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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 438-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
(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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of May 15, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $ .
As of May 15, 1997, the registrant had 5,848,508 shares of common stock
outstanding. Documents incorporated by reference:
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 30, 1997
Part III, Items 10, 11, 12 and 13 -- Definitive proxy statement for the 1997
Annual Meeting of Stockholders which will be filed with the Securities and
Exchange Commission within 120 days after the close of the 1997 year.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
The Company is the successor to the Emulex Micro Devices division of Emulex
Corporation. The Company was incorporated in Delaware in 1992, as Emulex Micro
Devices Corporation, a wholly-owned subsidiary of Emulex Corporation, and, in
1993, substantially all of the assets of the Emulex Micro Devices division were
transferred to the Company. In February 1994, pursuant to its spinoff from
Emulex Corporation, the Company became a separate publicly held corporation. The
terms "QLogic" and "Company" refer to QLogic Corporation and, for periods prior
to January 1993, the Emulex Micro Devices division of Emulex Corporation. The
Company's principal executive offices are located at 3545 Harbor Boulevard,
Costa Mesa, California 92626, and its telephone number is (714) 438-2200. FAS,
QLogic and the QLogic logo are trademarks of the Company.
All references to years refer to the Company's fiscal years ended March 30,
1997, March 31, 1996 and April 2, 1995, as applicable, unless the calendar years
are specified. References to dollar amounts, except share and per share data,
are in thousands, unless otherwise specified.
OVERVIEW
QLogic Corporation is a leading designer and supplier of semiconductor and
board level I/O products. The Company's products provide a high performance
interface between computer systems and their attached data storage peripherals,
such as hard disk drives, tape drives, removable disk drives, CD-ROM drives and
RAID subsystems. QLogic provides complete I/O technology solutions by designing
and marketing single chip controller and adapter board products for both sides
of the computer/peripheral device interlink, or "bus." Historically, the Company
has targeted the high performance sector of the I/O market, focusing primarily
on the SCSI industry standard. The Company is utilizing its I/O expertise to
develop products for emerging I/O standards, such as Fibre Channel. Fibre
Channel is experiencing early industry acceptance as a higher performance
solution that maintains signal integrity while allowing for increased
connectivity between a computer system and its data storage peripherals.
QLogic's products utilize various I/O standards to service the needs of
manufacturers and end users of various types of computer systems and components,
such as workstations, servers and data storage peripherals. The Company provides
high performance SCSI-based solutions and new I/O solutions based on the
emerging Fibre Channel standard, and is leveraging its technological
capabilities to provide solutions based on the IDE standard. QLogic markets and
distributes its products through a direct sales organization supported by field
application engineers, as well as through a network of independent
manufacturers' representatives and regional and international distributors. The
Company's primary OEM customers are major domestic and international suppliers
and manufacturers of servers, workstations and data peripherals, such as Sun
Microsystems, Inc., Fujitsu Limited and Digital Equipment Corporation.
INDUSTRY BACKGROUND
The increasing processing power of computers, the proliferation of
networks, the rapid growth in the usage of the Internet and intranets, the wider
application of computers in multimedia and telecommunications applications and
the availability of higher performance data storage peripheral devices have
driven the demand for increased data throughput among servers, workstations and
data storage peripherals and, as a result, for increased I/O system performance.
The I/O system is the electronic link between the host CPU and the computer's
data storage peripheral devices, such as hard disk drives, tape drives,
removable disk drives, CD-ROM drives and RAID subsystems. The I/O system must
utilize industry standard hardware and software interfaces to manage and direct
the flow of large volumes of data at high speeds between the CPU
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and multiple data storage peripherals, and, at the same time, minimize the
consumption of CPU processing power and maintain peripheral data storage
integrity. As microprocessors run at higher speeds and levels of performance,
they require I/O systems which support faster and more autonomous data
transmission and other advanced capabilities in order to function optimally.
IDE was an early standard for data interchange for personal computers.
Historically, IDE-based I/O systems managed and directed the flow of data
between personal computers and up to two hard disk drives. As PC-based servers
became increasingly sophisticated, the relatively low data throughput and
minimal connectivity of IDE became a limiting factor for system performance. As
a result, high performance systems, such as servers and workstations, migrated
to faster standards. Nevertheless, it is anticipated that IDE will remain an
important and cost-effective solution to the I/O needs of the personal computer
market due to the large installed base of personal computers and due to the
increasing performance capabilities of new IDE standards, such as EIDE and Ultra
IDE, which operate at higher data transfer rates and support up to four data
storage peripheral devices.
In response to the increased data throughput and connectivity required by
networks and workstations, SCSI was developed and adopted as the industry high
performance I/O interface standard. The overall growth of the SCSI marketplace
has been driven by rapid technological change and the evolving dynamics of high
performance computer and computer data storage peripheral devices, including,
the greater variety of higher performance peripheral devices; the continual
shift toward higher capacity and higher data rate disk drives; the need to
support greater numbers and types of attached peripherals; the movement toward
more distributed network architectures across greater distances; the need for
greater volumes of data transfer; and the demand for increased data throughput.
Additionally, SCSI is also benefiting from the emerging "plug and play"
standard, that is supported by Windows operating systems and Intel
microprocessor-based systems, which simplifies the installation process, and
from the growing usage of multi-tasking, multi-threading operating systems for
which the prevailing IDE technology is less suited.
