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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0537669
(State of incorporation) (I.R.S. Employer Identification No.)
3545 HARBOR BOULEVARD 92626
COSTA MESA, CALIFORNIA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 438-2200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
RIGHTS TO PURCHASE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(Title of class)
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Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
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As of May 31, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $60,710,775.
As of May 31, 1996, the registrant had 5,613,901 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference in the
Parts of this report indicated below:
Part II, Items 6, 7 and 8 -- Annual Report to Stockholders for the year ended March 31, 1996
Part III, Items 10, 11, 12 and 13 -- Definitive proxy statement for the 1996 Annual Meeting of Stockholders which will
be filed with the Securities and Exchange Commission within 120 days after the
close of the 1996 year.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
QLogic Corporation ("QLogic") was organized as a California corporation in
1992. Unless the context indicates otherwise, the "Company" and "QLogic" each
refer to the Registrant and its subsidiary.
All references to years refer to the Company's fiscal years ended March 31,
1996, April 2, 1995, and April 3, 1994, as applicable, unless the calendar years
are specified. References to dollar amounts, except share and per share data,
are in thousands, unless otherwise specified.
SIGNIFICANT BUSINESS DEVELOPMENT
Distribution
Prior to December 28, 1992, QLogic's former parent company, Emulex
Corporation ("Emulex"), operated its micro devices business as a division
("EMD"). On March 30, 1992, the Board of Directors of Emulex approved in
principle a plan of reorganization (the "Reorganization Plan"). Pursuant to the
Reorganization Plan, QLogic was formed as a separate corporation on November 18,
1992, and on December 28, 1992 exchanged 5,000,000 shares of its common stock
for the net assets of EMD.
On February 24, 1994 (the "Distribution Date"), pursuant to the
Reorganization Plan, Emulex declared a special dividend consisting of the
distribution (the "Distribution") to its stockholders of all outstanding shares
of common stock of QLogic. The purpose of the Distribution was to enable QLogic
to gain independent access to equity markets so that it may use its capital
stock as a source of funding for growth and acquisitions and to attract and
retain key employees. The Distribution was completed on February 28, 1994, and
QLogic became a publicly owned company on that date.
TECHNOLOGY AND PRODUCTS
The Company is a supplier of Small Computer Systems Interface (SCSI) Very
Large Scale Integration (VLSI) semiconductor chips. SCSI is an industry standard
for connecting peripheral devices to computer systems. The Company designs and
markets a full line of SCSI application standard products that meet the
requirements of host side (minicomputers, workstations and high-end PCs) as well
as target side (hard disk, tape, CD-ROM, and removable media drives) systems
designers.
In recent years the power and speed of computer operations have increased
by several magnitudes, and continued improvements in computer technology have
made possible new architectural advances in both standard microcomputer and
Reduced Instruction Set Computer (RISC) configurations. Such advances have made
Input/Output (I/O) performance critical to overall system performance. In many
applications, intelligent I/O controllers must now manage and direct the flow of
data at high speeds between multiple CPUs and peripheral devices such as disk
and tape drives, scanners, printers and CD-ROMs. The Company addresses this I/O
bottleneck by supplying a broad range of VLSI semiconductor solutions.
The Company markets its products to customers worldwide, both directly and
through sales representatives. It also conducts its own product testing,
engineering support and quality assurance, and uses outside subcontractors to
manufacture wafers and assemble products to its specifications using its
proprietary designs and incorporating its proprietary firmware and software.
PATENTS AND LICENSES
The Company believes that patents are of less significance in its industry
than such factors as innovative skills, technological expertise and marketing
abilities. The Company plans to continue to apply for patents both in the United
States and in foreign countries, when it deems it to be advantageous to do so.
The Company believes that there can be no assurance that patents will be issued,
or that any patent issued will provide significant protection or could be
successfully defended.
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As is the case with many companies in the electronics industry, it may be
desirable for the Company to obtain technology licenses from other companies in
the future. The Company has occasionally received notices of claimed
infringement of intellectual property rights and may receive additional such
claims in the future. The Company evaluates all such claims and, if necessary,
will seek to obtain appropriate licenses. There can be no assurance that any
such licenses, if required, will be available on acceptable terms.
SELLING AND MARKETING
The Company markets its products worldwide to OEMs, VARs, systems
integrators, industrial distributors, resellers, and end-users. At the end of
fiscal 1996, the domestic selling organization included three regional directors
located in satellite offices. At the end of fiscal 1996, the international
selling organization included one country manager located in one international
sales office.
The Company's export revenues were approximately 55, 62 and 71 percent of
consolidated net revenues for 1996, 1995 and 1994, respectively. In 1996, the
majority of export shipments were to Pacific Rim countries. The decline in
export revenue is described in more detail in "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Net Revenues."
QLogic's export sales are subject to certain risks common to all export
activities, such as governmental regulation and the risk of imposition of
tariffs or other trade barriers. Export sales of many products must also be
licensed by the Office of Export Administration of the U.S. Department of
Commerce.
Tokyo Electron (TEL) is a Japan-based distributor that sells to a dozen
Japan-based OEM's that use QLogic products. Products sold to TEL destined for
Fujitsu and Hitachi accounted for 16 and 14 percent, respectively, of QLogic's
revenue for fiscal year 1996. At the request of some Japan-based OEM's, the
Company intends to transition product distribution to some OEM customers from
TEL to a small newly formed distribution company. Although management does not
believe the transition will adversely impact the Company's sales to Japan, there
can be no assurance that the transition will successfully be completed. QLogic
is reimbursing the distributor for its start up cost.
Company sales to Tokyo Electron (TEL) accounted for 42, 24 and 33 percent
of total net revenues for fiscal 1996, 1995 and 1994, respectively. Company
sales to Sun Microsystems accounted for 13 percent of total net revenues in
fiscal 1996. Company sales to Avex Electronics accounted for 11 percent of total
net revenues in fiscal 1996.
Company sales to Micropolis Corporation accounted for approximately 14 and
15 percent of total net revenues for fiscal 1995 and 1994, respectively. The
Company's product sales to Digital Equipment Corporation accounted for
approximately 11 percent of total net revenues in fiscal 1995. Company sales to
Seagate accounted for 16 percent of total net revenues for 1994. Company sales
to Micropolis, DEC, Sun, and Avex were less than 10% for years in which
comparisons were not provided above.
Sales of QLogic products are highly concentrated among its top customers.
Furthermore, QLogic's top three customers accounted for approximately 66 percent
of revenues for fiscal 1996. There can be no assurances that sales to such
customers will continue or remain at comparable levels. QLogic's operating
results have been, and may continue to be, adversely affected by the development
by one or more of such customers of alternative sources, including the internal
development by such customers of products competitive with those of QLogic. The
Company believes it is a supplier of quality products and has good customer
relations with these customers; however, sales to any large customer depend on
demand for the customer's products and upon its decision to continue using
QLogic as a supplier. With the exception of TEL, Sun and Avex, the Company
believes that the loss of any one customer would not have a material adverse
effect on its business.
RELIANCE ON THE HIGH-PERFORMANCE COMPUTER MARKET
A significant portion of QLogic's products are currently used in
high-performance workstations, personal computers and other office automation
products. QLogic's operating results may be adversely affected by a downturn in
these markets. The semiconductor and peripheral systems industries have
experienced cyclical
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declines and advances, uncertainty, slowing PC demand, and a declining
semiconductor book-to-bill ratio. Factors contributing to cyclical change are
complex and largely unpredictable. As QLogic grows, the cyclical nature of the
industry may have a continuing impact on QLogic's business and operating
results.
ORDER BACKLOG
At March 31, 1996, the Company had product orders of approximately $15.5
million compared with approximately $6.6 million at April 2, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Operating Income."
All backlog is for delivery within six months or less, with the exception
of a small percentage of orders. The majority of orders are subject to
rescheduling and/or cancellation with little or no penalty. Given the nature of
the Company's business, most backlog is normally scheduled to ship within a
six-month period. 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 point
in time is not necessarily indicative of trends in the Company's business.
QLogic's customers have during fiscal 1996 encountered uncertain and
changing demand for their products. They typically order from QLogic based on
their forecasts. If demand falls below customers' forecasts, or if customers do
not control their inventories effectively, they may cancel or reschedule
shipments previously ordered from QLogic. QLogic has during fiscal 1996
experienced, and may at any time and with minimal notice in the future
experience, cancellations and postponements of orders.
ENGINEERING AND DEVELOPMENT
At March 31, 1996, the Company employed approximately 63 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 $7,191,000, $7,598,000 and $8,603,000 for fiscal 1996, 1995 and
1994, respectively.
COMPETITION
QLogic's principal competitors in the integrated circuit I/O controller
market are Cirrus Logic Corporation, Symbios Logic, Inc., and Adaptec Inc. Some
of the Company's larger disk drive and computer systems customers have the
capability to develop I/O controller integrated circuits for use in their
products that could replace the Company's products. At least one major customer
in the past has started making their own circuits and stopped buying from
QLogic. QLogic believes that one of its principal competitive strengths in the
integrated circuit I/O controller market is its ability to obtain major design
wins as the result of its systems level expertise, integrated circuit design
capability and substantial experience in I/O applications, particularly SCSI.
QLogic's principal competitors in the host adapter market are Adaptec
Corporation, Mylex Inc., and Advansys, Inc. In addition, some of the Company's
customers involved in computer system manufacturing have the capability to
develop host adapters for use in their products. Some of the potentially
competing computer system manufacturers are also QLogic customers. QLogic
believes that one of its principal competitive strengths in the host adapter
market is its systems level expertise, integrated circuit design capability and
substantial experience in I/O applications, particularly SCSI.
