
behalf of itself and all other similarly situated stockholders
of the Company. The original complaint named the members of the
Companys Board and the Company as defendants. The original
complaint asserted a claim for breach of fiduciary duty on
behalf of a putative class of holders of Shares relating to the
Companys January 2009 amendments to its Bylaws, adoption
of a new shareholder rights plan to replace its expiring rights
plan, and amendments to its Key Employee Retention Agreements,
and actions in response to Broadcoms announcement of its
proposal to acquire the Company. The original complaint sought
declaratory and injunctive relief, compensatory damages,
interest and costs, including attorneys and expert fees.
On September 17, 2009, Reid Middleton, Pipefitters Local
No. 636 Defined Benefit Plan and Norfolk County Retirement
System (together the Plaintiffs) filed a Verified Amended
Class Action and Derivative Complaint in the Court of
Chancery of the State of Delaware. The amended complaint is
brought on behalf of Plaintiffs and all other similarly situated
stockholders of the Company and, alternatively, derivatively on
behalf of the Company. The complaint names the members of the
Board as defendants and the Company as a nominal defendant. The
complaint asserts claims for breach of fiduciary duty on behalf
of a putative class of holders of Shares and, alternatively, a
derivative claim for devaluation of the Company stemming from
the Companys January 2009 amendments to its Bylaws,
adoption of a new stockholder rights plan to replace its
expiring rights plan, and amendments to its Key Employee
Retention Agreements, and actions in response to Broadcoms
announcement of its proposal to acquire the Company. The
complaint seeks declaratory relief, compensatory damages,
interest and costs, including attorneys and expert fees.
On October 13, 2009, the defendants filed an answer to the
amended complaint.
On December 3, 2009, the plaintiffs attorneys filed
an application for an award of attorneys fees and
expenses. The Court rejected the plaintiffs request for
attorneys fees as premature on December 18, 2009. On
February 4, 2010, the Court of Chancery granted a
Scheduling Order setting a trial date for December 6-10, 2010.
On July 9, 2010, the parties filed a stipulation of
settlement and order of dismissal of action wherein
Emulexs insurance carrier agreed to pay $3,000,000 for
plaintiffs counsel fees and expenses, subject to the
Courts final approval. The Company recorded the $3,000,000
potential settlement and related insurance recovery in fiscal
2010.
On September 14, 2009, Broadcom Corporation filed a patent
infringement lawsuit against the Company in the United States
District Court in the Central District of California. The
original complaint alleged that the Company is infringing 10
Broadcom patents covering certain data and storage networking
technologies. On February 23, 2010, Broadcom filed a first
amended complaint. The first amended complaint alleges that the
Company is infringing 12 Broadcom patents covering certain data
and storage networking technologies. The complaint seeks
declaratory and injunctive relief, monetary damages, and
interest and costs, including attorneys and expert fees.
On March 25, 2010, the Company filed its answer and
affirmative defenses to the first amended complaint alleging
that it believes that the Broadcom patents at issue are invalid
or not infringed, or both. In addition, the Company has asserted
counterclaims for declaratory judgment of invalidity and
non-infringement against each of the Broadcom patents at issue,
and seeks award of attorneys fees, costs, and expenses. On
January 11, 2010, the Court set a trial date of
September 20, 2011.
On May 26, 2010, Broadcom Corporation filed a patent
infringement lawsuit against the Company in the United States
District Court in the Central District of California. The 2010
lawsuit asserts that certain Emulex products are infringing on a
Broadcom patent covering certain data and storage networking
technologies. Broadcom seeks a judgment for damages, injunctive
relief, and an award of attorneys fees and costs. On
June 30, 2010, the Judge stated that the 2009 and 2010
patent cases would be consolidated into a single lawsuit. With
respect to this matter, management has determined that a
potential loss is not probable and
71
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accordingly, no amount has been accrued. The status of this
matter does not allow management of the Company to determine
whether a loss will occur or estimate the range of such a loss.
On November 9, 2009, the Company filed a lawsuit against
Broadcom Corporation alleging that Broadcom has acted in an
anticompetitive manner in violation of federal antitrust laws,
as well as made defamatory statements and engaged in acts of
unfair competition. The complaint seeks actual and punitive
damages, attorneys fees and costs, and injunctive relief
against Broadcom. On January 4, 2010, the Company filed an
amended complaint. The amended complaint alleges that Broadcom
has acted in an anticompetitive manner in violation of federal
antitrust laws and made defamatory statements. The amended
complaint seeks actual and punitive damages, attorneys
fees and costs, and injunctive relief. On June 7, 2010, the
Court denied Broadcoms motion to dismiss Emulexs
first amended complaint and to strike Emulexs defamation
claim.
In addition to the ongoing litigation discussed above, 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 the open matters will
not have a material adverse effect on the Companys
consolidated financial position, results of operations or
liquidity.
Other
Commitments and Contingencies
The Company has approximately $33.6 million of liabilities
for uncertain tax positions as of June 27, 2010 for which a
reasonably reliable estimate of the period of payment cannot be
made.
The Company has entered into various agreements for professional
services, joint-development, non-recurring engineering, and
purchases of inventory. As of June 27, 2010, the
Companys obligation associated with such agreements was
approximately $55.9 million.
In addition, the Company provides limited indemnification in
selected circumstances within its various customer contracts
whereby the Company indemnifies the parties to whom it sells its
products with respect to the Companys product infringement
of certain intellectual property, and in some limited cases
against bodily injury or damage to real or tangible personal
property caused by a defective Company product. It is not
possible to predict the maximum potential amount of future
payments under these or similar agreements, due to the
conditional nature of the Companys obligations and the
unique facts and circumstances involved in each particular
agreement. As of June 27, 2010, the Company has not
incurred any significant costs related to indemnification of its
customers.
|
|
Note 12
|
Shareholders
Equity
|
Stock
Repurchase Program
On December 5, 2006, the Companys Board of Directors
authorized the repurchase of up to $150.0 million of its
outstanding common stock over the next two years. In early
August 2008, the Companys Board of Directors approved
approximately $39.9 million of common stock repurchases,
the remaining amount available under the December 2006 plan,
which were completed in the first quarter of fiscal 2009.
In early August 2008, the Companys Board of Directors
authorized a new plan to repurchase up to $100.0 million of
its outstanding common stock. In April 2009, upon receipt of an
unsolicited acquisition proposal and related tender offer of
Broadcom Corporation to acquire the Company, the Companys
Board of Directors elected to temporarily suspend any activity
under the share repurchase plan. In light of Broadcom allowing
its tender offer to expire on July 14, 2009, Emulexs
Board of Directors elected to reactivate the $100.0 million
share repurchase plan effective July 15, 2009. From
June 29, 2009 through June 27, 2010, the Company has
repurchased 2.0 million shares of its common stock for an
aggregate purchase price of approximately $18.2 million or
an average of $9.12 per share under this plan. Subsequent to
June 27, 2010, the Company repurchased 495,200 shares
of its common stock under this program for an aggregate purchase
72
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
price of approximately $4.4 million for an average of
$8.93 per share. Approximately $77.3 million is
available under this program after these repurchases. The
Company may repurchase shares from
time-to-time
in open market purchases or privately negotiated transactions.