The continuing evolution towards higher performance computer systems has
led to the development of new connectivity solutions that provide even greater
levels of data interchange between computer systems and data storage peripheral
devices. Fibre Channel is emerging as a new industry standard to meet the demand
for increased connectivity and data transfer rates. Fibre Channel is an advanced
I/O standard which provides data transmission speeds up to approximately two and
one-half times the rate currently provided by the fastest SCSI-based solutions.
In addition, Fibre Channel is designed to maintain signal integrity while
allowing for data interchange between a computer system and up to eight times
more peripherals than SCSI. Furthermore, Fibre Channel is designed to support
the use of either a fibre optic connection or a more compact version of the
copper cable traditionally used for SCSI solutions. Fibre optic connection
allows the distance between a computer system and its data storage peripheral
devices to extend up to 10 kilometers. The Company believes Fibre Channel will
likely be the I/O technology of choice for larger, higher performance data and
network applications while SCSI-based products will continue to be used in
applications requiring lower functionality and performance.
Computer system and peripheral device manufacturers select I/O technologies
for incorporation into their products primarily on the basis of application,
performance and connectivity needs. The I/O products selected must be
specifically tailored to the manufacturer's requirements, in order to be
compatible with the manufacturer's system or peripherals either on a turn-key
basis or with minimal developmental effort. In addition to being compatible with
the present system or peripherals, I/O products ideally must be both "forward"
and "backward" compatible with future and past computers and peripherals. That
is, there must be a ready migration path between the I/O product and other
products currently sold or under development by the manufacturer. Also, it is
critical that the I/O product be available at a reasonable cost and in a timely
manner, so as not to delay the manufacturer's time to market, which has become
increasingly important in an era of short product life cycles. In order to
achieve these goals, manufacturers increasingly seek to involve I/O product
suppliers in their product planning, validation and development cycles. By
including the I/O system providers in their planning and development process,
manufacturers not only ensure compatibility between product lines but also
reduce the average time to market for their products.
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THE QLOGIC SOLUTION
QLogic is a leading designer and supplier of semiconductor and board level
I/O products. The Company has been designing and marketing SCSI-based products
for over 10 years and is a leading supplier of connectivity solutions to this
market sector. The Company is leveraging its technological expertise in SCSI
into higher and lower end hardware and software solutions for its OEM customer
base. In 1996, the Company introduced the industry's first fully integrated
single chip PCI to Fibre Channel controller. The Company also recently has
introduced devices based on IDE standards to address additional I/O needs of its
OEM customer base.
The Company works closely with its customers in order to anticipate and
help identify their needs. Even after a product is identified and validated, the
Company continues to work with the customer in a joint product development
process to ensure compatibility with the customer's future product designs. As a
result of this partnership oriented approach, the Company believes that its
customers benefit from significant time to market advantages. By gaining insight
into the customers' system needs, the Company believes that it is in a better
position to deliver I/O products with an easier migration path, thus reducing
the customers' firmware and software development costs and associated
implementation risks. In addition, by utilizing selected wafer fabrication
suppliers, the Company seeks to ensure that it has ready access to the latest
developments in wafer fabrication, while avoiding the fixed costs associated
with foundry ownership.
The Company's products are designed to reduce board space requirements on
plug-in cards, computer motherboards and peripheral controller boards by
integrating multiple I/O controller functions on a single chip. The Company
believes its products offer superior compatibility and ease of migration across
multiple I/O standards due to their use of common software or firmware. The
Company believes that its experience and focus on the SCSI market sector, the
ease of migration of its products, its current development efforts into I/O
standards such as IDE and Fibre Channel and its close customer relationships
with leading server, workstation and peripheral manufacturers provide the
Company with competitive advantages in the I/O product market.
TECHNOLOGY AND PRODUCTS
The Company develops and markets I/O products for both the host and
peripheral connections of the I/O bus. For the host interface, the Company's
products include a variety of adapters, in both board and single chip integrated
circuit form, which address the server and workstation segments of the computer
market. For peripheral applications, the Company provides single chip
controllers for data storage peripheral devices, including hard disk drives,
tape drives, removable disk drives, CD-ROM drives and RAID subsystems. The
Company's I/O products are currently based on the three most prevalent interface
standards: IDE, SCSI and Fibre Channel. The Company's peripheral products
include Fast Architecture SCSI ("FAS") and Triple Embedded Controller ("TEC")
products. The Company's computer systems products include Intelligent SCSI
Processor ("ISP") Host Adapter chips and QLA Host Adapter Board products.
The Company has historically focused on the SCSI standard interface for its
I/O product development. The Company's initial design wins for SCSI-based host
products came from manufacturers of workstations and servers using Reduced
Instruction Set Computer ("RISC") processors. The Company developed an embedded
RISC-based controller, which is supplied with executable firmware capable of
being custom tailored. The Company's leading peripheral technological
developments include a broad range of Very Large Scale Integration ("VLSI") SCSI
and IDE controllers, which incorporate intelligent I/O controllers with powerful
data error correction capability, in order to ensure data integrity between the
CPU and its peripherals. After accumulating significant architectural and
systems expertise in designing SCSI devices over successive generations of the
products, the Company expanded its SCSI-based host adapter board and peripheral
controller product lines to address additional computer systems and data storage
peripheral market segments, such as IDE and Fibre Channel.
In 1996, the Company introduced the industry's first fully integrated
single chip PCI to Fibre Channel controller. Fibre Channel is a scaleable data
transfer interface technology (currently implemented at 100 megabytes per
second) that maps multiple standard transport protocols, and utilizes compact
copper cables, or
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fiber optics to transmit data at distances up to 10 kilometers, while supporting
various topologies for data transfer. The Company's single chip design with an
embedded transceiver provides certain advantages over existing multi-chip
solutions, including a smaller footprint, increased reliability and a more
cost-effective solution. The Company believes Fibre Channel will become an
important I/O interface for high performance peripherals and networks over the
next several years.