QLogic believes competitive factors in design wins are time to market,
performance, product features, price, quality and technical support. The markets
for QLogic's products are highly competitive and are characterized by rapid
technological advances, frequent new product introductions and evolving industry
standards. QLogic's competitors continue to introduce products with improved
performance characteristics and its customers continue to develop new
applications. QLogic will have to continue to develop market-appropriate
products to remain competitive. While QLogic continues to devote significant
resources to research and development, there can be no assurance that such
efforts will be successful or that QLogic will develop and introduce new
technology and products in a timely manner. In addition, while relatively few
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competitors offer a full range of data I/O and SCSI products, additional
domestic and foreign manufacturers may increase their presence in, and resources
devoted to, these markets.
DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGY
The markets for the products of QLogic are characterized by rapid changes
in both product and process technologies. Because of continual improvements in
these technologies, the Company believes that its future operating results will
depend, in part, upon its ability to continue to improve product and process
technologies and develop new technologies in order to maintain the performance
advantages of products and processes relative to competitors, to adapt products
and processes to technological changes, and to adopt emerging industry
standards. Because of the complexity of its products, the Company has
experienced delays from time to time in completing products on a timely basis.
If the Company is unable to design, develop and introduce competitive new
products on a timely basis, its future operating results would be adversely
affected.
MANUFACTURING AND SUPPLIES
The Company produces two primary types of products, semiconductor products
and circuit board products. The Company designs both the semiconductor and
circuit board products, and both types of products are manufactured by outside
vendors and then tested by QLogic personnel. Most component parts used by the
outside vendors are standard off-the-shelf items which are, or can be, purchased
from two or more sources.
The Company believes that its semiconductor requirements do not justify the
high costs of owning, operating and constantly upgrading a wafer fabrication
facility. The Company purchases semiconductor products at both the probed die
stage and at the fully packaged stage. By contracting with multiple
semiconductor suppliers through purchase agreements and technology exchange
licenses, the Company feels that it can access the appropriate process
technologies in required volumes to execute its business plan. The Company's
reliance on third-party semiconductor manufacturers involves risks. The risks
include possible limitations of availability of product due to market
abnormalities, the possible unavailability of, or delays in obtaining access to,
certain process technologies, and the absence of complete control over
semiconductor delivery schedules, manufacturing yields, and total production
costs. The Company's semiconductor suppliers had a lower degree of capacity
utilization at the end of fiscal year 1996 than at the end of fiscal year 1995.
The Company believes that it will be able to procure the material it needs,
however, reduction in available supplier capacity could limit the Company's
future growth. Any of these factors could adversely impact QLogic's revenues and
profits.
The Company's employees monitor process yields in an effort to ensure
consistent overall quality. Product is tested at both the wafer stage and at the
fully packaged stage. Once packaged, all semiconductor parts are subjected to
production testing as well as quality acceptance testing. Because probed die are
typically procured on a fixed cost basis, any variation in final test yields
affect the Company's cost per circuit. The Company retains the right to reject
any parts based on failure to meet specified performance criteria. In the event
the Company experiences poor test yields it would have a material adverse effect
on operating results.
For circuit board products, the Company buys sets of material in kitted
form, and process engineering services from distributors. The kitted material is
delivered to a subcontractor that works in conjunction with the distributor to
assemble and test the circuit board products to QLogic specifications. The
Company believes that its current circuit board volumes do not justify the high
costs of owning and operating a circuit board assembly factory. There are
numerous subcontractors in the field of circuit board assembly. The Company
promotes access to required circuit board assembly process technologies by
creating designs that are usable by many suppliers and attempting to establish
their ability to manufacture quality product to QLogic specifications using the
required process technologies. The Company's reliance on third-party circuit
board assemblers involves risks. The risks include possible limitations of
availability of product due to market abnormalities, the possible unavailability
of, or delays in obtaining access to, certain process technologies and the
absence of complete control over delivery schedules, manufacturing yields, and
total production costs. Any of these risks could adversely impact QLogic's
revenues and profits.
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The Company attempts to ensure circuit board to product quality through
process audits, and inspecting finished products at the subcontractor's site as
well as at the Company after receiving product. The Company may reject any
circuit board products that do not meet QLogic quality and workmanship
standards.
Electronic components have experienced a decrease in demand and a related
increase in supply during fiscal 1996 causing reduced lead times and reduced
costs on selected parts due to more available industry capacity. The decreased
lead times allowed the Company to better react to demand changes. However, a
significant delay in receiving these parts could have a material adverse effect
upon the Company's business.
The Company has its own testing facility to test the quality of
subcontracted circuits, and emphasizes the quality and reliability of its
products. The Company has been ISO 9001/TickIT certified since October 1994. The
Company performs required final tests on products and audits finished goods
inventory quality assurance procedures. The Company believes it has satisfactory
relationships with its suppliers. The Company has an ongoing quality control
program, which includes reporting, employee education and training.
EMPLOYEES
The Company had 145 employees at March 31, 1996 and 161 employees at April
2, 1995. QLogic's future operating results will depend in large measure on its
ability to attract and retain highly skilled employees who are in great demand.
None of QLogic's employees is represented by a labor union.
ITEM 2. PROPERTIES.
The Company's corporate offices and principal product development, sales
and operational facilities are currently located in one building approximately
70,000 square feet in size in Costa Mesa, California. The Company occupies the
facility pursuant to a lease that expires in calendar 1999. The Company leases
three sales offices domestically.
ITEM 3. LEGAL PROCEEDINGS.
In August 1993, Quality Semiconductor Incorporated (QSI) alleged that
QLogic's corporate name and certain QLogic trademarks infringed upon QSI's
rights in the trademark "Q", which QSI claims it owns for semiconductor
products.
In December 1993, QSI filed a complaint in the U.S. District Court for the
Northern District of California, alleging trademark infringement by QLogic. On
May 13, 1994, the Court issued a preliminary injunction enjoining the Company
from using its stylized "QLogic" trademark. As a result, QLogic adopted a new
stylized logo, in accordance with the guidelines set forth in the Court's order.
The District Court found that there had been no intentional infringement and
that there had been no damage to QSI, but the Court did not resolve certain
issues with respect to QLogic's continued use of the letter "Q" and adoption of
new trademarks.
The parties reached an agreement on March 15, 1996, which settled all
remaining issues in the matter and allowed QLogic to continue its use of the
letter "Q" with certain restrictions. Under the agreement, QLogic made a one
time payment to QSI for an amount which is to remain confidential, per the terms
of the agreement. The settlement payment, which was accrued as of March 31,
1996, did not have a material adverse effect on QLogic's financial position or
results of operations.
Following initiation of the dispute between QLogic and QSI, the Company
sought coverage from its insurance carrier for its attorney's fees and expenses
in defending the trademark action brought by QSI. The insurer denied coverage,
prompting QLogic to file suit in August 1995 for declaratory relief and breach
of contract. The litigation is pending.
The Company is not aware of any pending legal proceedings which could have
a material adverse effect on the financial position or operations of the
Company.
The Company believes that it is in compliance with all city, state, and
federal rules and regulations pertaining to environmental impact and use.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of fiscal 1996 to a vote
of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive and certain other officers of the Company are as follows:
NAME AGE POSITION
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H.K. Desai............................. 50 President and Chief Executive Officer
Thomas R. Anderson..................... 52 Vice President and Chief Financial Officer
Michael R. Manning..................... 42 Secretary and Treasurer
David Tovey............................ 51 Vice President, Marketing
Officers of the Company are elected annually by the Board of Directors for
each year period, or portion thereof, and serve at the discretion of the Board
of Directors of the Company.
Mr. Desai joined the Company in August 1995 as President and Chief
Technical Officer. He was subsequently promoted to President and Chief Executive
Officer. From May 1995 to August 1995, he was Vice President, Engineering
(Systems Products) at Western Digital Corporation, a manufacturer of disk
drives. From July 1990 until May 1995, he served as director, and subsequently
Vice President of Engineering at QLogic. From 1980 until joining the Company in
1990 Mr. Desai was an Engineering Section Manager at Unisys Corporation, a
computer system manufacturer.
Mr. Anderson joined the Company in July 1993 as Chief Financial Officer.
Prior to joining the Company, Mr. Anderson was Executive Vice President, Chief
Operating Officer and Chief Financial Officer of HIARC, Inc., a software startup
company. From October 1990 to December 1992, he was corporate Senior Vice
President and Chief Financial Officer at Distributed Logic Corporation, a
manufacturer of tape and disk controllers and subsystems. From June 1982 to
April 1990, he held various positions, the latest of which was corporate Vice
President and Chief Financial Officer with Cipher Data Products, Inc., a
supplier of tape and optical disk drives to the computer industry.
Mr. Manning joined Emulex, a network product manufacturer (QLogic's former
parent company) in July 1983 as Director of Tax. He was named Senior Director
and Treasurer of Emulex in April 1991 and Secretary in August 1992. Mr. Manning
joined the Company in June 1993. Prior to joining Emulex, Mr. Manning was a Tax
Manager at KPMG Peat Marwick LLP, independent certified public accountants.
Mr. Tovey joined the Company in April 1994 as Vice President Marketing.
From March 1985 to April 1994, he held various positions with Toshiba America
Information Systems, a computer system manufacturer including director of
technology planning and Vice President of OEM marketing. Prior to Toshiba, Mr.
Tovey held various marketing and sales management positions with Unisys
Corporation.
None of the executive officers of the Company has any family relationship
with any other executive officer of the Company or director of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRINCIPAL MARKET AND PRICES
Shares of common stock of the Company are traded and quoted in the NASDAQ
National Market System under the symbol QLGC. The following table sets forth the
range of high and low sales prices per share of common stock of the Company for
each quarterly period of the two most recent years as reported on NASDAQ.
SALES PRICES
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HIGH LOW
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FISCAL 1996
First Quarter.......................................................... 5.12 4.25
Second Quarter......................................................... 6.62 4.25
Third Quarter.......................................................... 8.87 5.62
Fourth Quarter......................................................... 9.12 6.50
HIGH LOW
---- ----
FISCAL 1995
First Quarter.......................................................... 6.75 4.00
Second Quarter......................................................... 6.75 4.25
Third Quarter.......................................................... 7.75 5.50
Fourth Quarter......................................................... 9.38 4.12
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of May 31, 1996 was 483.