The share repurchases will be financed by available cash
balances and cash from operations. The Companys Board of
Directors has not set an expiration date for the plan.
Shareholder
Rights Plan
In January 2009, the Companys Board of Directors adopted a
Rights Agreement to replace the previous agreement that expired
on January 19, 2009. On January 14, 2009, the Board of
Directors authorized and declared a dividend of one preferred
stock purchase right for each share of common stock of the
Company under the Rights Agreement. The dividend was paid on
January 24, 2009 to the record holders of shares of common
stock as of this date. The Rights Agreement provides for
Preferred Stock Purchase Rights (Rights) that attach to and
transfer with each share of common stock. Effective as of
October 2, 2009, the Company terminated the Rights
Agreement.
Exchange
Program
On July 14, 2009, the Company completed the option exchange
program approved by shareholders at Emulexs Annual
Shareholders Meeting on November 19, 2008. There were
3,925,263 options cancelled in exchange for a total of 225,783
unvested stock awards granted to 379 employees. In
connection with the option exchange program, the Company is
required to recognize incremental share-based compensation
expense over the remaining vesting period if the number of
shares underlying the restricted stock units multiplied by the
last reported sales price of the Companys common stock on
the grant date of the restricted stock units exceeds the fair
value of the eligible options immediately before their
cancellation. The incremental share-based compensation expense
related to the option exchange program was negligible.
Stock-Based
Compensation
As of June 27, 2010, the Company had three stock-based
plans for employees and directors that are open for future
awards and are described below. In addition, the Company had
eight stock-based plans, including six plans assumed in
connection with prior acquisitions, each of which is closed for
future grants but has options outstanding.
Amounts recognized in the financial statements with respect to
these plans for fiscal 2010, 2009, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Total cost of stock-based payment plans during the period
|
|
$
|
18,152
|
|
|
$
|
23,095
|
|
|
$
|
29,008
|
|
Amounts capitalized in inventory during the period
|
|
|
(517
|
)
|
|
|
(615
|
)
|
|
|
(569
|
)
|
Amounts recognized in income for amounts previously capitalized
in inventory
|
|
|
479
|
|
|
|
628
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts charged against income, before income tax benefit
|
|
$
|
18,114
|
|
|
$
|
23,108
|
|
|
$
|
29,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of related income tax benefit recognized in income
|
|
$
|
6,677
|
|
|
$
|
7,563
|
|
|
$
|
8,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
The Employee Stock Purchase Plan (the Purchase Plan or ESPP) was
adopted by the Board of Directors and approved by the
stockholders in 2000 and became effective on January 1,
2001. Under the Purchase Plan, employees of the Company who
elect to participate have the right to purchase common stock at
a 15%
73
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
discount from the lower of the market value of the common stock
at the beginning or the end of each six month offering period.
Employees purchase common stock using payroll deductions, which
may not exceed 10% of their eligible compensation (the amount
may be increased from time to time by the Company but may not
exceed 15% of eligible compensation). The Purchase Plan was
amended and adopted by the Board of Directors in 2007. The
amended and restated Purchase Plan was approved by the
stockholders in 2007 and became effective on November 15,
2007. The amendment changed the six month option periods from
April 1 to September 30 of each year to May 1 to October 31 and
from October 1 to March 31 of each year to November 1 to
April 30. In addition, the amendment increased the maximum
number of shares that an employee may purchase in each six month
period from 500 shares to 1,000 shares, and increased
the maximum dollar amount that can be withheld from employees
during each six month period from $12,500 to $25,000 (subject to
a maximum of $25,000 in any calendar year). No employee may
purchase more than $25,000 worth of common stock (calculated at
the time the purchase right is granted) or 2,000 shares in
any calendar year. The Compensation Committee of the Board of
Directors administers the Purchase Plan. The Company has
reserved a total of 3,450,000 shares of common stock for
issuance under the Purchase Plan. As of June 27, 2010,
there are 678,085 shares available for future award grants.
Employee
Stock Option and Equity Incentive Plan
On December 1, 2005, the Companys shareholders
ratified and approved the Emulex Corporation 2005 Equity
Incentive Plan (the Equity Incentive Plan). The Companys
Equity Incentive Plan permits the grant of stock options,
restricted stock awards consisting of shares of common stock and
restricted stock units that are subject to a substantial risk of
forfeiture (vesting) restrictions for some period of time
(unvested stock awards), unrestricted stock awards that are free
of any vesting restrictions, performance awards entitling the
recipient to acquire shares of common stock or to vest in shares
of common stock upon the attainment of specified performance
goals (Performance Awards) and stock appreciation rights to its
domestic and international employees. The aggregate number of
shares which may be used under the Equity Incentive Plan
consists of 2,937,475 shares of common stock, plus the
number of shares underlying options that were outstanding on the
effective date of the Equity Incentive Plan (October 24,
2005) that expire, are forfeited, cancelled or terminate
for any reason under the Employee Stock Option Plan and the 2004
Employee Stock Incentive Plan without having been exercised in
full. On November 30, 2006, an additional
1,500,000 shares were approved for issuance by the
Companys stockholders. On November 15, 2007, the
Companys stockholders approved an amendment to the Equity
Incentive Plan to increase the number of shares authorized for
issuance under the Equity Incentive Plan by another 1,500,000
and to provide that shares available for grant under the Aarohi
Communications, Inc. 2001 Stock Option Plan (the Aarohi
Plan) and the Sierra Logic, Inc. 2001 Stock Option Plan
(the Sierra Plan) may be used for awards granted
under the Equity Incentive Plan. The Equity Incentive Plan is
administered by the Board of Directors, or at the discretion of
the Board, by a committee consisting of two or more independent
directors of the Company. Stock option awards are granted with
an exercise price not less than fair market value of the
Companys stock at the date of grant; these awards
generally vest based on three years of continuous service and
have a six year contractual term. Certain stock option awards
provide for accelerated vesting if there is a change in control
(as defined in the Equity Incentive Plan) or achieving certain
performance targets within the meaning of Section 162(m) of
the Internal Revenue Code and the regulations thereunder. As of
June 27, 2010, there were 4,211,853 shares available
for future award grants under the Equity Incentive Plan,
including the shares available for grant under the Employee
Stock Option Plan, 2004 Employee Stock Incentive Plan, Aarohi
Plan and Sierra plan.
Unvested stock awards may be awarded (or sold at a purchase
price determined by the Board or Committee) upon terms
established by the Board or Committee at its sole discretion.
The vesting provisions of unvested stock awards will be
determined individually by the Board or Committee for each
grant, but generally vest annually over three years.
Unrestricted stock awards will be free of any vesting
provisions.
74
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Beginning May 2, 2006, the Company granted unvested stock
awards to employees and non-employee directors under the Equity
Incentive Plan.