The Company's host adapter chip product line incorporates its ISP, which
integrates certain controller functions, such as a proprietary RISC processor, a
host interface (PCI or SBus) and a protocol processor (SCSI or Fibre Channel).
By incorporating an I/O processor to control SCSI or Fibre Channel operations
and by including a proprietary RISC processor to control and direct memory and
software activities, the Company's ISP architecture facilitates faster
throughput and is designed to minimize customer resource requirements as I/O
standards evolve. Furthermore, the Company's product architecture is designed to
facilitate both upward and downward compatibility. Customers' significant
software investments can be preserved during transition from Fast SCSI to Ultra
SCSI, with only minimal additional software design necessary to complete the
upward migration to the Company's Fibre Channel solutions.
For the peripherals market, the Company's TEC architecture integrates
certain control functions such as buffer controller, powerful data error
correction and disk formatting, microprocessor interface and I/O interface
(SCSI, IDE or Fibre Channel). The Company's products are designed to facilitate
backward migration from SCSI to IDE and forward migration from SCSI to Fibre
Channel by ensuring that a substantial portion of a customer's firmware
investments can be preserved during the transition. The Company's common
architecture modules for ISP and TEC products are designed to benefit the
Company's customers by providing faster time to market, reduced support costs,
simplified technology transitions and increased performance.
The markets in which the Company competes are characterized by rapidly
changing technology, evolving industry standards and continuing improvements in
products and services. There can be no assurance that the Company will respond
effectively to technological changes or that the Company's products will conform
to evolving industry standards and protocols. The Company has invested and will
continue to invest significant resources in the development of its Fibre Channel
based products; there can be no assurance that Fibre Channel will be adopted as
a predominant industry standard, or that the Company's Fibre Channel products
will conform to an industry standard which has yet to be uniformly adopted. The
failure of the Company's products to gain acceptance within industry standards
and protocols would adversely affect the Company's business, financial condition
and results of operations.
SALES AND MARKETING
QLogic markets and distributes its products through a direct sales
organization supported by field application engineers, as well as through a
network of independent manufacturers' representatives and regional and
international distributors. In North America, the Company uses a tiered sales
and marketing approach, with a direct sales force to serve large and strategic
OEM accounts, OEM representatives that are focused on specific medium sized
accounts, and regional distributors and resellers that serve smaller accounts.
In the Pacific Rim, the Company sells directly as well as through a master
distributor. In Europe, the Company sells its products through distributors and
through a representative. The Company believes that it is important to work
closely with its large peripheral and computer system manufacturer OEMs during
their design cycles. The Company supports these customers with extensive
applications and system design support, as well as training classes and seminars
both in the field and from its offices in Costa Mesa, California. The Company
also maintains a high level of customer support through technical hotlines and
Internet communications.
The Company's manufacturers' representatives and distributors are not
subject to minimum purchase requirements and can discontinue marketing any of
the Company's products at any time. The Company's distributors are permitted to
return to the Company a portion of the products purchased by them. In addition,
the Company provides its distributors with price protection in the event that
the Company reduces the prices of its products. The loss of one or more
manufacturers' representatives or distributors could have an adverse effect on
the Company's business, financial condition and results of operations.
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The Company's sales efforts are focused on establishing and developing long
term relationships with OEMs and other potential customers. The sales cycle
typically begins with a design win, which entails a product of the Company being
selected to be incorporated into a potential customer's computer system or data
storage peripherals. Once the Company secures a design win with a given
customer, the time to production shipment can range between six and 18 months.
After winning a design with a potential customer, QLogic works closely with the
customer to integrate its product with the customer's current and next
generation products. Due to the extensive amounts of resources required for each
customer design, typically only one I/O solution is designed into any given
customer product. After being designed into a customer's product, sales are
typically made through purchase orders which are subject to cancellation,
postponement or other types of delays.
Export revenues of the Company's products accounted for approximately 45%,
55% and 62% of net revenues for fiscal 1997, 1996 and 1995, respectively.
International sales are denominated in U.S. dollars. Due to its international
sales, the Company is subject to a number of risks, including restrictions
related to export regulations as well as those related to political upheaval and
economic downturns in foreign nations.
ENGINEERING AND DEVELOPMENT
In order to compete successfully, the Company believes that it must
continually design, develop and introduce new products that take advantage of
market opportunities and address emerging standards. The Company's strategy is
to leverage its substantial base of architectural and systems expertise and
product innovation capabilities to address a broad range of I/O solutions as
well as to develop products for its core SCSI business. The Company is currently
engaged in the development of integrated circuit I/O controllers for additional
I/O standards and enabling technologies, such as Fibre Channel, Ultra SCSI, Low
Voltage Differential (LVD), Ultra IDE and 1394 (Firewire). The Company intends
to broaden its product lines while continuing to allow its customers to
transition rapidly to Fibre Channel and other emerging I/O standards.
At March 30, 1997, the Company employed approximately 90 engineers,
including technicians and support personnel engaged in the development of new
products and the improvement of existing products. There can be no assurance
that the Company will continue to be successful in attracting and retaining key
personnel with the skills and expertise necessary to develop new products in the
future. Engineering and development expenses were approximately $10.4 million,
$7.2 million and $7.6 million for fiscal 1997, 1996 and 1995, respectively.
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and product obsolescence. The
Company's success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. There
can be no assurance that the Company will be able to identify new product
opportunities successfully and develop and bring to market new products in a
timely manner, or that the Company will be able to respond effectively to
technological advancements or new product announcements.