DIVIDENDS
The Company has never paid cash dividends on its common stock and has no
current intention to do so.
On June 4, 1996, the Board of Directors of the Company unanimously adopted
a Shareholder Rights Plan ("the Rights Plan") pursuant to which it declared a
dividend distribution of one preferred stock purchase right (a "Right") for each
outstanding share of the common stock.
The Rights dividend will be payable on June 20, 1996 to the holders of
record of shares of common stock on that date. Each Right entitles the
registered holder, on certain events, to purchase from the Company 1/100th of a
share of the Company's Series A Junior Participating Preferred Stock, par value
$.001 per share, 200,000 shares authorized and no shares issued or outstanding
at June 4, 1996 (the "Series A Preferred Stock"), at a price of $45.00 per
1/100th of a share, subject to adjustment.
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ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should
be read in conjunction with the consolidated financial statements and notes
thereto.
SELECTED FINANCIAL DATA
FISCAL YEAR ENDED
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APRIL APRIL
MARCH 31, 2, 3, MARCH 28, MARCH 29,
1996 1995 1994 1993 1992
--------- ------- ------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS DATA:
Net revenues........................... $53,779 $57,675 $44,902 $52,257 $39,386
Cost of sales.......................... 34,413 34,285 28,148 27,190 21,247
------- ------- ------- ------- -------
Gross profit................. 19,366 23,390 16,754 25,067 18,139
Operating expenses:
Engineering and development.......... 7,191 7,598 8,603 8,587 5,023
Selling and marketing................ 6,490 7,541 6,178 3,925 2,908
General and administrative........... 4,501 4,872 4,356 3,363 2,624
Impairment of goodwill............... -- -- 542 -- --
Amortization of goodwill............. -- -- 99 133 133
Consolidation charges................ -- -- 507 -- --
------- ------- ------- ------- -------
Total operating expenses.......... 18,182 20,011 20,285 16,008 10,688
------- ------- ------- ------- -------
Operating income (loss)........... 1,184 3,379 (3,531) 9,059 7,451
Transaction costs...................... -- -- 1,142 -- --
Interest income (expense).............. 19 (53) (104) (90) (72)
------- ------- ------- ------- -------
Income (loss) before income taxes.... 1,203 3,326 (4,777) 8,969 7,379
Income tax provision (benefit)......... 537 1,361 (28) 3,109 2,560
------- ------- ------- ------- -------
Net income (loss).................... $ 666 $ 1,965 $(4,749) $ 5,860 $ 4,819
======= ======= ======= ======= =======
Net income per common and equivalent
share(1)............................. $ 0.12 $ 0.35
======= =======
SELECTED BALANCE SHEET DATA:
Working capital........................ $13,334 $10,564 $ 6,424 $ 5,315 $ 6,017
Total assets........................... $28,539 $24,592 $22,613 $18,457 $14,915
Long-term capitalized lease
obligations, excluding current
installments......................... $ 576 $ 853 $ 1,156 $ 986 $ 871
Other non-current liabilities.......... $ 2,016 $ 1,381 $ -- $ -- $ --
Stockholders' equity................... $16,277 $15,581 $13,615 $11,193 $10,145
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(1) Per share data has not been presented for periods prior to fiscal 1995 as
the Company operated as a wholly owned subsidiary of Emulex Corporation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth selected items from the QLogic Corporation
Consolidated Statements of Operations and should be read in conjunction with the
Selected Financial Data and Consolidated Financial Statements included elsewhere
herein. Reference to amounts are in thousands unless otherwise specified. Prior
to December 28, 1992, Emulex Corporation ("Emulex") operated the micro devices
business as a division ("EMD"). On March 30, 1992, the Board of Directors of
Emulex approved in principle a plan of reorganization (the "Reorganization
Plan"). Pursuant to the Reorganization Plan, QLogic was formed as a
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separate corporation on November 18, 1992 and on December 28, 1992 exchanged
5,000,000 shares of its common stock for the net assets of EMD.
On February 24, 1994, pursuant to the Reorganization Plan, Emulex declared
a special dividend consisting of the distribution (the "Distribution") to its
stockholders of all outstanding shares of common stock of QLogic. The purpose of
the Distribution was to enable QLogic to gain independent access to equity
markets so that it may use its capital stock as a source of funding for growth
and acquisitions and to attract and retain key employees.
FISCAL YEAR ENDED
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MARCH 31, 1996 APRIL 2, 1995 APRIL 3, 1994
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
Net revenues......................... $53,779 100.0% $57,675 100.0% $44,902 100.0%
Cost of sales........................ 34,413 64.0 34,285 59.4 28,148 62.7
------- ----- ------- ----- ------- -----
Gross profit....................... 19,366 36.0 23,390 40.6 16,754 37.3
Operating expenses:
Engineering and development........ 7,191 13.4 7,598 13.2 8,603 19.2
Selling and marketing.............. 6,490 12.1 7,541 13.1 6,178 13.8
General and administrative......... 4,501 8.3 4,872 8.4 4,356 9.7
Impairment of goodwill............. -- -- -- -- 542 1.2
Amortization of goodwill........... -- -- -- -- 99 0.2
Consolidation charges.............. -- -- -- -- 507 1.1
------- ----- ------- ----- ------- -----
Total operating expenses........ 18,182 33.8 20,011 34.7 20,285 45.2
------- ----- ------- ----- ------- -----
Operating income (loss)......... $ 1,184 2.2% $ 3,379 5.9% $(3,531) (7.9)%
======= ===== ======= ===== ======= =====
NET REVENUES
Net revenues for the year ended March 31, 1996 decreased $3.9 million or
6.8 percent from fiscal 1995 to $53.8 million. The decrease was primarily due to
decreases in sales of the TEC, board, license and ISP product lines of $11.4
million, $1.5 million, $0.7 million, and $0.6 million, respectively. The
decreases were partially offset by an increase in FAS and ISP product lines of
$6.7 million and $4.3 million. The overall decline was due to unfavorable market
conditions, particularly in the first quarter of fiscal 1996.
Export revenues for fiscal 1996 decreased $6.0 million or 16.7 percent from
the prior fiscal year to approximately $29.8 million. The decrease resulted
primarily from U.S. exports to Singapore declining $14.9 million. All of the
Company's customers in Singapore are, or were, major customers. The decline in
sales to Singapore was partially offset by an increase in sales to Japan of $9.1
million. The Company is negotiating with a small Japanese company to distribute
the Company's products in Japan. The negotiations may result in a shift of
revenue from the Company's primary distributor in Japan, Tokyo Electron, to the
new distributor.
Net revenues for the year ended April 2, 1995 increased $12.8 million or
28.5 percent over fiscal 1994, to $57.7 million. The increase was a result of
growth in board, ISP and other product sales of $9.6 million, $4.8 million, and
$0.3 million, respectively. An offsetting sales decrease of $1.9 million
occurred in the TEC product line.
COST OF SALES
The cost of sales percentage for the year ended March 31, 1996 was 64.0
percent, an increase of 4.6 percent over the prior fiscal year. The increase in
the cost of sales percentage was primarily due to inventory write-down charges
being higher in the current year compared to the prior year.
10
11
The cost of sales percentage for the year ended April 2, 1995 was 59.4
percent, a decrease of 3.3 percent from the prior fiscal year. The decrease in
the cost of sales percentage was primarily due to inventory write-down charges
in fiscal 1994 which were not required in fiscal 1995.
OPERATING EXPENSES
Operating expenses for the year ended March 31, 1996 decreased $1.8 million
or 9.1 percent from the prior fiscal year. The decrease in operating expenses
was due to selling and marketing expenses decreasing by $1.1 million primarily
attributable to a reduction in advertising. Additionally, engineering and
development expenditures decreased by $0.4 million due to reduced equipment
repair, consulting, and depreciation expenses. General and administrative
expenses decreased $0.4 million primarily due to decreased bad debt expense.
Operating expenses for the year ended April 2, 1995 decreased $0.3 million
or 1.4 percent from the prior fiscal year. The decrease in operating expenses
was due to non-recurring expenses in the previous fiscal year, namely
consolidation charges of $0.5 million, goodwill amortization of $0.1 million and
goodwill impairment of $0.5 million, which were not required in fiscal year
1995. Additionally, engineering and development expenditures decreased by $1.0
million. Offsetting expenditure increases occurred in general and administrative
of $0.5 million related to bad debt expense, and in selling and marketing of
$1.4 million reflecting costs to support market expansion.
OPERATING INCOME
The Company's results for the twelve month period ended March 31, 1996 were
adversely impacted in the first half of the year by the loss of sales to Seagate
Technology, Inc. Also during the fiscal year, one large OEM decreased purchases
of one older product at a much faster rate than purchases increased for its
replacement product. These events reduced the Company's gross profits for fiscal
year 1996.
Operating income for the year ended March 31, 1996 decreased $2.2 million
from the year ended April 2, 1995. The lower operating income for the year ended
March 31, 1996 was associated with gross profit as a percentage of sales
decreasing by 4.6 percent compared to the prior year. A partially offsetting
factor was a decrease in operating expense of $1.8 million from the prior fiscal
year.
Operating income for the year ended April 2, 1995 increased $6.9 million
from the year ended April 3, 1994. The higher operating income for the year
ended April 2, 1995 was associated with gross profit as a percentage of sales
increasing by 3.3 percent compared to the prior year. Also contributing to the
increase in operating income was an operating expense decrease of $0.3 million
from the prior fiscal year.