Performance awards will be subject to the attainment of
performance goals established by the Board or Committee, the
periods during which performance is to be measured, and all
other limitations and conditions applicable to the awarded
shares. Performance goals shall be based on a pre-established
objective formula or standard that specifies the manner of
determining the number of performance awards that will be
granted or will vest if the performance goal is attained.
Performance goals will be determined by the Board or the
Committee prior to the time 25% of the service period has
elapsed and may be based on one or more business criteria that
apply to an individual, a business unit or the Company. As of
June 27, 2010, there are no performance awards outstanding.
Stock appreciation rights entitle the holder to receive the
appreciation in the value of common stock underlying the stock
appreciation right. The Board or Committee may grant a stock
appreciation right either as a stand alone right, or if such
right does not provide for the deferral of compensation within
the meaning of Section 409A of the Internal Revenue Code of
1986, as amended, in tandem with all or any part of the shares
of common stock that may be purchased by the exercise of a stock
option. As of June 27, 2010, there are no stock
appreciation rights outstanding.
The Companys 1997 Stock Option Plan for Non-Employee
Directors (the Director Plan) was amended and approved by the
stockholders on November 30, 2006 to allow for a maximum of
1,880,000 shares of common stock to be issued. The Director
Plan provides that an option to purchase 60,000 shares of
common stock is granted to each non-employee director of the
Company upon the first date that such director becomes eligible
to participate. These options shall be exercisable as to 33.3%
of the shares on each anniversary of the grant if the director
is still a director of the Company. In addition, the Director
Plan provides that on each yearly anniversary of the date of the
initial grant, each eligible director shall automatically be
granted an additional option to purchase 20,000 shares of
common stock. From fiscal 2007, in lieu of the 20,000 annual
stock option grant, each eligible director received an unvested
stock award grant of 7,000 shares. These options or
unvested stock awards shall be exercisable as to 50% of the
shares on the six month anniversary, 25% on the nine month
anniversary and 25% on the year anniversary of the grant date.
The exercise price per option granted will not be less than the
fair market value of the Companys stock at the date of
grant. No option or unvested stock awards granted under the
Director Plan shall be exercisable after the expiration of the
earlier of (i) ten years following the date the option or
unvested stock awards is granted or (ii) one year following
the date the optionee ceases to be a director of the Company for
any reason. The administrator of the Director Plan has the
discretion to grant additional awards in the form of unvested
stock awards
and/or stock
appreciation rights or to substitute unvested stock awards or
stock appreciation rights for the formula grants described
above. Options or unvested stock awards granted under the
Director Plan are non-qualified stock awards. As of
June 27, 2010, there were 387,203 shares available for
future award grants under the Director Plan.
The Companys Employee Stock Option Plan (the Plan), which
is shareholder approved, permitted the grant of stock options
and unvested stock to its domestic and international employees
for up to approximately 33.7 million shares of common
stock. Stock option awards were granted under the plan with an
exercise price not less than the fair market value of the
Companys stock at the date of grant; these stock option
awards generally vest based on either three or four years of
continuous service and have either a six or ten year contractual
term. Certain stock option awards provide for accelerated
vesting if there is a change in control (as defined in the
Plan) or achieving certain performance targets. With the
approval and adoption of the Equity Incentive Plan on
December 1, 2005, the Plan became closed for future grants
of options.
The Companys 2004 Employee Stock Incentive Plan (the 2004
Plan), which is shareholder approved, permitted the grant of
stock options and unvested or unrestricted shares to its
employees for up to 2,000,000 shares of common stock. The
purchase price for the shares subject to any option granted
under the
75
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 Plan was not permitted to be less than 100% of the fair
market value of the shares of common stock of the Company on the
date the option was granted. These stock option awards generally
vest based on either three or four years of continuous service
and have either a six or ten year contractual term. With the
approval and adoption of the Equity Incentive Plan on
December 1, 2005, the 2004 Plan became closed for future
award grants.
Options granted under the Plan and options granted under the
2004 Plan prior to August 2005 have a 10 year contractual
term and become exercisable on a cumulative basis as to 25% of
the total number of shares one year from the date the option is
granted with an additional 6.25% after the end of each
consecutive calendar quarter thereafter, except when otherwise
provided by the Board of Directors or the Compensation
Committee. Beginning with awards granted in August 2005, each
option granted generally has a six year contractual term and
becomes exercisable on a cumulative basis as to 30% of the total
number of shares one year from the date the option is granted
with an additional 7.5% after the end of each of the next four
consecutive calendar quarters and an additional 10% after the
end of each of the next four consecutive quarters thereafter,
except when otherwise provided by the Board of Directors or the
Compensation Committee.
In connection with the acquisition of Sierra Logic, Aarohi,
Vixel Corporation, and Giganet, Inc., the Company assumed the
Sierra Plan, the Aarohi Plan, the Vixel Corporation Amended and
Restated 1995 Stock Option Plan, the Vixel Corporation 1999
Equity Incentive Plan,the Vixel Corporation 2000 Non-Officer
Equity Incentive Plan, and the Giganet, Inc. 1995 Stock Option
Plan (collectively, the Acquisition Plans). Shares previously
authorized for issuance under the Acquisition Plans are no
longer available for future grants, but options previously
granted under these plans remain outstanding. Shares available
under the Sierra Plan and the Aarohi Plan may be granted under
the Equity Incentive Plan.
As of June 27, 2010, we anticipate that the number of
shares authorized under the Equity Incentive Plan, the Director
Plan, and the Purchase Plan are sufficient to cover future stock
option exercises and shares that will be purchased during the
next six month option period from May 1, 2010 to
October 31, 2010 under the Purchase Plan.
The fair value of each stock option award under the Equity
Incentive Plan and the Director Plan and purchase under the
Purchase Plan is estimated on the date of grant using the
Black-Scholes option-pricing model based on the market price of
the underlying common stock on the date of grant, expected term,
stock price volatility and expected risk-free interest rates.
Expected volatilities are based on equal weighting of historical
volatilities for periods equal to the expected term and implied
volatilities based on traded options to buy the Companys
shares. The fair value of each unvested stock award is
determined based on the closing price of the Companys
common stock on the grant date.