BACKLOG
The Company's backlog of orders was approximately $20.6 million at March
30, 1997, compared to approximately $15.5 million at March 31, 1996. All backlog
is scheduled for delivery within six months or less. Most orders are subject to
rescheduling and/or cancellation with little or no penalty. Purchase order
release lead times depend upon the scheduling practices of the individual
customer, and the rate of booking new orders fluctuates from month to month. The
Company's customers have in the past encountered uncertain and changing demand
for their products. Orders are typically placed based on customer 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 the Company. In the past, the Company has experienced, and may at
any time and with minimal notice in the future experience, cancellations and
postponements of orders. Therefore, the level of backlog at any particular date
is not necessarily indicative of sales for any future period.
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COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. All of the Company's
products compete with products available from several companies, many of whom
have research and development, long term guaranteed supply capacity, marketing
and financial resources, manufacturing capability and customer support
organizations that are substantially greater than those of the Company. 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 identify and 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.
The Company currently competes primarily with Adaptec, Inc. and Symbios
Logic, Inc. In the Fibre Channel sector of the I/O market, the Company expects
to compete primarily with Adaptec, Inc., Symbios Logic, Inc. and Hewlett-Packard
Company. In the IDE sector, the Company expects to compete with Adaptec, Inc.
and Cirrus Logic, Inc. The Company may compete with some of its larger disk
drive and computer systems customers, some of which have the capability to
develop I/O controller integrated circuits for use in their products. At least
one large OEM customer in the past has decided to vertically integrate and has
therefore ceased purchases from the Company.
The Company 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.
The Company believes competitive factors in design wins are time to market,
performance, product features, price, quality, technical support and ease of
migration path to other I/O standards. The Company will have to continue to
develop products appropriate to its markets to remain competitive, as its
competitors continue to introduce products with improved performance
characteristics. While the Company continues to devote significant resources to
research and development, there can be no assurance that such efforts will be
successful or that the Company will develop and introduce new technology and
products in a timely manner. In addition, while relatively few competitors offer
a full range of SCSI and other I/O products, additional domestic and foreign
manufacturers may increase their presence in, and resources devoted to, these
markets. There can be no assurance that the Company will compete successfully in
the future against its existing competitors or potential competitors.
MANUFACTURING
The Company subcontracts the manufacturing of its semiconductor chips and
its host adapter boards to independent foundries and subcontractors, which
allows the Company to avoid the high costs of owning, operating and constantly
upgrading a wafer fabrication facility and a host adapter board assembly
factory. As a result, the Company focuses its resources on product design and
development, quality assurance, sales and marketing and customer support. The
Company designs both its semiconductor and host adapter board products, and
performs final tests on products, including tests required under the Company's
ISO9001/TickIT Certification. The Company also provides fab process reliability
tests, conducts failure analysis and audits its finished goods inventory to
confirm the integrity of its quality assurance procedures.
The Company's semiconductor products are ASICs, currently manufactured for
the Company by a number of domestic and offshore foundries. The Company's major
semiconductor suppliers are Toshiba, NEC
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Electronics, LSI Logic and Samsung Semiconductor, Inc. Most of the Company's
products are manufactured using 0.8, 0.6 or 0.5 micron process technology.
The Company is dependent on its foundries to allocate to the Company
apportion of their foundry capacity sufficient to meet the Company's needs and
to produce products of acceptable quality and with acceptable manufacturing
yields in a timely manner. These foundries fabricate products for other
companies and manufacture products of their own design. The Company does not
have long-term agreements with any of its foundries, and purchases both wafers
and finished chips on a purchase order basis. Therefore, the foundries generally
are not obligated to supply products to the Company for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order. The Company works with its existing foundries, and
intends to qualify new foundries, as needed, to obtain additional manufacturing
capacity. There can be no assurance, however, that the Company will be able to
obtain additional capacity.
The Company currently purchases its semiconductor products from its
foundries either in finished form or wafer form. The Company uses subcontractors
for die assembly of its semiconductor products purchased in wafer form, and for
assembly of its host adapter board products. In the assembly process for the
Company's semiconductor products, the silicon wafers are separated into
individual die, which are then assembled into packages and tested. Following
assembly, the packaged devices are further tested and inspected by the Company
prior to shipment to customers. For its host adapter board products, the Company
purchases components and printed circuit boards as kits. The Company provides
these kits to contract manufacturing companies that work together with the
Company's component suppliers to assemble the boards to the Company's
specifications.
The Company believes most component parts used in its host adapter boards
are standard off-the-shelf items which are, or can be, purchased from two or
more sources. The Company selects suppliers on the basis of technology,
manufacturing capacity, quality and cost. Whenever possible and practicable, the
Company strives to have at least two manufacturing locations for each host
adapter board and chip product. Nevertheless, the Company's reliance on
third-party manufacturers involves risks, including possible limitations on
availability of products due to market abnormalities, unavailability of, or
delays in obtaining access to, certain product technologies and the absence of
complete control over delivery schedules, manufacturing yields, and total
production costs. The inability of the Company's suppliers to deliver products
of acceptable quality and in a timely manner or the inability of the Company to
procure adequate supplies of its products could have a material adverse effect
on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
Although the Company has seven patents issued and two additional patent
applications pending in the United States, the Company relies primarily on its
trade secrets, trademarks and copyrights to protect its intellectual property.