Both the semiconductor and the computer peripherals industries are highly
competitive and are characterized by rapidly changing technology and evolving
industry standards. All of the Company's products compete with products
available from numerous companies, many of which have substantially greater
research and development, marketing and financial resources, manufacturing
capability, customer support organizations and brand recognition than those of
the Company. There can be no assurance that the Company's SCSI products will be
able to compete successfully with other SCSI products offered presently or in
the future by other SCSI vendors.
Although the Company believes that it provides an adequate allowance for
sales returns, there can be no assurance that future sales returns will not
exceed the Company's allowance in any particular fiscal quarter, and therefore,
could have a material adverse effect on operating results.
The Company provides its major distributors and certain volume purchasers
with price protection in the event that the Company reduces the price of its
products. Although the Company believes that it has provided an adequate
allowance for price protection, there can be no assurance that the impact of
future price reductions by the Company will not exceed the Company's allowance
in any specific fiscal period. Any price protection in excess of recorded
allowances could result in a material adverse effect on operating results.
11
12
A significant portion of the Company's revenue in each fiscal quarter
results from orders booked in that quarter. A significant percentage of the
Company's bookings and sales to major customers on a quarterly basis
historically has occurred during the last month of the quarter and have
typically been concentrated in the latter half of that month. Orders placed by
major customers are typically based upon the customers' forecasted sales level
for Company products and inventory levels of Company products desired to be
maintained by the major distribution customers at the time of the orders. Major
distribution customers sometimes receive negotiated cash rebates, market
development funds, and extended payment terms from the Company for incentive
purposes, in accordance with, or in some cases, above and beyond standard
industry practice. Changes in purchasing patterns by one or more of the
Company's major customers, customer policies pertaining to desired inventory
levels of Company products, negotiations of rebate and market development funds,
as well as changes in the ability of the Company to anticipate in advance the
mix of customer orders or to ship large quantities of products near the end of a
fiscal quarter, could result in material fluctuations in quarterly operating
results. These factors could also increase the inventory levels maintained by
the Company and adversely affect the inventory reserves required to be
maintained by the Company.
The Company's revenue during the fourth quarter of fiscal 1996 resulted
primarily from the Company's OEM business. In the Company's OEM business,
backlog is a significant source of subsequent period revenue and profits. The
Company's backlog at March 31, 1996 was approximately $15.5 million, a $8.9
million increase from the end of the prior fiscal year.
The Company believes that there is a desire among certain major
distribution customers and volume purchasers to reduce their on-hand inventory
levels of computer products, including the Company's products. This could have a
significant adverse impact on the Company's operating results during the future
period or periods that such customers initiate such inventory reductions. The
timing of new product announcements and introductions by the Company or
significant product returns by major distribution customers to the Company could
also result in material fluctuations in quarterly operating results.
In addition to the factors described above that could adversely affect the
Company's business and results of operations, and, therefore, the market
valuation of its common stock, the Company's future results of operations may be
impacted by various trends and uncertainties that are beyond the Company's
control, including adverse changes in general economic conditions, government
regulations and foreign currency fluctuations.
Other characteristics of the Company and the computer software and hardware
industry may adversely impact the Company. As the Company's products become more
complex, the Company could experience delays in product development that are
common in the computer industry. Significant delays in product development and
release would adversely affect the Company's results of operations. There can be
no assurance that the Company will respond effectively to technological changes
or new product announcements by other companies or that the Company's research
and development efforts will be successful. Furthermore, introduction of new
products, moving production of existing products to different suppliers, and
customers' extended use of mature products involves substantial business risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses and expedite charges, in addition to lower sales and lower profits.
As a result of the foregoing factors, past performance trends by the
Company may not be indicative of future operating results and should not be used
by investors in predicting or anticipating future results. The market price of
the Company's common stock has been, and may continue to be, volatile. Factors
identified above, along with other factors that may arise in the future,
quarterly fluctuations in the Company's operating results and general conditions
or perceptions of securities analysts relating to technology stocks in general
or to the Company specifically, may have a significant impact on the market
price of the Company's common stock and could cause substantial market price
fluctuations over short periods.
NEW ACCOUNTING STANDARDS
Stock Compensation. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("Statement No. 123"), issued in
October 1995 and effective for fiscal years beginning
12
13
after December 15, 1995, encourages, but does not require, a fair market based
method of accounting for employee stock options or similar equity instruments.
Statement No. 123 allows an entity to elect to continue to measure compensation
cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APBO No. 25"), but requires pro forma disclosures of net
earnings and earnings per share as if the fair value based method of accounting
had been applied. The Company expects to adopt Statement No. 123 in fiscal 1997.
While the Company is still evaluating Statement No. 123, the Company currently
expects to elect to continue to measure compensation costs under APBO No. 25,
and comply with the pro forma disclosure requirements. If the Company makes this
election, Statement No. 123 will have no impact on the Company's financial
position or results of operations.
Impairment of Long-Lived Assets. Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("Statement No. 121"), issued in March 1995
and effective for fiscal years beginning after December 15, 1995, establishes
accounting standards for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles, and goodwill either to be
held or disposed of. Management believes the adoption of Statement No. 121 will
not have a material impact on the Company's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
QLogic has financed its recent working capital needs and capital
expenditure requirements primarily from internally generated funds and
facilities and equipment leases.
During the fiscal year, the Company's cash position improved from a cash
balance of $1.1 million at April 2, 1995, to a record level of $8.4 million at
March 31, 1996, with no outstanding bank indebtedness. The growth in cash is
attributable to improvements in cash collection, improved cash management, and
internal efficiency.
Working capital at March 31, 1996 increased by $2.8 million from April 2,
1995 primarily due to increases in cash offset by reduced liabilities, compared
to a working capital increase of $4.1 million at the end of fiscal 1995 from the
prior fiscal year, primarily due to increases in accounts receivable and
inventories.
QLogic has a line of credit of up to $7.5 million with Silicon Valley Bank.
There were no borrowings under the line of credit during the year ended March
31, 1996. The line of credit with Silicon Valley Bank expires July 5, 1996. It
is the Company's intention to attempt to extend the line of credit.
QLogic anticipates capital expenditures in fiscal 1997 will be
approximately $3.5 million. QLogic also has long-term capital lease commitments
of approximately $0.9 million which are due over the next five years. QLogic
believes that existing cash balances, facilities and equipment leases, cash flow
from operating activities and its available line of credit should be sufficient
to satisfy its anticipated long-term operating and capital expenditure
requirements.
In order to increase working capital to take advantage of business
opportunities, the Company may seek additional equity and/or debt financing
within the next twelve months.
Prior to the Distribution, QLogic and Emulex entered into a Tax Sharing
Agreement (the "Tax Sharing Agreement") for purposes of allocating
pre-Distribution tax liabilities between QLogic and Emulex and to implement the
Distribution as a tax-free distribution. The total amount due Emulex pursuant to
the Tax Sharing Agreement at March 31, 1996 is $1,760,000 which is included in
other non-current liabilities. Amounts due Emulex under the Tax Sharing
Agreement are payable on December 30, 1999, and bear interest, commencing
January 1, 1996, at the rate applicable to underpayments of Federal Income
Taxes, which was 9 percent at March 31, 1996. Interest due Emulex is payable
quarterly beginning April 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are referenced in Item 14(a).
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14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
QLogic Corporation:
We have audited the accompanying consolidated balance sheets of QLogic
Corporation and subsidiary as of March 31, 1996 and April 2, 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QLogic
Corporation and subsidiary as of March 31, 1996 and April 2, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
May 17, 1996
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15
QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995
------- -------
ASSETS
Cash..................................................................... $ 8,414 $ 1,149
Accounts and notes receivable, less allowance for doubtful accounts
of $506 in 1996 and $595 in 1995 (note 7 and 8)........................ 7,033 9,358
Inventories (notes 3 and 8).............................................. 6,670 6,547
Deferred income taxes (note 5)........................................... 648 87
Prepaid expenses and other current assets................................ 239 200
------- -------
Total current assets................................................... 23,004 17,341
Property and equipment, net (notes 4 and 8).............................. 5,520 6,773
Other assets............................................................. 15 478
------- -------
$28,539 $24,592
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (note 5)................................................ $ 6,177 $ 4,937
Accrued expenses (notes 6 and 12)........................................ 3,218 1,537
Current installments of capitalized lease obligations (note 8)........... 275 303
------- -------
Total current liabilities.............................................. 9,670 6,777
Capitalized lease obligations, excluding current installments (note 8)... 576 853
Other non-current liabilities (note 5)................................... 2,016 1,381
Commitments and contingencies (notes 5 and 8)............................
Stockholders' equity (notes 11 and 14):
Preferred stock, $.10 par value; 1,000,000 shares authorized;
none issued and outstanding......................................... -- --
Common stock, $.10 par value; 12,500,000 shares authorized; 5,557,598
and 5,552,458 shares issued and outstanding in 1996 and 1995,
respectively........................................................ 556 555
Additional paid-in capital............................................. 16,801 16,772
Accumulated deficit.................................................... (1,080) (1,746)
------- -------
Total stockholders' equity.......................................... 16,277 15,581
------- -------
$28,539 $24,592
======= =======
See accompanying notes to consolidated financial statements.
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16
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, APRIL 2, 1995 AND APRIL 3, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1996 1995 1994
---------- ---------- -------
Net revenues (notes 7 and 9)............................. $ 53,779 $ 57,675 $44,902
Cost of sales (note 9)................................... 34,413 34,285 28,148
---------- ---------- -------
Gross profit........................................... 19,366 23,390 16,754
Operating expenses (note 9):
Engineering and development............................ 7,191 7,598 8,603
Selling and marketing.................................. 6,490 7,541 6,178
General and administrative............................. 4,501 4,872 4,356
Impairment of goodwill................................. -- -- 542
Amortization of goodwill............................... -- -- 99
Consolidation charges (note 6)......................... -- -- 507
---------- ---------- -------
Total operating expenses............................ 18,182 20,011 20,285
Operating income (loss)........................... 1,184 3,379 (3,531)
Transaction costs (note 9)............................... -- -- 1,142
Interest income (expense)................................ 19 (53) (104)
---------- ---------- -------
Income (loss) before income taxes...................... 1,203 3,326 (4,777)
Income tax provision (benefit) (note 5).................. 537 1,361 (28)
---------- ---------- -------
Net income (loss)........................................ $ 666 $ 1,965 $(4,749)
========== ========== =======
Net income per common and equivalent share............... $ 0.12 $ 0.35
========== ==========
Weighted average common and common equivalent shares..... 5,736,910 5,567,466
========== ==========
See accompanying notes to consolidated financial statements.