The assumptions used to compute the fair value of the
compensatory element related to the shares to be purchased under
the Purchase Plan for fiscal 2010, 2009, and 2008 were:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
37% - 43%
|
|
49% - 87%
|
|
32% - 45%
|
Weighted average expected volatility
|
|
40%
|
|
67%
|
|
40%
|
Expected dividends
|
|
|
|
|
|
|
Expected term (in years)
|
|
0.5
|
|
0.5
|
|
0.5
|
Weighted average expected term (in years)
|
|
0.5
|
|
0.5
|
|
0.5
|
Risk-free interest rate
|
|
0.17% - 0.24%
|
|
0.30% - 1.13%
|
|
1.67% - 4.08%
|
76
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assumptions used to compute the fair value of stock option
grants under the Equity Incentive Plan and the Director Plan for
fiscal 2010, 2009, and 2008 were:
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected volatility
|
|
43% - 49%
|
|
42% - 53%
|
|
33% - 40%
|
Weighted average expected volatility
|
|
47%
|
|
44%
|
|
37%
|
Expected dividends
|
|
|
|
|
|
|
Expected term (in years)
|
|
3.0 - 5.0
|
|
3.0 - 5.0
|
|
2.4 - 5.0
|
Weighted average expected term (in years)
|
|
3.8
|
|
3.8
|
|
3.3
|
Risk-free interest rate
|
|
1.49% - 2.55%
|
|
1.12% - 3.02%
|
|
1.75% - 4.17%
|
A summary of option activity under the plans for fiscal 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Options outstanding at June 28, 2009
|
|
|
12,180,404
|
|
|
$
|
21.68
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
553,000
|
|
|
$
|
10.62
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(128,745
|
)
|
|
$
|
5.46
|
|
|
|
|
|
|
|
|
|
Options canceled
|
|
|
(4,565,106
|
)
|
|
$
|
22.91
|
|
|
|
|
|
|
|
|
|
Options forfeited
|
|
|
(508,458
|
)
|
|
$
|
16.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 27, 2010
|
|
|
7,531,095
|
|
|
$
|
20.73
|
|
|
|
2.72
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at June 27, 2010
|
|
|
7,421,465
|
|
|
$
|
20.87
|
|
|
|
2.68
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 27, 2010
|
|
|
6,759,623
|
|
|
$
|
21.77
|
|
|
|
2.47
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of unvested stock awards activity for fiscal 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Awards outstanding and unvested at June 28, 2009
|
|
|
2,721,606
|
|
|
$
|
12.84
|
|
Awards granted
|
|
|
2,156,355
|
|
|
$
|
9.85
|
|
Awards vested
|
|
|
(1,206,210
|
)
|
|
$
|
14.34
|
|
Awards forfeited
|
|
|
(234,010
|
)
|
|
$
|
12.55
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding and unvested at June 27, 2010
|
|
|
3,437,741
|
|
|
$
|
10.46
|
|
|
|
|
|
|
|
|
|
|
As of June 27, 2010, there was approximately
$18.1 million of total unrecognized compensation cost
related to unvested share-based compensation arrangements
granted under the plans. That cost is expected to be recognized
over a weighted-average period of 1.1 years.
The weighted average grant date fair value of options granted in
fiscal 2010, 2009, and 2008, was $3.94, $4.08, and $4.80
respectively. The weighted average grant date fair value of
unvested stock awards granted in fiscal 2010, 2009, and 2008 was
$9.85, $9.19, and $17.98 respectively. The total intrinsic value
of stock options exercised in fiscal 2010, 2009, and 2008 was
approximately $0.9 million, $1.7 million, and
$5.7 million respectively. The total fair value of unvested
stock awards that vested in fiscal 2010, 2009, and 2008 was
approximately $12.4 million, $8.6 million, and
$7.9 million, respectively. Cash received from stock option
77
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercises under stock-based plans and shares purchased under the
Purchase Plan in fiscal 2010, 2009, and 2008 was approximately
$6.1 million, $7.1 million, and $10.4 million,
respectively. The actual tax benefit realized for the tax
deductions from option exercises and vested stock awards was
approximately $5.2 million, $4.1 million and
$5.1 million in fiscal 2010, 2009, and 2008, respectively.
The components of income tax (benefit) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(8,562
|
)
|
|
$
|
1,852
|
|
|
$
|
86,598
|
|
Deferred
|
|
|
(9,850
|
)
|
|
|
(2,824
|
)
|
|
|
(2,382
|
)
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,050
|
|
|
|
400
|
|
|
|
(517
|
)
|
Deferred
|
|
|
(3,938
|
)
|
|
|
(3,697
|
)
|
|
|
1,220
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
4,540
|
|
|
|
2,331
|
|
|
|
69
|
|
Deferred
|
|
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(17,276
|
)
|
|
$
|
(1,938
|
)
|
|
$
|
84,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax (benefit) expense in fiscal years 2010, 2009, and
2008 excludes (shortfall) excess tax benefits recorded directly
to additional
paid-in-capital
in the amounts of approximately ($3.4) million,
($0.9) million, and $2.0 million, respectively,
related to exercises of stock options under the Companys
stock option plans.
Income before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(29,922
|
)
|
|
$
|
4,947
|
|
|
$
|
77,680
|
|
Foreign
|
|
|
36,266
|
|
|
|
659
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,344
|
|
|
$
|
5,606
|
|
|
$
|
77,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
are presented below:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Capitalization of inventory costs
|
|
$
|
98
|
|
|
$
|
79
|
|
Reserves not currently deductible
|
|
|
8,835
|
|
|
|
9,962
|
|
Share-based compensation
|
|
|
17,274
|
|
|
|
15,706
|
|
Net operating loss carryforwards
|
|
|
10,902
|
|
|
|
11,639
|
|
General business and state credit carryforwards
|
|
|
19,373
|
|
|
|
13,589
|
|
Capitalized research and development expenditures
|
|
|
1,314
|
|
|
|
2,030
|
|
Capital loss carryforwards
|
|
|
2,370
|
|
|
|
2,609
|
|
Property and equipment
|
|
|
2,473
|
|
|
|
529
|
|
Other
|
|
|
1,271
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
63,910
|
|
|
|
56,851
|
|
Less valuation allowance
|
|
|
(3,121
|
)
|
|
|
(3,002
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
|
60,789
|
|
|
|
53,849
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Various state taxes
|
|
|
5,335
|
|
|
|
4,349
|
|
Intangible assets customer relationships
|
|
|
324
|
|
|
|
584
|
|
Intangible assets core technology and patents
|
|
|
8,030
|
|
|
|
16,121
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
13,689
|
|
|
|
21,054
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
47,100
|
|
|
$
|
32,795
|
|
|
|
|
|
|
|
|
|
|
Based on the Companys historical and anticipated future
pre-tax results of operations, management believes it is more
likely than not that the Company will realize the benefit of the
approximately $47.1 million net deferred tax assets
existing as of June 27, 2010. 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.
The Company has approximately $5.9 million of capital loss
carryforwards available as of June 27, 2010. If unused,
approximately $0.9 million and $5.0 million of the
carryforwards would expire in fiscal years 2011 and 2014,
respectively. Management believes it is more likely than not
that the Company will not be able to generate sufficient capital
gain income to realize these benefits prior to the expiration of
these capital loss carryforwards. In addition, the Company
believes it is more likely than not that the Company will not be
able to utilize $1.3 million of Massachusetts research
credits. Therefore, a valuation allowance of approximately
$3.1 million is recorded as of the end of fiscal 2010.
The Company has made no provision for U.S. income taxes or
foreign withholding taxes on the earnings of its foreign
subsidiaries, as these amounts are intended to be indefinitely
reinvested in operations outside the United States. As of
June 27, 2010, there is no cumulative amount of
undistributed earnings of our foreign subsidiaries.