The Company attempts to protect its proprietary information through agreements
with its customers, suppliers, employees and consultants, and through other
security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the I/O solutions markets, its technical
expertise and ability to introduce new products on a timely basis will be more
important in maintaining its competitive position than protection of its
intellectual property. Although the Company continues to implement protective
measures and intends to defend vigorously its intellectual property rights,
there can be no assurance that these measures will be successful.
The Company has received notices of claimed infringement of trademark
rights in the past, and there can be no assurance that third parties will not
assert claims of infringement of trademarks or any other intellectual property
rights against the Company with respect to existing and future products. In the
event of a patent or other intellectual property dispute, the Company may be
required to expend significant resources to develop
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non-infringing technology or to obtain licenses to the technology which is the
subject of the claim. There can be no assurance that the Company would be
successful in such development or that any such license would be available on
commercially reasonable terms, if at all. In the event of litigation to
determine the validity of any third party's claims, such litigation could result
in significant expense to the Company, and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is determined
in favor of the Company.
EMPLOYEES
The Company had 184 employees as of March 30, 1997. The Company believes
that its future prospects will depend, in part, on its ability to continue to
attract, train, motivate, retain and manage skilled engineering, sales,
marketing and executive personnel. None of QLogic's employees is represented by
a labor union. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company's corporate offices and principal product development, sales
and operational facilities are currently located in one, approximately 70,000
square foot building in Costa Mesa, California. The Company occupies the
facility pursuant to a lease that expires in 1999. The Company believes that its
current facilities are adequate for its present level of operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to ordinary disputes arising in
the normal course of business. The Company does not believe that the outcome of
these matters will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1997 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
- ----------------------------- --- -----------------------------------------------------
H.K. Desai 51 President, Chief Executive Officer and Director
Thomas R. Anderson 52 Vice President and Chief Financial Officer
Mark K. Edwards 38 Vice President, Sales and Corporate Marketing
Lawrence F. Fortmuller, Jr. 48 Vice President and General Manager, Computer Products
Michael R. Manning 42 Secretary and Treasurer
Vice President and General Manager, Peripheral
David Tovey 52 Products
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 of QLogic and President of QLogic Foreign Sales Corporation.
He was subsequently promoted to President and Chief Executive Officer and became
a Director in January 1996. 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 of
Engineering, 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 Vice President and Chief
Financial Officer. Prior to joining the Company, Mr. Anderson was executive vice
president, chief operating officer and chief financial officer of HIARC, a
software startup company. From October 1990 to January 1993, he was corporate
Senior Vice President and Chief Financial Officer of Distributed Logic
Corporation, a manufacturer of tape and disk
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controllers and computer subsystems. From June 1982 to April 1990, he held
various positions with Cipher Data Products, Inc., including corporate Vice
President, Chief Financial Officer, Treasurer and Assistant Secretary. Before
joining Cipher, Mr. Anderson held various financial positions with Dataproducts
Corporation, Rockwell International and Arthur Andersen LLP.
Mr. Edwards joined the Company in October 1996 as Vice President -- Sales
and Corporate Marketing. Prior to joining the Company, Mr. Edwards served as
Vice President -- Sales and Marketing for the Storage Systems Division of Unisys
Corporation, from August 1994 to September 1996, and as Director -- European
Channels from August 1993 through August 1994. Prior to joining Unisys, Mr.
Edwards served as Regional Sales Manager for Zitel Corporation from April 1991
through August 1993. Prior to joining Zitel, Mr. Edwards held a sales and
management position with Digital Equipment Corporation.
Mr. Fortmuller joined the Company in October 1996 as Vice President and
General Manager -- Computer Systems Group. Prior to joining the Company, Mr.
Fortmuller held various positions with AST Research, Inc., a manufacturer of
microprocessor-based systems, for nine years, including Vice President --
Americas Marketing from September 1995 to October 1996; Vice President and
General Manager -- Server Business Unit from August 1994 through September 1995;
Director of Product Marketing from 1990 through August 1994; and various product
marketing positions. Prior to joining AST Research, Inc., Mr. Fortmuller held
various product marketing positions with Data Card Corporation, MSI Data
Corporation and Litton Industries, Inc.
Mr. Manning joined the Company in June 1993 as Treasurer and Secretary.
Previously, Mr. Manning held various positions at Emulex, including Senior
Director and Treasurer from April 1991 with the additional role of Secretary in
1992. Mr. Manning joined Emulex in July 1983 as Tax Director. Prior to joining
Emulex, Mr. Manning was a Tax Manager at KPMG Peat Marwick LLP, independent
certified public accountants.
Mr. Tovey has served as Vice President and General Manager -- Peripheral
Products Group since October 1996. From April 1994 to October 1996, Mr. Tovey
served as Vice President -- Marketing of the Company. From March 1985 to April
1994, he held various positions in the Disk Products Division of Toshiba America
Information Systems, a computer system and disk drive manufacturer, including
Director of Technology Planning and Vice President -- HDD Marketing. Prior to
1985, Mr. Tovey held various marketing and sales management positions with
Unisys Corporation and engineering positions with Ferranti, Ltd. in the U.K.
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 fiscal years as reported on NASDAQ.
SALES PRICES
---------------------
HIGH LOW
------ ------
FISCAL 1997
First Quarter.......................................... $12.00 $ 8.50
Second Quarter......................................... 13.00 9.00
Third Quarter.......................................... 28.38 12.50
Fourth Quarter......................................... 30.13 18.50
FISCAL 1996
First Quarter.......................................... $ 5.13 $ 4.25
Second Quarter......................................... 6.63 4.50
Third Quarter.......................................... 8.88 5.63
Fourth Quarter......................................... 9.13 6.50
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of May 15, 1997 was 412.