16
17
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, APRIL 2, 1995 AND APRIL 3, 1994
(IN THOUSANDS)
RETAINED RECEIVED
COMMON STOCK ADDITIONAL EARNINGS FROM TOTAL
-------------- PAID-IN (ACCUMULATED EMULEX STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) CORP. EQUITY
----- ------ ---------- ------------ -------- ------------
Balance on March 28, 1993............. 5,000 $1,000 $ 9,279 $ 1,038 $ (124) $ 11,193
Net transactions with
Emulex Corporation, March 29,
1993 to February 24, 1994........ -- -- 6,937 -- 124 7,061
Issuance of common stock to Emulex
Corporation...................... 551 110 -- -- -- 110
Adjustment to par value due to
reverse stock split.............. -- (555) 555 -- -- --
Net loss............................ -- -- -- (4,749) -- (4,749)
----- ------ ------- ------- ----- -------
Balance on April 3, 1994.............. 5,551 555 16,771 (3,711) -- 13.615
Net income.......................... -- -- -- 1,965 -- 1,965
Issuance of common stock............ 1 -- 1 -- -- 1
----- ------ ------- ------- ----- -------
Balance on April 2, 1995.............. 5,552 555 16,772 (1,746) -- 15,581
Net income.......................... -- -- -- 666 -- 666
Issuance of common stock............ 6 1 29 -- -- 30
----- ------ ------- ------- ----- -------
Balance on March 31, 1996............. 5,558 $ 556 $ 16,801 $ (1,080) $ -- $ 16,277
===== ====== ======= ======= ===== =======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, APRIL 2, 1995 AND APRIL 3, 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 1994
------- ------- -------
Cash flows from operating activities:
Net income (loss)........................................... $ 666 $ 1,965 $(4,749)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 2,452 2,445 1,969
Amortization and impairment of goodwill.................. -- -- 641
Loss on disposal of property and equipment............... 11 34 400
Provision (benefit) for deferred income taxes............ (561) (87) 519
Change in assets and liabilities:
Decrease (increase) in accounts receivable............... 2,325 (3,351) 39
Increase in inventories.................................. (123) (1,372) (463)
Decrease (increase) in prepaid expenses and other current
assets................................................. (39) 30 (60)
Decrease (increase) in other assets...................... 463 (101) 414
Increase (decrease) in accounts payable.................. 1,240 (990) 1,128
Increase (decrease) in accrued expenses.................. 1,681 (100) 639
Increase in other non-current liabilities................ 635 1,381 --
------- ------- -------
Net cash provided by (used in) operating activities......... 8,750 (146) 477
------- ------- -------
Cash flows used in investing activities:
Additions to property and equipment......................... (1,210) (1,282) (2,957)
------- ------- -------
Net cash used in investing activities....................... (1,210) (1,282) (2,957)
------- ------- -------
Cash flows from financing activities:
Principal payments under capital leases..................... (305) (278) (435)
Proceeds from exercise of stock options..................... 30 1 --
Net transactions with Emulex Corporation.................... -- -- 5,769
------- ------- -------
Net cash provided by (used in) financing activities......... (275) (277) 5,334
------- ------- -------
Net change in cash............................................ 7,265 (1,705) 2,854
------- ------- -------
Cash at beginning of year..................................... 1,149 2,854 --
------- ------- -------
Cash at end of year........................................... $ 8,414 $ 1,149 $ 2,854
======= ======= =======
Cash paid during the year for:
Interest.................................................... $ 101 $ 121 $ 14
======= ======= =======
Income taxes................................................ $ 404 $ 252 $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the stated years, QLogic engaged in the following significant non-cash
investing and financing transactions:
- - During fiscal year 1994, QLogic received property and equipment with a net
book value of $1,402 in exchange for an account payable from Emulex. At the
time the transaction took place, QLogic was a wholly-owned subsidiary of
Emulex.
- - Effective February 20, 1994, QLogic issued 551,000 shares, with a total value
of $110, to Emulex in exchange for an account payable. At the time the
transaction took place, QLogic was a wholly-owned subsidiary of Emulex.
- - Capital lease obligations of $475 were incurred during fiscal year 1994 when
the Company entered into lease agreements for new equipment.
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996, APRIL 2, 1995 AND APRIL 3, 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (1) BASIS OF PRESENTATION
QLogic Corporation ("QLogic" or the "Company") is a supplier of Small
Computer Systems Interface ("SCSI") Very Large Scale Integration ("VLSI")
semiconductor chips. The Company designs and markets a full line of SCSI
application standard products.
Prior to December 28, 1992, Emulex Corporation ("Emulex") operated its
micro devices business as a division ("EMD"). On March 30, 1992, the Board of
Directors of Emulex approved in principle a plan of reorganization (the
"Reorganization Plan") (see note 9). Pursuant to the Reorganization Plan, QLogic
was formed as a separate corporation on November 18, 1992 and on December 28,
1992 exchanged 5,000,000 shares of its common stock for the net assets of EMD.
The exchange was accounted for as a Reorganization of entities under common
control, in a manner similar to a pooling of interests. Accordingly, QLogic
recorded the net assets acquired at Emulex's historical carrying value of
$10,279.
On February 24, 1994 (the "Distribution Date"), pursuant to the
Reorganization Plan, Emulex declared a special dividend consisting of the
distribution (the "Distribution") to its stockholders of all outstanding shares
of common stock of QLogic. The purpose of the Distribution was to enable QLogic
to gain independent access to equity markets so that it may use its capital
stock as a source of funding for growth and acquisitions and to attract and
retain key employees. Costs related to the Distribution totaled approximately
$1,142 and were charged to expense during fiscal year 1994.
The accompanying financial statements for periods prior to the Distribution
are based on the specific assets and liabilities which were acquired by the
Company in the aforementioned reorganization and were prepared from the books
and records of Emulex using historical accounting principles.
Prior to the Distribution, Emulex performed various services on behalf of
QLogic. Such services included accounting, finance, treasury, legal and tax
advisory services. The accompanying consolidated financial statements reflect an
allocation of costs related to those services. Management believes that the
basis of all such allocations is reasonable.
Prior to December 1994, QLogic did not have separately identified cash
balances. Emulex made all disbursements and cash collections on behalf of
QLogic. Prior to the transfer of assets to QLogic, transactions with Emulex were
accounted for in the Emulex investment. Subsequent to the transfer of assets,
but prior to the Distribution, transactions with Emulex were accounted for as a
receivable from Emulex. Subsequent to the Distribution, the receivable from
Emulex was closed out to additional paid-in capital.
NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts
of QLogic Corporation and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year
QLogic's fiscal year ends on the Sunday nearest March 31. Fiscal years 1996
and 1995 each comprised 52 weeks. Fiscal year 1994 comprised 53 weeks.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
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20
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, and depreciation and
amortization are provided on the straight-line method over estimated useful
lives of two to seven years.
Goodwill
Goodwill represented the excess cost of net assets acquired over
liabilities assumed and was stated at the lower of cost or net realizable value,
less accumulated amortization. Amortization was provided on the straight-line
method over the periods expected to be benefited. Amortization of goodwill was
$99 for the year ended April 3, 1994.
Prior to the issuance in March 1995 of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("Statement No. 121"), the Company assessed
the recoverability of intangible assets by determining whether the amortization
of the goodwill balance over its remaining life could be recovered through
projected non-discounted future net income. The amount of goodwill impairment,
if any, was measured based on projected discounted future net income streams
using a discount rate reflecting the Company's average cost of capital.
Under the provisions of Statement No. 121, the Company now assesses the
recoverability of long-lived assets and certain identifiable related assets by
determining whether estimated future cash flows (undiscounted and without
interest charges) expected to result from the use of the assets and their
eventual disposition are less than the carrying amounts of the assets, in which
case an impairment loss is recognized. Otherwise, an impairment loss is not
recognized. Based upon such analysis, the Company believes there is no
impairment as of March 31, 1996.
The Company recorded goodwill related to the acquisition of the minority
interest in Computer Array Development, Inc. ("CAD") in the amount of $1,327
assuming a useful life of ten years beginning February 1988. The Company has
continually evaluated the recoverability and possible existence of impairment of
the remaining unamortized goodwill balance based on forecasts of non-discounted
net income over the remaining amortization period of the goodwill. During the
quarter ended December 26, 1993, the Company completed a forecast of its
operations. The forecast showed a significant decrease in net income streams for
products tied to CAD technology due to management's decision to change the
future product mix emphasizing a greater share of revenue from other products
which do not incorporate the CAD technology. Management's decision was made in
part taking into consideration a first-time operating loss in the quarter ended
December 26, 1993 on products tied to the CAD technology and performance in the
quarter ended December 26, 1993 compared to the original plan.
The operating loss in the quarter ended December 26, 1993 was due primarily
to customers shifting their production to products containing devices
competitive with those marketed by QLogic. The forecast indicated that the
expected results no longer supported recoverability of the unamortized goodwill
and that a complete impairment of the asset in the amount of $542 had resulted.
The amount of the impairment was measured based on the discounted net income
streams over the remaining expected economic life of the asset, the discount
rate being indicative of the Company's average cost of capital.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("Statement No. 123"), which encourages, but does not require, a
fair value based method of accounting for employee stock options. Statement No.