79
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The actual income tax (benefit) expense on pretax income before
income taxes differs from expected federal income tax expense
for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Expected income tax expense at 35%
|
|
$
|
2,220
|
|
|
$
|
1,962
|
|
|
$
|
27,271
|
|
State income tax (benefit) expense, net of federal tax benefit
|
|
|
(1,877
|
)
|
|
|
(2,143
|
)
|
|
|
457
|
|
Change in valuation allowance allocated to income tax expense
|
|
|
(211
|
)
|
|
|
|
|
|
|
|
|
Effect of foreign activities taxed at differing tax rates
|
|
|
(4,557
|
)
|
|
|
4,960
|
|
|
|
57,609
|
|
Expiration of prior period tax matters
|
|
|
(4,258
|
)
|
|
|
(5,282
|
)
|
|
|
(1,583
|
)
|
Research and other credits
|
|
|
(1,558
|
)
|
|
|
(4,691
|
)
|
|
|
(1,795
|
)
|
Stock-based compensation
|
|
|
(3,157
|
)
|
|
|
1,506
|
|
|
|
2,494
|
|
Prior period Section 199 deduction
|
|
|
(5,733
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
1,855
|
|
|
|
1,750
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(17,276
|
)
|
|
$
|
(1,938
|
)
|
|
$
|
84,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2010, the Company recognized a tax benefit related to
a release of liabilities for uncertain tax positions as a result
of an expiration of statute of limitations of approximately
$4.3 million and a tax benefit related to the domestic
production activities deductions for tax years 2005 through 2007
of approximately $5.7 million, recognized as a result of
filing the amended returns in fiscal 2010.
As of June 27, 2010, the Company had federal and state net
operating loss carryforwards of approximately $25.3 million
and $23.1 million, respectively, available to offset future
federal and state taxable income. If unused, the federal net
operating loss carryforwards will expire during the fiscal years
2011 through 2023, and the state net operating loss
carryforwards will begin to expire in fiscal 2015. Included in
the federal net operating loss carryforwards are Aarohi losses
of approximately $24.5 million and Sierra Logic losses of
approximately $0.7 million. The annual utilization of these
net operating loss carryforwards is limited due to restrictions
imposed under federal law due to a change in ownership.
As of June 27, 2010, the Company had federal and state
research and experimentation credit carryforwards of
approximately $2.6 million and $16.5 million,
respectively, which are available to reduce federal and state
income taxes. If unused, the federal carryforwards expire during
the fiscal years 2022 through 2030, and certain state
carryforwards will begin to expire in fiscal 2019. For federal
tax purposes, the Company has approximately $0.1 million of
foreign tax credit carryforwards available through fiscal 2019.
As of June 27, 2010, the Company had total unrecognized tax
benefits of approximately $33.6 million compared to
approximately $31.3 million as of June 28, 2009. If
fully recognized, approximately $29.3 million of the
$33.6 million would impact the Companys effective tax
rate. The Company does not expect that the liability for
unrecognized tax benefits will change significantly within the
next 12 months.
A rollforward of the activity in the gross unrecognized tax
benefits for the year ended June 27, 2010 is as follows (in
thousands):
|
|
|
|
|
Balance at June 28, 2009
|
|
$
|
31,408
|
|
Additions based on tax positions related to the current year
|
|
|
5,859
|
|
Additions for tax positions of prior years
|
|
|
1,136
|
|
Reductions for tax positions of prior years
|
|
|
|
|
Reductions for tax positions due to a lapse in statute
|
|
|
(4,852
|
)
|
|
|
|
|
|
Balance at June 27, 2010
|
|
$
|
33,551
|
|
|
|
|
|
|
80
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys Federal income tax returns for fiscal years
2007 to 2010 and California income tax returns for fiscal years
2006 to 2010 are open as the statute of limitations have not yet
expired. The Company is currently under audit by federal and
various state taxing authorities. The Company does not believe
that the resolution of these audits will have a material effect
on its financial statements; however, there is no assurance that
the Company will accurately predict the outcomes of these
audits, and the amounts ultimately paid upon resolution of
audits could be materially different from the amounts previously
included in our income tax expense and therefore could have a
material impact on our tax provision, net income and cash flows.
The Company had accrued interest and penalties related to
unrecognized tax benefits included in other liabilities of
approximately $1.2 million and $1.0 million as of
June 27, 2010 and June 28, 2009, respectively.
|
|
Note 14
|
Revenue
by Product Families, Geographic Area and Significant
Customers
|
Revenues
by Product Families
The Company designs and markets two major distinct product
families: Host Server Products (HSP) and Embedded Storage
Products (ESP). HSP mainly consists of Fibre Channel based
connectivity products and converged Fibre Channel over Ethernet
based products. The Companys Fibre Channel based products
include HBAs, custom form factor solutions for OEM blade servers
and ASICs. These products enable servers to efficiently connect
to local area networks (LANs), SANs, and network attached
storage (NAS) by offloading data communication processing tasks
from the server as information is delivered and sent to the
network. The Companys converged products include Converged
Network Adapters (CNAs). CNAs efficiently move data between
local area networks (LANs) and SANs using Fibre Channel over
Ethernet (FCoE) to map the Fibre Channel protocol directly into
the data layer of Ethernet networks.
ESP mainly consists of Input/Output controller (IOC) solutions,
embedded bridge, and embedded router products. Embedded storage
switches, bridges, routers, and IOCs are deployed inside storage
arrays, tape libraries, and other storage appliances that
connect storage controllers to storage capacity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Host Server Products
|
|
$
|
288,437
|
|
|
$
|
284,099
|
|
|
$
|
352,687
|
|
Embedded Storage Products
|
|
|
110,283
|
|
|
|
93,559
|
|
|
|
134,858
|
|
Other
|
|
|
430
|
|
|
|
564
|
|
|
|
756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
399,150
|
|
|
$
|
378,222
|
|
|
$
|
488,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
by Geographic Area
The Companys net revenues by geographic area based on
bill-to location are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Asia Pacific
|
|
$
|
141,105
|
|
|
|
35
|
%
|
|
$
|
107,914
|
|
|
|
29
|
%
|
|
$
|
125,392
|
|
|
|
26
|
%
|
United States
|
|
|
130,511
|
|
|
|
33
|
%
|
|
|
144,201
|
|
|
|
38
|
%
|
|
|
197,063
|
|
|
|
40
|
%
|
Europe, Middle East, and Africa
|
|
|
121,757
|
|
|
|
31
|
%
|
|
|
120,260
|
|
|
|
32
|
%
|
|
|
160,386
|
|
|
|
33
|
%
|
Rest of the world
|
|
|
5,777
|
|
|
|
1
|
%
|
|
|
5,847
|
|
|
|
1
|
%
|
|
|
5,460
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
399,150
|
|
|
|
100
|
%
|
|
$
|
378,222
|
|
|
|
100
|
%
|
|
$
|
488,301
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal years 2010, 2009, and 2008, net revenues from sales to
customers in the United Kingdom, based on bill-to location, were
approximately 13%, 12%, and 16%, respectively. Net revenues from
sales to
81
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
customers in Singapore, based on bill-to location, for fiscal
years 2010, 2009, and 2008 were 13%, 13%, and 13%, respectively.