DIVIDENDS
The Company has never paid cash dividends on its common stock and has no
current intention to do so. In addition, the Company's existing credit agreement
restricts the Company from paying cash dividends.
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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.
FISCAL YEAR ENDED
----------------------------------------------------------------------
MARCH 30, MARCH 31, APRIL 2, APRIL 3, MARCH 28,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS
DATA
Net revenues........................ $ 68,927 $ 53,779 $ 57,675 $ 44,902 $ 52,257
Cost of sales....................... 38,151 34,413 34,285 28,148 27,190
------- ------- ------- ------- -------
Gross profit.............. 30,776 19,366 23,390 16,754 25,067
Operating expenses:
Engineering and development....... 10,422 7,191 7,598 8,603 8,587
Selling and marketing............. 6,372 6,490 7,541 6,178 3,925
General and administrative........ 4,628 4,501 4,872 4,356 3,363
Impairment of goodwill............ -- -- -- 542 --
Amortization of goodwill.......... -- -- -- 99 133
Consolidation charges............. -- -- -- 507 --
------- ------- ------- ------- -------
Total operating expenses....... 21,422 18,182 20,011 20,285 16,008
------- ------- ------- ------- -------
Operating income (loss)........ 9,354 1,184 3,379 (3,531) 9,059
Transaction costs................... -- -- -- 1,142 --
Interest expense.................... 125 153 146 107 90
Interest and other income........... 602 172 93 3 --
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 9,831 1,203 3,326 (4,777) 8,969
Income tax provision (benefit)...... 3,983 537 1,361 (28) 3,109
------- ------- ------- ------- -------
Net income (loss)................... $ 5,848 $ 666 $ 1,965 $ (4,749) $ 5,860
======= ======= ======= ======= =======
Net income per common and equivalent
share(1).......................... $ 0.93 $ 0.12 $ 0.35
======= ======= =======
SELECTED BALANCE SHEET DATA
Working capital..................... $ 19,811 $ 13,334 $ 10,564 $ 6,424 $ 5,315
Total assets........................ $ 36,963 $ 28,539 $ 24,592 $ 22,613 $ 18,457
Long-term capitalized lease
obligations, excluding current
installments...................... $ 352 $ 576 $ 853 $ 1,156 $ 986
Other non-current liabilities....... $ 924 $ 2,016 $ 1,381 $ -- $ --
Total stockholders' equity.......... $ 24,353 $ 16,277 $ 15,581 $ 13,615 $ 11,193
- ---------------
(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
that involve risk and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed hereunder,
in "Risk Factors" and "Business."
The Company is the successor to the Emulex Micro Devices division of Emulex
Corporation ("Emulex"). On February 24, 1994, Emulex declared a special dividend
consisting of the distribution to its stockholders of all outstanding shares of
Common Stock of QLogic, pursuant to which the Company became a separate publicly
held corporation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed in absolute terms and as a percentage of the
Company's net revenues.
FISCAL YEAR ENDED
-----------------------------------------------------------------
MARCH 30, 1997 MARCH 31, 1996 APRIL 2, 1995
----------------- ----------------- -----------------
(DOLLARS IN THOUSANDS)
Net revenues..................... $68,927 100.0% $53,779 100.0% $57,675 100.0%
Cost of sales.................... 38,151 55.3 34,413 64.0 34,285 59.4
------- ----- ------- ----- ------- -----
Gross profit................... 30,776 44.7 19,366 36.0 23,390 40.6
Operating expenses:
Engineering and development.... 10,422 15.1 7,191 13.4 7,598 13.2
Selling and marketing.......... 6,372 9.3 6,490 12.1 7,541 13.1
General and administrative..... 4,628 6.7 4,501 8.3 4,872 8.4
------- ----- ------- ----- ------- -----
Total operating expenses.... 21,422 31.1 18,182 33.8 20,011 34.7
------- ----- ------- ----- ------- -----
Operating income............ $ 9,354 13.6% $ 1,184 2.2% $ 3,379 5.9%
======= ===== ======= ===== ======= =====
NET REVENUES
The Company's net revenues are derived primarily from the sale of
SCSI-based I/O products. License fees also contribute to the Company's net
revenues. Net revenues for fiscal 1997 increased $15.1 million or 28% from
fiscal 1996 to $68.9 million. The increase was primarily the result of an
increase in sales of the TEC, Host Board and ISP product lines. A partially
offsetting decline in sales of $4.4 million occurred in the FAS product line.
Net revenues for fiscal 1996 decreased $3.9 million or 7% from fiscal 1995
to $53.8 million. The decrease was primarily due to decreases in sales of the
TEC, Host Board and other sources of revenue of $11.4 million, $1.5 million and
$700,000, respectively. The decreases were partially offset by an increase in
sales of the FAS and ISP product lines of $6.7 million and $4.3 million,
respectively. The overall decline was due to unfavorable market conditions, the
loss of a large OEM customer as such customer transitioned to a more vertically
integrated manufacturing policy and industry consolidation that resulted in the
acquisitions of other large customers.
Export revenues for fiscal 1997 increased $1.5 million or 5% from fiscal
1996, to approximately $31.3 million, primarily due to increased sales to
customers in Japan. Export revenues for fiscal 1996 decreased $6.0 million or
17% from fiscal 1995, to approximately $29.8 million. The decrease resulted
primarily from U.S. exports to Singapore declining $14.9 million. The decline in
revenues to Singapore was the result of a loss of the large OEM customer
discussed above and decreased sales to another large OEM customer. This decline
was partially offset by an increase in sales to Japan-based customers of $9.1
million.