123 will be effective for fiscal years beginning after December 15, 1995. While
the Company is still evaluating Statement No. 123, it currently expects to elect
to continue to measure compensation cost under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Company management does not believe that
20
21
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the adoption of this new standard will have a material effect on the
consolidated financial statements of the Company.
Use of Estimates
Company management has made a number of estimates and assumptions relating
to the reporting of assets and liabilities in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
Revenue Recognition
QLogic recognizes revenue from the sale of product at the time of shipment.
Prior to the Distribution, sales to Emulex were based on the average sales price
of a product to non-affiliated customers. In instances where the only sales of a
given product were to Emulex, the price was based on the overall gross margin on
sales to non-affiliated customers for that quarter.
Sales of the Company's products are generally recognized upon shipment.
Sales of the Company's products to distributors are subject to a limited right
of return. A portion of sales to distributors, representing estimated returns,
is not recognized.
The Company generally warrants its products to be free from defects for
periods of one to five years from shipment. Estimated warranty expense is
recognized upon shipment of product.
Research and Development
Research and development costs, including costs related to the development
of new products and process technology, are expensed as incurred.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. 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.
The Company was included in Emulex's consolidated Federal and combined
state income tax group prior to the Distribution. The Company's income taxes
were determined on a separate return basis.
Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" ("Statement No. 107"), which requires all entities to
disclose the fair value of financial instruments, both assets and liabilities
recognized and not recognized on the balance sheet, for which it is practicable
to estimate fair value. Statement No. 107 defines fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. As of March 31, 1996, the fair value of all
financial instruments approximated carrying value.
21
22
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reverse Stock Split
On February 24, 1994, the Company declared a 1-for-2 reverse split of the
Company's common stock. The par value remained $0.10 per share. All references
to the number of shares and per share information have been adjusted to reflect
the reverse stock split.
Net Income per Share
Net income per common and equivalent share for the years ended March 31,
1996 and April 2, 1995 was computed based on the weighted average number of
common and equivalent shares outstanding. The Company has granted certain stock
options (see note 11) which have been treated as common stock equivalents in
computing both primary and fully diluted income per share. Primary income per
share approximates fully diluted income per share for the years ended March 31,
1996 and April 2, 1995.
Per share data has not been presented for periods prior to the Distribution
as the Company operated as a wholly-owned subsidiary.
NOTE (3) INVENTORIES
Components of inventories are as follows:
1996 1995
------ ------
Raw materials...................................................... $2,122 $2,279
Work in progress................................................... 1,455 1,192
Finished goods..................................................... 3,093 3,076
------ ------
$6,670 $6,547
====== ======
NOTE (4) PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
1996 1995
------- -------
Product and test equipment....................................... $ 9,285 $ 9,463
Furniture and fixtures........................................... 1,086 1,839
Semiconductor designs............................................ 2,552 1,803
Leasehold improvements........................................... 842 933
Land and buildings............................................... 358 358
------- -------
14,123 14,396
Less accumulated depreciation and amortization................... 8,603 7,623
------- -------
$ 5,520 $ 6,773
======= =======
22
23
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE (5) INCOME TAXES
The components of the income tax provision (benefit) are as follows:
1996 1995 1994
----- ------ -----
Federal
Current................................................. $ 872 $1,216 $(378)
Deferred................................................ (453) (64) 364
State:
Current................................................. 226 232 (169)
Deferred................................................ (108) (23) 155
----- ------ -----
$ 537 $1,361 $ (28)
===== ====== =====
The effective income tax on income (loss) before income taxes differs from
expected Federal income tax for the following reasons:
1996 1995 1994
----- ------ -------
Expected income tax provision (benefit) at 34%........... $ 409 $1,130 $(1,624)
State income tax, net of Federal tax benefit............. 74 138 (14)
Tax benefit of net operating loss........................ (26) (84) --
Tax benefit of net operating loss allocable to Emulex.... -- -- 1,609
Tax benefit of research and development and other
credits................................................ (391) (729) --
Increase in valuation allowance.......................... 312 813 --
Nondeductible permanent differences...................... 39 27 --
Other, net............................................... 120 66 1
----- ------ -------
$ 537 $1,361 $ (28)
===== ====== =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
1996 1995
------ ------
Deferred tax assets:
Alternative minimum tax credit................................... $ 92 $ 238
Reserves not currently deductible................................ 1,555 1,239
Depreciation..................................................... 940 526
Research and development credit.................................. 1,085 491
Other............................................................ 101 84
------ ------
Total gross deferred tax assets.......................... 3,773 2,578
Less valuation allowance........................................... 1,918 1,606
------ ------
1,855 972
------ ------
Deferred tax liabilities:
Research and development expenditures............................ 875 809
State tax expense................................................ 332 --
Other............................................................ -- 76
------ ------
Total gross deferred tax liabilities..................... 1,207 885
------ ------
Net deferred tax assets............................................ $ 648 $ 87
====== ======
23
24
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
QLogic has approximately $1,085 of research and development credit
carryovers at March 31, 1996. If unused, these credits will expire in the years
2008 to 2011. In addition, the Company has approximately $92 of alternative
minimum tax credit carryovers which may be carried over indefinitely.
QLogic also has approximately $200 of net operating loss carryovers at
March 31, 1996. Utilization of these carryovers will be limited to approximately
$50 a year over the next four fiscal years, as a result of the Company filing
short period tax returns in 1994. Any unused carryover at the end of this period
will be fully utilizable in any future year until 2009, after which any unused
carryover will expire.
Based on the Company's current and historical pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit of
the existing net deferred tax assets at March 31, 1996. 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.
During fiscal year 1994, QLogic and Emulex entered into a Tax Sharing
Agreement for purposes of allocating pre-Distribution tax liabilities between
QLogic and Emulex. Under the Tax Sharing Agreement, Emulex generally will be
liable for and will indemnify QLogic against (a) pre-Distribution Federal, state
and local tax liabilities of Emulex and its subsidiaries (including QLogic), (b)
taxes or liabilities resulting from a breach of any covenant or representation
by Emulex contained in the Tax Sharing Agreement, (c) taxes imposed on QLogic or
its stockholders in the event that the Distribution is taxable due to any reason
other than a breach of certain covenants or representations by QLogic and (d)
taxes relating to the recapture or restoration or certain pre-Distribution tax
items (such as depreciation recapture) of Emulex or its subsidiaries. QLogic
will be liable for and will indemnify Emulex and its subsidiaries against (i)
post-Distribution Federal, state and local tax liabilities of QLogic, (ii) taxes
or liabilities resulting from a breach of any covenant or representation by
QLogic contained in the Tax Sharing Agreement, and (iii) taxes imposed on Emulex
in the event that the Distribution is taxable due to a breach of certain
covenants and representations by QLogic in the Tax Sharing Agreement unless,
prior to the breach, there is obtained, on the basis of valid representations,
(1) a ruling from the Internal Revenue Service reasonably satisfactory to
Emulex, or (2) an opinion acceptable to Emulex from counsel (such acceptance not
to be unreasonably withheld, provided that, if counsel for Emulex does not
concur with such opinion, Emulex's refusal to accept such opinion will not be
considered unreasonable), in each case to the effect that the breach will not
cause the Distribution to become subject to Federal income tax. In any event, if
QLogic becomes liable to indemnify Emulex pursuant to these provisions, it is
likely that the liability will be material to QLogic.
The Tax Sharing Agreement provides that the party having responsibility for
a tax liability under the Tax Sharing Agreement generally will be primarily
responsible for, and bear the fees, costs and expenses (including attorneys' and
accountants' fees) of, the defense of an audit or other proceeding arising out
of or related to that tax liability.
The Tax Sharing Agreement also generally provides that, subject to certain
limitations, Emulex will pay to QLogic the net benefit realized by Emulex from
the carryback to tax years before the Distribution of certain tax attributes of
QLogic arising in tax years after the Distribution and QLogic will pay to Emulex
the net benefit realized by QLogic from the use after the Distribution Date of
certain tax attributes of Emulex arising in pre-Distribution tax years.
Accordingly, QLogic has recognized no deferred tax assets with respect to such
tax attributes.
The total amount due Emulex pursuant to the Tax Sharing Agreement at March
31, 1996 and April 2, 1995 totaled $1,760 and $1,209, respectively, and is
included in other non-current liabilities. Amounts due Emulex under the Tax
Sharing Agreement are payable on December 30, 1999, and bear interest,
commencing January 1, 1996, at the rate applicable to underpayments of Federal
income taxes, which was 9 percent at March 31, 1996. Interest due Emulex is
payable quarterly beginning in April 1996. The total amount of
24
25
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrued interest payable to Emulex at March 31, 1996 is $28, which is included
in accounts payable in the accompanying balance sheet.
NOTE (6) CONSOLIDATION CHARGES AND DISTRIBUTION EXPENSES
QLogic incurred significant nonrecurring charges related to the
restructuring of QLogic's operations during the third quarter of fiscal 1994.
The charges included employee termination expenses for 13 employees of
approximately $250, an accrual for facilities and manufacturing consolidation of
approximately $207, and other provisions of approximately $50. Of the total $507
of consolidation charges, $403 of costs and payments had been charged against
the related accruals as of April 2, 1995, representing severance and other
related expense of $300 and lease obligations of $103. During the year ended
March 31, 1996 costs and payments were charged against the remaining accrual
representing lease obligations of $104. At March 31, 1996, the balance of the
accrual is zero.
NOTE (7) EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
QLogic's export shipments (primarily to Pacific Rim countries) were
approximately $29,800, $35,765 and $31,858, representing 55, 62 and 71 percent
of net revenues for 1996, 1995 and 1994, respectively. The following table
represents sales to customers accounting for greater than 10% of total Company
sales, or customer accounts receivable accounting for greater than 10% of total
Company accounts receivable.