No other country in Asia Pacific, Europe, Middle East, Africa or
the rest of the world accounted for more than 10% of net
revenues during these periods.
Significant
Customers
The following table represents direct sales to customers
accounting for greater than 10% of the Companys net
revenues or customer accounts receivable accounting for greater
than 10% of the Companys accounts receivable. Amounts not
presented were less than 10% in the current fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
|
Net Revenues
|
|
Receivable
|
|
|
2010
|
|
2009
|
|
2008
|
|
2010
|
|
2009
|
|
Hewlett-Packard
|
|
|
13
|
%
|
|
|
17
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
15
|
%
|
IBM
|
|
|
22
|
%
|
|
|
22
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
24
|
%
|
In addition to direct sales, some of the Companys larger
OEM customers purchased or marketed products indirectly through
distributors, resellers, or other third parties. Customers with
total direct and indirect revenues, including customer specific
models purchased or marketed indirectly through distributors,
resellers, and other third parties, of more than 10% in the
current fiscal year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
|
2010
|
|
2009
|
|
2008
|
|
EMC
|
|
|
12
|
%
|
|
|
14
|
%
|
|
|
18
|
%
|
Hewlett-Packard
|
|
|
14
|
%
|
|
|
17
|
%
|
|
|
15
|
%
|
IBM
|
|
|
31
|
%
|
|
|
31
|
%
|
|
|
28
|
%
|
|
|
Note 15
|
Net
Income (Loss) per Share
|
In June 2008, the FASB issued authoritative guidance for whether
instruments granted in share-based payment transactions are
participating securities prior to vesting and therefore need to
be included in the earnings allocation in computing earnings per
share (EPS) under the two-class method described in previously
issued guidance for EPS. This guidance was effective for fiscal
years, and interim reporting periods within those fiscal years,
beginning after December 15, 2008, which was the
Companys fiscal year beginning June 29, 2009. Upon
adoption, EPS data for all periods presented were adjusted to
conform to the authoritative guidance.
82
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator Net income (loss)
|
|
$
|
23,620
|
|
|
$
|
7,544
|
|
|
$
|
(7,071
|
)
|
Less: Undistributed earnings allocated to participating
securities
|
|
|
(317
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to common shareholders for
basic net income (loss) per share
|
|
$
|
23,303
|
|
|
$
|
7,357
|
|
|
$
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed earnings allocated to common shareholders for
diluted net income (loss) per share
|
|
$
|
23,308
|
|
|
$
|
7,358
|
|
|
$
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per share
weighted average shares outstanding
|
|
|
80,097
|
|
|
|
80,770
|
|
|
|
82,323
|
|
Dilutive options outstanding, unvested stock units and ESPP
|
|
|
1,185
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share
adjusted weighted average shares outstanding
|
|
|
81,282
|
|
|
|
81,113
|
|
|
|
82,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.29
|
|
|
$
|
0.09
|
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive options and unvested stock awards excluded from the
computations
|
|
|
8,203
|
|
|
|
14,606
|
|
|
|
13,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average market price of common stock
|
|
$
|
11.09
|
|
|
$
|
8.91
|
|
|
$
|
16.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The antidilutive stock options and unvested stock were excluded
from the computation of diluted net income (loss) per share due
to the assumed proceeds from the awards exercise or
vesting being greater than the average market price of the
common shares or due to the Company incurring a net loss for the
periods presented.
83
EMULEX
CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16
|
Unaudited
Quarterly Consolidated Financial Data
|
Selected unaudited quarterly consolidated financial data for
fiscal years 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss)
|
|
|
|
Net
|
|
|
|
|
|
Net (Loss)
|
|
|
Income
|
|
|
|
Revenues
|
|
|
Gross Profit
|
|
|
Income
|
|
|
per Share
|
|
|
|
(In thousands, except per share data)
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
103,129
|
|
|
$
|
63,382
|
|
|
$
|
(2,469
|
)
|
|
$
|
(0.03
|
)
|
Third quarter
|
|
|
102,204
|
|
|
|
64,420
|
|
|
|
13,309
|
|
|
|
0.16
|
|
Second quarter
|
|
|
108,290
|
|
|
|
66,784
|
|
|
|
8,942
|
|
|
|
0.11
|
|
First quarter
|
|
|
85,527
|
|
|
|
52,106
|
|
|
|
3,838
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
399,150
|
|
|
$
|
246,692
|
|
|
$
|
23,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth quarter
|
|
$
|
79,297
|
|
|
$
|
49,018
|
|
|
$
|
(4,509
|
)
|
|
$
|
(0.06
|
)
|
Third quarter
|
|
|
78,568
|
|
|
|
46,802
|
|
|
|
(5,965
|
)
|
|
|
(0.07
|
)
|
Second quarter
|
|
|
108,661
|
|
|
|
65,985
|
|
|
|
10,517
|
|
|
|
0.13
|
|
First quarter
|
|
|
111,696
|
|
|
|
69,952
|
|
|
|
7,501
|
|
|
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
378,222
|
|
|
$
|
231,757
|
|
|
$
|
7,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
SCHEDULE OF
EMULEX CORPORATION AND SUBSIDIARIES
85
EMULEX
CORPORATION AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
Years
ended June 27, 2010, June 28, 2009, and June 29,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
Amounts
|
|
|
|
|
|
|
Balance at
|
|
|
Including
|
|
|
Charged
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Changes in
|
|
|
Against
|
|
|
at End
|
|
Classification
|
|
of Period
|
|
|
Estimates
|
|
|
Reserve
|
|
|
of Period
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Year ended June 27, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,553
|
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
1,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns, allowances and reserves
|
|
$
|
2,989
|
|
|
$
|
14,990
|
|
|
$
|
14,205
|
|
|
$
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability
|
|
$
|
2,462
|
|
|
$
|
(195
|
)
|
|
$
|
630
|
|
|
$
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,753
|
|
|
$
|
(196
|
)
|
|
$
|
4
|
|
|
$
|
1,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns, allowances and reserves
|
|
$
|
4,225
|
|
|
$
|
8,717
|
|
|
$
|
9,953
|
|
|
$
|
2,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability
|
|
$
|
4,174
|
|
|
$
|
48
|
|
|
$
|
1,760
|
|
|
$
|
2,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,902
|
|
|
$
|
(146
|
)
|
|
$
|
3
|
|
|
$
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns, allowances and reserves
|
|
$
|
3,330
|
|
|
$
|
14,398
|
|
|
$
|
13,503
|
|
|
$
|
4,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty liability
|
|
$
|
3,832
|
|
|
$
|
2,304
|
|
|
$
|
1,962
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|
$
|
4,174
|
|
|
|
|
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|
|
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|
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86
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
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By:
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/s/ James
M. McCluney
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James M. McCluney
Chief Executive Officer
Date: August 26, 2010
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
August 26, 2010.