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The Company's six largest customers in each
respective
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period accounted for approximately 71%, 81% and 71% of the Company's net
revenues for fiscal 1997, 1996 and 1995, respectively. For fiscal 1997, Sun
Microsystems, Inc., Tokyo Electron Limited, and Fujitsu Limited accounted for
approximately 20%, 19% and 16% of the Company's net revenues, respectively. For
fiscal 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Avex
Electronics, Inc. accounted for approximately 42%, 13% and 11% of the Company's
net revenues, respectively. For fiscal 1995, Tokyo Electron Limited, Micropolis
Corporation and Digital Equipment Corporation accounted for approximately 24%,
14% and 11% of the Company's net revenues, respectively.
The Company believes that its major customers continually evaluate whether
or not to purchase products from alternate or additional sources. Accordingly,
there can also be no assurance that a major customer will not reduce, delay or
eliminate its purchases from the Company. Any such reduction, delay or loss of
purchases could have a material adverse effect on the Company's business,
financial condition and results of operations.
COST OF SALES
Cost of sales consists primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The cost of sales percentage for fiscal 1997 was
55%, a decrease of 9% from the prior fiscal year. The percentage decrease was
due to computer systems products accounting for a greater percentage of net
revenues. Computer system products contain higher levels of integration and
functionality and are generally associated with higher average selling prices
and gross margins. The Company continued to focus on reducing component costs as
well as implementing design efficiencies during fiscal 1997. The cost of sales
percentage for fiscal 1996 was 64%, an increase of 5% over fiscal 1995. The
increase in the cost of sales percentage was primarily due to inventory
write-down charges being higher in fiscal 1996 compared to the prior year. The
Company's ability to maintain its current gross margin can be significantly
affected by factors such as supply costs and, in particular, the cost of silicon
wafers, the mix of products shipped, competitive price pressures, the timeliness
of volume shipments of new products and the Company's ability to achieve
manufacturing cost reductions. The Company anticipates that it will be
increasingly more difficult to reduce manufacturing costs. In addition, the
Company believes the cost of sales percentage will be adversely impacted by
sales of IDE-based products, which carry lower margins. As a result, the Company
does not anticipate cost of sales to decrease at a rate consistent with historic
trends.
OPERATING EXPENSES
Engineering and Development. Engineering and development expenses consist
primarily of salaries and other personnel related expenses, development related
equipment, occupancy costs and depreciation. For fiscal 1997, engineering and
development expenditures increased by $3.2 million from fiscal 1996, primarily
due to increased salary and occupancy expenses related to increased headcount.
In particular, the Company significantly expanded its engineering staff in
fiscal 1997, in connection with its development of Fibre Channel products. In
fiscal 1996, engineering and development expenditures decreased by $407,000 from
the prior fiscal year, primarily due to reduced equipment repair, consulting and
depreciation expenses. The Company expects that engineering and development
expenses will increase in absolute dollars in fiscal 1998.
Selling and Marketing. Selling and marketing expenses consist primarily of
sales commissions, salaries and other expenses for selling and marketing
personnel, travel expenses and trade shows. During fiscal 1997, selling and
marketing expenses decreased by $118,000 compared to fiscal 1996, primarily as a
result of reduced advertising and trade show expenses, due to the Company's
shift away from selling to resellers, which typically requires more advertising
and other promotions. The decrease in advertising cost was partially offset by
an increase in marketing salaries. In fiscal 1996, selling and marketing
expenses decreased by $1.1 million compared to fiscal 1995, primarily due to a
reduction in advertising costs to support reseller marketing efforts. The
Company expects that selling and marketing expenses will increase in absolute
dollars in fiscal 1998.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for corporate management, finance,
accounting and human resources. For fiscal 1997, general and administrative
expenses increased $127,000 from the prior year, primarily due to expenses
related to
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implementing a new computer system and salaries. For fiscal year 1996, general
and administrative expenses decreased $371,000 compared to fiscal 1995,
primarily due to decreased bad debt expense.
INTEREST EXPENSE
Interest expense decreased $28,000 during fiscal 1997 from fiscal 1996,
primarily due to lower capital lease commitments outstanding. Interest expense
increased $7,000 during fiscal 1996 from fiscal 1995, primarily due to increases
in capital lease obligations.
INTEREST AND OTHER INCOME
Interest and other income increased $430,000 during fiscal 1997 from fiscal
1996, primarily due to larger balances of cash and cash equivalents. Interest
and other income increased in fiscal 1996 to $172,000 from $93,000 in fiscal
1995, primarily due to larger balances of cash and cash equivalents.
INCOME TAX PROVISION
The Company's effective tax rates were 41%, 45% and 41% for fiscal 1997,
1996 and 1995, respectively.
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. Cash provided by operations was approximately
$12.6 million for fiscal 1997. Cash provided by operations was approximately
$8.8 million in fiscal 1996, compared to cash used in operations of $146,000 in
fiscal 1995. The growth in cash provided by operations is primarily attributable
to improved profitability, accounts receivable collection, cash management and
internal efficiency.
Cash used in investing activities was approximately $3.9 million, $1.2
million, and $1.3 million for fiscal 1997, 1996 and 1995, respectively,
reflecting expenditures for property and equipment.
Cash provided by financing activities was approximately $2.0 million for
fiscal 1997, which reflected proceeds from the exercise of stock options, offset
in part by principal payments under capital leases. Cash used in financing
activities, reflecting primarily principal payments under capital leases, was
approximately $275,000 and $277,000 in fiscal 1996 and 1995, respectively.