ACCOUNTS
SALES RECEIVABLE
----------------------- --------------
1996 1995 1994 1996 1995
----- ----- ----- ----- -----
Customer 1........................................ 42% 24% 33% 34% 20%
Customer 2........................................ 13% n/a n/a 15% n/a
Customer 3........................................ 11% n/a n/a 17% n/a
With the exception of these customers, management of QLogic believes that
the loss of any one customer would not have a material adverse effect on its
business.
NOTE (8) COMMITMENTS AND CONTINGENCIES
Line of Credit
On July 10, 1995, the Company obtained an unsecured line of credit from a
bank. Maximum borrowings under the line of credit are $7.5 million subject to a
borrowing base based on accounts receivable and inventories, with a $1 million
sub-limit for letters of credit. Interest on outstanding advances is payable
monthly at the bank's prime rate plus 0.5 percent. The line of credit expires on
July 5, 1996. The line of credit contains certain restrictive covenants that,
among other things, require the maintenance of certain financial ratios and
restrict the Company's ability to incur additional indebtedness. The Company was
in compliance with all such covenants as of March 31, 1996. In the event of a
default under the line of credit, amounts outstanding would become secured by
substantially all of the assets of the Company. There were no borrowings under
the line of credit as of March 31, 1996. The Company is attempting to extend the
line of credit through the end of fiscal 1997.
Leases
The Company leases certain equipment under long-term non-cancelable capital
lease agreements which expire at various dates through the year 2000. The
required lease payments and, accordingly, the capitalized lease obligation and
related assets have been included in the accompanying financial statements. The
cost of equipment held under capital leases was $2,299 and $2,485 at March 31,
1996 and April 2, 1995, respectively.
25
26
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The related accumulated depreciation was $1,425 and $1,206 at March 31, 1996 and
April 2, 1995, respectively.
Future minimum non-cancelable lease commitments are as follows:
CAPITAL OPERATING
LEASES LEASES
------- ---------
FISCAL YEAR:
1997............................................................ $ 342 $ 712
1998............................................................ 269 712
1999............................................................ 234 712
2000............................................................ 145 415
---- ------
Total minimum lease payments...................................... $ 990 $ 2,551
======
Less amounts representing interest (at rates ranging from 4% to
9%)............................................................. 139
----
Present value of future minimum capitalized lease obligations..... $ 851
Less current installments under capitalized lease obligations..... 275
----
Capitalized lease obligations, excluding current installments..... $ 576
====
Rent expense for fiscal 1996 and 1995 was $653 and $689, respectively.
Litigation
QLogic is involved in various legal proceedings which have arisen in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE (9) TRANSACTIONS WITH EMULEX
For purposes of governing certain ongoing relationships between Emulex and
QLogic after the Distribution and to provide mechanisms for an orderly
transition, Emulex and QLogic entered into certain agreements. Such agreements
include: (i) a Distribution Agreement, providing for, among other things, the
Distribution and the division between Emulex and QLogic of certain liabilities;
(ii) an Employee Benefits Allocation Agreement, providing for certain
allocations between Emulex and QLogic of responsibilities with respect to
employee compensation, benefit and labor matters; (iii) a Tax Sharing Agreement
(see note 5); (iv) an Administrative Services Agreement; (v) a Lease Assignment;
and (vi) a License Agreement. Subsequent to the Distribution, Emulex and QLogic
may be in positions of potential conflict due to the ongoing relationships
between the companies. In addition, Emulex and QLogic share one common director.
Net transactions with Emulex include disbursements by Emulex for operating
expenses, income taxes and allocated expenses, net of Emulex cash collections
for QLogic.
Transaction cost for fiscal 1994 represent amounts allocated to QLogic by
Emulex related to the Distribution.
26
27
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There were no sales to Emulex during the years ended March 31, 1996 or
April 2, 1995. Revenue and cost of sales from sales to Emulex were $76 and $51,
respectively, for the year ended April 3, 1994.
NOTE (10) EMPLOYEE RETIREMENT SAVINGS PLAN
In 1989, Emulex established a pretax savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code for substantially all domestic
employees, including QLogic employees. Under the plan, eligible employees are
able to contribute up to 12% of their compensation. Emulex contributions matched
up to 3% of a participant's compensation. Emulex's contributions on behalf of
QLogic's employees were $133 in 1994.
In 1994, in anticipation of the Distribution, QLogic established a pretax
savings and profit sharing plan under Section 401(k) of the Internal Revenue
Code for substantially all domestic employees. Under the plan, eligible
employees are able to contribute up to 12% of their compensation. QLogic
contributions match up to 3% of a participant's compensation. QLogic's direct
contributions on behalf of its employees were $193, $205 and $22 in 1996, 1995
and 1994, respectively. Emulex's contributions on behalf of QLogic's employees
were $34 in 1994.
NOTE (11) INCENTIVE COMPENSATION PLANS
On January 12, 1994, the Company's Board of Directors adopted the QLogic
Corporation Stock Awards Plan (the "Stock Awards Plan") and the QLogic
Corporation Non-Employee Director Stock Option Plan (the "Director Plan")
(collectively the "Stock Option Plans"), both of which became effective upon the
Distribution.
The Stock Awards Plan provides for the issuance of incentive and
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. The Stock Awards Plan permits the
Compensation Committee of the Board of Directors to select eligible employees to
receive awards and to determine the terms and conditions of awards. A total of
1,100,000 shares were originally reserved for issuance under the Stock Awards
Plan; on August 22, 1995, 250,000 additional shares were authorized for a total
of 1,350,000 shares reserved for issuance under the Stock Awards Plan. As of
March 31, 1996, no shares of restricted stock were issued, options to purchase
761,998 shares of Common Stock were outstanding, and there were 581,109 shares
available for future grants.
In connection with the Distribution, each option to purchase Emulex common
stock ("Old Emulex Options") was converted into two separately exercisable
options: one option to purchase Emulex common stock and one option to purchase
Company common stock ("New QLogic Options"). The exercise price of Old Emulex
Options was allocated between the New QLogic Options based on relative stock
market prices of the underlying common stock.
Options granted under the Company's Stock Awards Plan provide that an
employee holding a stock option may exchange stock which the employee already
owns as payment against the exercise of an option. This provision applies to all
options outstanding at March 31, 1996.
Under the terms of the Director Plan, each eligible director received an
initial grant of stock options effective as of the Distribution Date. New
directors receive, at fair market value, an option to purchase 12,500 shares of
common stock of the Company upon election to the Board. A total of 125,000
shares have been reserved for issuance under the Director Plan. As of March 31,
1996, options for a total of 87,500 shares were outstanding and the remaining
37,500 shares were available for grant.
27
28
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity in 1996, 1995 and 1994 under the Company's Stock
Option Plans was as follows:
AVERAGE OPTION
PRICE PER
SHARES SHARE
-------- --------------
Conversion of old Emulex options to new QLogic options at
the Distribution Date..................................... 657,607 $ 8.65
Options granted at Distribution............................. 112,500 6.50
Options canceled............................................ (12,180) 10.12
--------- ------
Options outstanding at April 3, 1994........................ 757,927 8.31
Granted..................................................... 193,900 5.27
Canceled.................................................... (79,073) 8.40
Exercised................................................... (1,753) 1.16
--------- ------
Options outstanding at April 2, 1995........................ 871,001 7.66
Granted..................................................... 395,983 5.66
Canceled.................................................... (407,346) 7.35
Exercised................................................... (5,140) 5.72
--------- ------
Options outstanding at March 31, 1996....................... 854,498 $ 6.89
========= ======
At March 31, 1996, 365,553 share options were exercisable under the
Company's Stock Option Plans.
NOTE (12) ACCRUED EXPENSES
Components of accrued expenses are as follows:
1996 1995
------ ------
Payroll.......................................................... $ 393 $ 356
Vacation......................................................... 362 416
Other............................................................ 2,463 765
------ ------
$3,218 $1,537
====== ======
NOTE (13) CONDENSED QUARTERLY RESULTS (UNAUDITED)
The following summarizes certain unaudited quarterly financial information
for fiscal 1996, 1995 and 1994. Per share data for periods prior to the
Distribution has not been presented because QLogic operated as a wholly-owned
subsidiary of Emulex.
THREE MONTHS ENDED
----------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
------- --------- -------- -------
FISCAL 1996
Net revenues............................. $ 9,570 $13,105 $14,886 $16,218
Operating income (loss).................. (1,162) 375 695 1,276
Net income (loss)........................ (724) 214 444 732
Net income (loss) per share.............. (0.13) 0.04 0.08 0.13
FISCAL 1995
Net revenues............................. $14,235 $15,349 $15,419 $12,672
Operating income......................... 948 1,117 1,246 68
Net income............................... 534 651 745 35
Net income per share..................... 0.10 0.12 0.13 0.01
28
29
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED
----------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
------- --------- -------- -------
1994Net revenues......................... $12,986 $11,626 $ 8,923 $11,367
Operating income (loss).................. 575 505 (4,924 ) 313
Net income (loss)........................ 362 317 (5,515 ) 87
NOTE (14) SHAREHOLDER RIGHTS PLAN (UNAUDITED)
On June 4, 1996, the Board of Directors of the Company unanimously adopted
a Shareholder Rights Plan ("the Rights Plan"), pursuant to which it declared a
dividend distribution of one preferred stock purchase right (a "Right") for each
outstanding share of the common stock.
The Rights dividend will be payable on June 20, 1996 to the holders of
record of shares of common stock on that date. Each Right entitles the
registered holder, on certain events, to purchase from the Company 1/100th of a
share of the Company's Series A Junior Participating Preferred Stock, par value
$.001 per share, 200,000 shares authorized and no shares issued or outstanding
at June 4, 1996 (the "Series A Preferred Stock"), at a price of $45.00 per
1/100th of a share, subject to adjustment.