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Signature
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Title
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/s/ James
M. McCluney
(James
M. McCluney)
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Chief Executive Officer and Director
(Principal Executive Officer)
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/s/ Michael
J. Rockenbach
(Michael
J. Rockenbach)
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Executive Vice President,
Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
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/s/ Paul
F. Folino
(Paul
F. Folino)
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Executive Chairman
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/s/ Fred
B. Cox
(Fred
B. Cox)
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Director and Chairman Emeritus
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/s/ Michael
P. Downey
(Michael
P. Downey)
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Director
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/s/ Bruce
C. Edwards
(Bruce
C. Edwards)
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Director
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/s/ Robert
H. Goon
(Robert
H. Goon)
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Director
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/s/ Don
M. Lyle
(Don
M. Lyle)
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Director
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/s/ Dean
A. Yoost
(Dean
A. Yoost)
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Director
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87
EXHIBIT INDEX
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Exhibit No.
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Description of Exhibit
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2
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.1
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Agreement and Plan of Merger, dated June 7, 2010, by and among
Emulex Corporation, Tortuga Electronics LLC, ServerEngines
Corporation, and Raju Vegesna, as Stockholder Agent
(incorporated by reference to Exhibit 2.1 to the Companys
Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 7, 2010) (Pursuant to Item 601(b)(2)
of Regulation S-K, annexes and schedules to the Agreement and
Plan of Merger have been omitted; annexes and schedules will be
supplementally provided to the Securities and Exchange
Commission upon request)
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3
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.1
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Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys 1997 Annual
Report on Form 10-K).
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3
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.2
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Certificate of Amendment of Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2000).
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3
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.3
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Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on
January 16, 2009).
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3
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.4
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Amended and Restated Certificate of Designations, Preferences
and Rights of Series A Junior Participating Preferred Stock of
Emulex Corporation, incorporated by reference to Exhibit 3.1 to
the Companys Form 8-K filed with the Securities and
Exchange Commission on January 16, 2009.
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10
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.1*
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Giganet, Inc. 1995 Stock Option Plan (incorporated by reference
to Exhibit 99.1 to the Companys Registration Statement on
Form S-8, filed March 2, 2001).
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10
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.2*
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Emulex Corporation Employee Stock Option Plan, as amended
(incorporated by reference to Appendix B to the Companys
Definitive Proxy Statement for its Annual Meeting of
Stockholders held on November 21, 2002).
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10
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.3*
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Emulex Corporation 1997 Stock Option Plan for Non-Employee
Directors, as amended (incorporated by reference to Appendix B
to the Companys Definitive Proxy Statement for its Annual
Meeting of Stockholders held on November 30, 2006).
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10
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.4*
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Emulex Corporation Employee Stock Purchase Plan, as amended
(incorporated by reference to Appendix B to Emulex
Corporations proxy statement on Schedule 14A for the 2008
annual meeting of its stockholders filed with the Securities and
Exchange Commission on October 14, 2008).
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10
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.5*
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Emulex Corporation 2004 Employee Stock Incentive Plan
(incorporated by reference to Appendix B to the Companys
Definitive Proxy Statement for its Annual Meeting of
Stockholders held on November 18, 2004).
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10
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.6
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Standard Commercial Lease between the Flatley Company and
Giganet, Inc. (incorporated by reference to Exhibit 10.15 to the
Companys 2001 Annual Report on Form 10-K).
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10
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.7*
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Form of Key Employee Retention Agreement between the Company and
its executive officers other than Paul F. Folino and James M.
McCluney, Jeffrey W. Benck, and Michael J. Rockenbach
(incorporated by reference to Exhibit 10.7 to the Companys
Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 2006).
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10
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.8*
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Form of Key Employee Retention Agreement for Paul F. Folino,
James M. McCluney, Jeffrey W. Benck, and Michael J. Rockenbach
(incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed with the Securities and Exchange Commission on
January 16, 2009).
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10
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.9*
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Emulex Corporation Change in Control Retention Plan
(incorporated by reference to Exhibit 10.4 to the Companys
Form 10-Q filed with the Securities and Exchange Commission on
April 29, 2009).
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10
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.10
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Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.1 to the Companys current Report on Form 8-K
filed May 17, 2005).
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10
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.11
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Real Estate Lease dated September 12, 2000, between LM Venture,
LLC and Emulex Corporation (incorporated by reference to Exhibit
10.22 to the Companys 2003 Annual Report on Form 10-K).
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88
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Exhibit No.
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Description of Exhibit
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10
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.12
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First Amendment to Lease (amendment dated February 8, 2001),
between LM Venture LLC and Emulex Corporation (incorporated by
reference to Exhibit 10.23 to the Companys 2003 Annual
Report on Form 10-K).
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10
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.13*
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Vixel Corporation Amended and Restated 1995 Stock Option Plan
incorporated by reference to Exhibit 10.2 of Amendment No. 1 to
the Registration Statement on Form S-1 of Vixel Corporation
(File No. 333-81347 filed on August 16, 1999).
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10
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.14*
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Vixel Corporation 1999 Equity Incentive Plan (as amended)
(incorporated by reference to Exhibit 10.23 of Amendment No. 1
to the Registration Statement on Form S-1 of Vixel Corporation
(File No. 333-81347), filed on August 16, 1999).
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10
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.15*
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Vixel Corporation 2000 Non-Officer Equity Incentive Plan
(incorporate reference to Exhibit 99.1 of the Registration
Statement on Form S-8/S-3 of Vixel Corporation (File No.
333-39000), filed on June 9, 2000).
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10
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.16
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First Amendment to Standard Commercial Lease (amendment dated
July 1, 2004) between the Flatley Company and Emulex Design
& Manufacturing Corporation, successor-in-interest to
Giganet, Inc. (incorporated by reference to Exhibit 10.15 to the
Companys 2004 Annual Report on Form 10-K).
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10
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.17*
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Form of Director Stock Option Agreement and related form of
Grant Summary for grants made pursuant to the 1997 Non-Employee
Director Stock Option Plan (incorporated by reference to Exhibit
10.1 to the Companys Current Report on Form 8-K filed
August 30, 2005).
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10
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.18*
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Form of Incentive Stock Option Agreement for grants made
pursuant to the Employee Stock Option Plan (incorporated by
reference to Exhibit 10.2 to the Companys Current Report
on Form 8-K filed August 30, 2005).
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10
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.19*
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Form of Non-Qualified Stock Option Agreement for grants made
pursuant to the Employee Stock Option Plan (incorporated by
reference to Exhibit 10.3 to the Companys Current Report
on Form 8-K filed August 30, 2005).
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10
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.20*
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Form of Incentive Stock Option Agreement for grants made
pursuant to the 2004 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 10.4 to the Companys Current
Report on Form 8-K filed August 30, 2005).
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10
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.21*
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Form of Non-Qualified Stock Option Agreement for grants made
pursuant to the 2004 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 10.5 to the Companys Current
Report on Form 8-K filed August 30, 2005).
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10
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.22*
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Form of Notice of Grant of Stock Options and Stock Option
Agreement for grants made pursuant to both the Employee Stock
Option Plan and 2004 Employee Stock Incentive Plan (incorporated
by reference to Exhibit 10.6 to the Companys Current
Report on Form 8-K filed August 30, 2005).
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10
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.23
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Office Lease Agreement dated August 25, 2005 by and between
24000 Development, LLC and Emulex Design & Manufacturing
Corporation (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed August 31, 2005).
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10
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.24*
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Description of Compensation Arrangements with Non-Employee
Directors.
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10
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.25*
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Form of Amendment to Incentive Stock Option Agreements under the
Amended and Restated 2005 Equity Incentive Plan.
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10
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.26*
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Executive Incentive Plan of the Company, as amended,
incorporated by reference to Exhibit 10.1 to the Companys
Form 8-K filed with the Securities and Exchange Commission on
September 3, 2009.
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10
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.27*
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Aarohi Communications, Inc. 2001 Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed May 8, 2006).
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10
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.28*
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Form of Aarohi Communications, Inc. Stock Option
Agreement(incorporated by reference to Exhibit 99.2 to the
Companys Registration Statement on Form S-8 filed May 8,
2006).
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10
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.29*
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Form of Aarohi Communications, Inc. Stock Option Agreement
(alternate form) (incorporated by reference to Exhibit 99.3 to
the Companys Registration Statement on Form S-8 filed May
8, 2006).
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89
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Exhibit No.
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Description of Exhibit
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10
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.30*
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Form of Aarohi Communications, Inc. Notice of Grant of Stock
Option (incorporated by reference to Exhibit 99.4 to the
Companys Registration Statement on Form S-8 filed May 8,
2006).
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10
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.31*
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Form of Emulex Corporation Stock Option Assumption Documents for
holders of options granted under the Aarohi Communications, Inc.
2001 Stock Option Plan (incorporated by reference to Exhibit
99.5 to the Companys Registration Statement on Form S-8
filed May 8, 2006).
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10
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.32*
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Amended and Restated Emulex Corporation 2005 Equity Incentive
Plan (incorporated by reference to Appendix A to Emulex
Corporations proxy statement on Schedule 14A for the 2008
annual meeting of its stockholders filed with the Securities and
Exchange Commission on October 14, 2008).
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10
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.33*
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Form of 2005 Equity Incentive Plan Restricted Stock Award
Agreement (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the period
ended April 2, 2006).
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10
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.34*
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Form of Notice of Grant of Restricted Stock Award under 2005
Equity (incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on Form 10-Q for the period
ended April 2, 2006).
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10
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.35
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Second Amendment to Lease dated May 26, 2006 by and between
Brass Creekside, L.P. and Emulex Design & Manufacturing
Corporation (incorporated by reference to the Companys
Current Report on Form 8-K filed June 5, 2006).
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10
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.36*
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Sierra Logic, Inc. 2001 Stock Option Plan (incorporated by
reference to Exhibit 99.1 to the Companys Registration
Statement on Form S-8 filed on October 5, 2006).
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10
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.37*
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Form of Sierra Logic, Inc. Stock Option Agreement and Notice of
Grant of Stock Option (incorporated by reference to Exhibit 99.2
to the Companys Registration Statement on Form S-8 filed
on October 5, 2006).
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10
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.38*
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Form of Emulex Corporation Stock Option Assumption Documents for
holders of options granted under the Sierra Logic, Inc. 2001
Stock Option Plan (incorporated by reference to Exhibit 99.3 to
the Companys Registration Statement on Form S-8 filed on
October 5, 2006).
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10
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.40
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Deed of Lease between Aarohi Communications Private Limited and
M/s M.K. Chakrapani & Co. relating to the Companys
offices in Bangalore, India (incorporated by reference to
Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q
for the period ended October 1, 2006)
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10
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.41*
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Offer letter, dated May 4, 2008, from the Company to Jeffrey W.
Benck (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on May 12, 2008).
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10
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.42*
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Form of Amendment to Non-Qualified Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to the Companys
Form 8-K filed with the Securities and Exchange Commission on
January 16, 2009).
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10
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.43*
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Form of Amendment to Restricted Stock Award Agreement
incorporated by reference to Exhibit 10.3 to the Companys
Form 8-K filed with the Securities and Exchange Commission on
January 16, 2009.
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10
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.44*
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Form of Notice of Grant of Restricted Stock Unit under the
Amended and Restated 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Companys Form 10-Q filed
with the Securities and Exchange Commission on January 30, 2009).
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10
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.45*
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Form of Restricted Stock Unit Award Agreement under the Amended
and Restated 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.4 to the Companys Form 10-Q filed
with the Securities and Exchange Commission on January 30, 2009).
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10
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.46*
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Form of Appendix to Restricted Stock Award Agreement, Restricted
Stock Unit Award Agreement, Non-Qualified Stock Option
Agreement, and Incentive Stock Option Agreement for Change in
Control Retention Plan Participants or Employees Covered by a
Key Employee Retention Agreement under the Amended and Restated
2005 Equity Incentive Plan.
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10
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.47*
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Form of Restricted Stock Unit Award Agreement for Non-U.S.
Grantees under the Amended and Restated 2005 Equity Incentive
Plan (incorporated by reference to Exhibit 10.6 to the
Companys Form 10-Q filed with the Securities and Exchange
Commission on January 30, 2009).
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90
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Exhibit No.
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Description of Exhibit
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10
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.48*
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Form of Appendix to Restricted Stock Unit Award Agreement for
Non-U.S. Grantees under the Amended and Restated 2005 Equity
Incentive Plan.
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10
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.49*
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Letter Agreement between Emulex Corporation, a California
corporation, and Michael Smith (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K
filed August 6, 2008).
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10
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.50*
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Separation Agreement, dated September 25, 2009, between the
Company and Marshall D. Lee (incorporated by reference to
Exhibit 10.2 to the Companys Form 10-Q filed with the
Securities and Exchange Commission on November 2, 2009).
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10
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.51
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Support Agreements, each dated June 7, 2010, by and between
Emulex Corporation and the parties listed on the signature pages
thereto (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 7, 2010).
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10
|
.52*
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Form of Amendment to Restricted Stock Unit Agreements under the
Amended and Restated 2005 Equity Incentive Plan.
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21
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|
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List of Company subsidiaries.
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23
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|
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Consent of Independent Registered Public Accounting Firm.
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31A
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|
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Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of
the Sarbanes-Oxley Act of 2002.
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31B
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Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to §302 of
the Sarbanes-Oxley Act of 2002.
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* |
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Indicates a management contract or compensation plan or
arrangement. |
91