The Rights become exercisable (i) the 10th business day following the date
of a public announcement that a person or a group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more
of the outstanding shares of common stock, or (ii) the 10th business day
following the commencement of, or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the person or
group making the offer becoming an Acquiring Person (the earlier of the dates
described in clauses (i) and (ii) being called the "Date of Distribution").
The Rights held by an Acquiring Person or its affiliates are not
exercisable. All shares of common stock that will be issued prior to the
Distribution Date will include such Rights. The Rights will expire at the close
of business on June 4, 2006 (the "Scheduled Expiration Date"), unless prior
thereto the Date of Distribution occurs, or unless the Scheduled Expiration Date
is extended.
In the event the Company's assets are liquidated, the holders of the shares
of Series A Preferred Stock will be entitled to an aggregate payment of $1.00
per share or 100 times the payment to be distributed per share of common stock,
whichever is greater. Each share of Series A Preferred Stock will have 100
votes, voting together with the shares of common stock. Finally, in the event of
any merger, consolidation or other transaction in which shares of common stock
are exchanged, each share of Series A Preferred Stock will entitle the holder to
receive 100 times the amount received per share of common stock, subject to
adjustment.
Holders of Rights will be entitled to purchase shares or assets of the
Company or an Acquiring Person with a value that is double the exercise price in
the event of certain acquisitions involving the Acquiring Person, directly or
indirectly.
29
30
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the Company's Definitive Proxy Statement for its 1996
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to the Company's Directors. Such information is incorporated herein by
reference.
See the information presented in Part I of this report under the heading
"Executive Officers of the Registrant" for information relating to the Company's
executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the Company's Definitive Proxy Statement for its 1996
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to Executive Compensation. Such information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the Company's Definitive Proxy Statement for its 1996
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to security ownership of certain beneficial owners and management. Such
information is incorporated herein by reference.
There are no arrangements, known to the Company, which might at a
subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the Company's Definitive Proxy Statement for its 1996
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to certain relationships and related transactions. Such information is
incorporated herein by reference.
30
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
(1) Consolidated Financial Statements
The following consolidated financial statements of the Company for the
years ended March 31, 1996, April 2, 1995 and April 3, 1994 are filed as
part of this report:
FINANCIAL STATEMENT INDEX
FINANCIAL STATEMENT PAGE
- -------------------------------------------------------------------------------------- ----
Independent Auditors' Report........................................................ 14
Consolidated Balance Sheets as of March 31, 1996 and April 2, 1995.................. 15
Consolidated Statements of Operations for the years ended March 31, 1996, April 2,
1995 and April 3, 1994........................................................... 16
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1996,
April 2, 1995 and April 3, 1994.................................................. 17
Consolidated Statements of Cash Flows for the years ended March 31, 1996, April 2,
1995 and April 3, 1994........................................................... 18
Notes to Consolidated Financial Statements.......................................... 19
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company
for the years ended March 31, 1996, April 2, 1995 and April 3, 1994 is
filed as part of this report:
PAGE NUMBER OF THIS REPORT
--------------------------
Schedule II -- Valuation and Qualifying Accounts 34
All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and, therefore,
have been omitted.
(3) Exhibits Index
EXHIBIT NO. ITEM CAPTION
- ----------- ----------------------------------------------------------------------------------
*2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California corporation, and QLogic
Corporation.
*3.1 Certificate of Incorporation of Emulex Micro Devices Corporation, dated November
13, 1992.
*3.2 EMD Incorporation Agreement, dated as of January 1, 1993.
*3.3 Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993.
*3.4 By-Laws of QLogic Corporation.
***3.5 Amendments to By-Laws of QLogic Corporation.
*10.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan.
*10.2 Form of QLogic Corporation Stock Awards Plan.
*10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware corporation,
Emulex Corporation, a California corporation, and QLogic Corporation.
*10.4 Administrative Services Agreement, dated as of February 21, 1993, among Emulex
Corporation, a California corporation, Emulex Corporation, a Delaware corporation
and QLogic Corporation.
31
32
EXHIBIT NO. ITEM CAPTION
- ----------- ----------------------------------------------------------------------------------
*10.5 Employee Benefits Allocation Agreement, dated as of January 24, 1994, among Emulex
Corporation, a Delaware corporation, Emulex Corporation, a California corporation,
and QLogic Corporation.
*10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex Corporation, a
California corporation, QLogic Corporation and C.J. Segerstrom & Sons, a general
partnership.
*10.7 Intellectual Property Assignment and Licensing Agreement, dated as of January 24,
1994, between Emulex Corporation, a California corporation, and QLogic
Corporation.
*10.8 Form of QLogic Corporation Savings Plan.
*10.9 Form of QLogic Corporation Savings Plan Trust.
**10.10 Loan and Security Agreement with Silicon Valley Bank.
***10.11 Form of Indemnification Agreement between QLogic Corporation and Directors.
***10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between QLogic
Corporation and Emulex Corporation.
10.13 Separation Agreement between QLogic Corporation and Bill Caldwell, dated July 26,
1995.
10.14 Separation Agreement between QLogic Corporation and Mel Gable, dated June 14,
1995.
10.15 Separation Agreement between QLogic Corporation and Joe Pleso, dated October 18,
1995.
10.16 Employment Agreement between QLogic Corporation and HK Desai dated August 4, 1995.
21.1 Subsidiary of the registrant.
23.1 Consent of Independent Auditors.
27 Financial Data Schedule.
- ---------------
* Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended April 3, 1994 and is incorporated herein by reference.
*** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended April 2, 1995 and is incorporated herein by reference.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
32
33
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.
QLOGIC CORPORATION
By: /s/ H.K. DESAI
------------------------------------
H.K. Desai
President and Chief Executive
Officer
Date: June 14, 1996
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 June 14, 1996.
SIGNATURE TITLE
- ------------------------------------------ -----------------------------------------------
PRINCIPAL EXECUTIVE OFFICER:
/s/ H.K. DESAI President and Chief Executive Officer
- ------------------------------------------
(H.K. Desai)
PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:
/s/ THOMAS R. ANDERSON Vice President and Chief Financial Officer
- ------------------------------------------
(Thomas R. Anderson)
/s/ GARY E. LIEBL Director and Chairman of the Board
- ------------------------------------------
(Gary E. Liebl)
/s/ JAMES A. BIXBY Director
- ------------------------------------------
(James A. Bixby)
/s/ CAROL L. MILTNER Director
- ------------------------------------------
(Carol L. Miltner)
/s/ GEORGE D. WELLS Director
- ------------------------------------------
(George D. Wells)
33
34
SCHEDULE II
QLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1996, APRIL 2, 1995 AND APRIL 3, 1994
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND AMOUNTS END OF
CLASSIFICATION OF PERIOD EXPENSES WRITTEN OFF PERIOD
- ----------------------------------------------- ---------- ---------- ----------- ----------
Year Ended March 31, 1996
Allowance for doubtful accounts.............. $ 595 $ 23 $ (112) $ 506
Inventory reserves........................... $1,464 $2,914 $(2,537) $1,841
Year Ended April 2, 1995
Allowance for doubtful accounts.............. $ 204 $ 625 $ (234) $ 595
Inventory reserves........................... $1,388 $1,013 $ (937) $1,464
Year Ended April 3, 1994
Allowance for doubtful accounts.............. $ 26 $ 200 $ (22) $ 204
Inventory reserves........................... $1,093 $1,508 $(1,213) $1,388
34
35
EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NO. ITEM CAPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
*2.1 Distribution Agreement dated as of January 24, 1994 among Emulex
Corporation, a Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation....................................
*3.1 Certificate of Incorporation of Emulex Micro Devices Corporation, dated
November 13, 1992......................................................
*3.2 EMD Incorporation Agreement, dated as of January 1, 1993...............
*3.3 Certificate of Amendment of Certificate of Incorporation, dated May 26,
1993...................................................................
*3.4 By-Laws of QLogic Corporation..........................................
***3.5 Amendments to By-Laws of QLogic Corporation............................
*10.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan.....
*10.2 Form of QLogic Corporation Stock Awards Plan...........................
*10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware
corporation, Emulex Corporation, a California corporation, and QLogic
Corporation............................................................
*10.4 Administrative Services Agreement, dated as of February 21, 1993, among
Emulex Corporation, a California corporation, Emulex Corporation, a
Delaware corporation and QLogic Corporation............................
*10.5 Employee Benefits Allocation Agreement, dated as of January 24, 1994,
among Emulex Corporation, a Delaware corporation, Emulex Corporation, a
California corporation, and QLogic Corporation.
*10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex
Corporation, a California corporation, QLogic Corporation and C.J.
Segerstrom & Sons, a general partnership...............................
*10.7 Intellectual Property Assignment and Licensing Agreement, dated as of
January 24, 1994, between Emulex Corporation, a California corporation,
and QLogic Corporation.................................................
*10.8 Form of QLogic Corporation Savings Plan................................
*10.9 Form of QLogic Corporation Savings Plan Trust..........................
**10.10 Loan and Security Agreement with Silicon Valley Bank...................
***10.11 Form of Indemnification Agreement between QLogic Corporation and
Directors..............................................................
***10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between QLogic
Corporation and Emulex Corporation.....................................
10.13 Separation Agreement between QLogic Corporation and Bill Caldwell,
dated July 26, 1995....................................................
10.14 Separation Agreement between QLogic Corporation and Mel Gable, dated
June 14, 1995..........................................................
10.15 Separation Agreement between QLogic Corporation and Joe Pleso, dated
October 18, 1995.......................................................
10.16 Employment Agreement between QLogic Corporation and HK Desai dated
August 4, 1995.........................................................
21.1 Subsidiary of the registrant...........................................
23.1 Consent of Independent Auditors........................................
27 Financial Data Schedule................................................
- ---------------
* Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended April 3, 1994 and is incorporated herein by reference.
*** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended April 2, 1995 and is incorporated herein by reference.