Working capital at March 30, 1997 was $19.8 million, as compared to $13.3
million at March 31, 1996. At March 30, 1997, the Company's principal sources of
liquidity included cash and cash equivalents of $19.1 million. In addition, the
Company has a line of credit of up to $7.5 million with Silicon Valley Bank. The
line of credit allows the Company to borrow at the bank's prime rate plus 0.5%.
There were no borrowings under the line of credit as of March 30, 1997. The line
of credit with Silicon Valley Bank expires July 5, 1997, and, although there can
be no assurances, the Company currently expects to renew this line of credit.
The Company believes that existing cash balances, facilities and equipment
leases, cash flows from operating activities and its available line of credit
will provide the Company with sufficient funds to finance its operations for at
least the next 12 months.
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 12 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 30, 1997 was $458,000 which was included in
other noncurrent liabilities. Amounts due Emulex under the Tax Sharing Agreement
are payable on December 30, 1999, and commenced bearing interest on January 1,
1996, at the rate applicable to underpayments of Federal income taxes, which was
9% at March 30, 1997. Interest due Emulex is payable quarterly and the Company
commenced interest payments in April 1996.
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RISK FACTORS
Except for the historical information contained herein, the discussion in
this Form 10-K contains certain forward-looking statements. When used in this
Form 10-K the words "forecast," "projected," "believes," "expects," and similar
expressions are intended to identify forward looking statements. In addition,
the Company may from time to time make oral forward-looking statements. The
Company wishes to caution readers that a number of important factors could cause
results to differ materially from those in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter to quarter. As a
result, the Company believes that period to period comparisons of its operating
results are not necessarily meaningful, and that such comparisons cannot be
relied upon as indicators of future performance. In addition, there can be no
assurance that the Company will maintain its current profitability in the
future. A significant portion of the Company's net revenues in each fiscal
quarter results from orders booked in that quarter. In the past, a significant
percentage of the Company's quarterly bookings and sales to major customers
occurred during the last month of the quarter, and there can be no assurance
that this trend will not return in the future. Orders placed by major customers
are typically based on their forecasted sales and inventory levels for the
Company's products. Changes in purchasing patterns by one or more of the
Company's major customers, customer order changes or rescheduling, gain or loss
of significant customers, customer policies pertaining to desired inventory
levels of the Company's products, negotiations of rebates and extended payment
terms, as well as changes in the ability of the Company to anticipate in advance
the mix of customer orders, could result in material fluctuations in quarterly
operating results. Certain large OEM customers may require the Company to
maintain higher levels of inventory as such customers attempt to minimize their
own inventories. In addition, the Company must order its products and build
inventory substantially in advance of product shipments, and because the markets
for the Company's products are subject to rapid technological and price changes,
there is a risk the Company will forecast incorrectly and produce excess or
insufficient inventory of particular products. To the extent the Company
produces excess or insufficient inventory or is required to hold excess
inventory, the Company's operating results could be adversely affected. Other
factors that could cause the Company's sales and operating results to vary
significantly from period to period include: the time, availability and sale of
new products; seasonal OEM customer demand, such as the decline experienced in
the fiscal quarter ended June 30, 1996; changes in the mix of products having
differing gross margins; variations in manufacturing capacities, efficiencies
and costs; the availability and cost of components, including silicon wafers;
warranty expenses; variations in product development and other operating
expenses; and general economic and other conditions affecting the timing of
customer orders and capital spending. The Company's quarterly results of
operations are also influenced by competitive factors, including pricing and
availability of the Company's and its competitors' products. Although the
Company does not maintain its own wafer manufacturing facility, a large portion
of the Company's expenses are fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer
purchases of the Company's products. Order deferrals by the Company's customers,
delays in the Company's introduction of new products and longer than anticipated
design-in cycles for the Company's products have in the past adversely affected
the Company's quarterly results of operations. Due to all of the foregoing
factors, as well as other unanticipated factors, it is likely that in some
future quarter or quarters the Company's operating results will be below the
expectations of public market analysts or investors. In such event, the price of
the Company's Common Stock would likely be materially and adversely affected.
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DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The Company's six largest customers in each
respective period accounted for approximately 71%, 81% and 71% of the Company's
net revenues for fiscal 1997, 1996 and 1995, respectively. For fiscal 1997, Sun
Microsystems, Inc., Tokyo Electron Limited and Fujitsu Limited accounted for
approximately 20%, 19% and 16% of the Company's net revenues, respectively. For
fiscal 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Avex
Electronics, Inc. accounted for approximately 42%, 13% and 11% of the Company's
net revenues, respectively. For fiscal 1995, Tokyo Electron Limited, Micropolis
Corporation and Digital Equipment Corporation accounted for approximately 24%,
14% and 11% of the Company's net revenues, respectively. There can be no
assurance that sales to such customers will continue or remain at comparable
levels. In particular, the Company expects that sales to Tokyo Electron Limited
will significantly decrease as the Company establishes a direct sales channel
and a replacement distributor relationship in Japan. The Company's operating
results have been, and may continue to be, adversely affected by the development
of alternative I/O solutions including the internal development by the Company's
customers of products competitive with those of the Company. For example, the
Company's results of operations during fiscal year ended March 31, 1996 were
adversely affected as a result of the loss of a large OEM customer as such
customer transitioned to a more vertically integrated manufacturing policy, and
industry consolidation that resulted in the acquisitions of other large
customers. The loss of any of the Company's major customers would have a
material adverse effect on its business, financial condition and results of
operations. In addition, a majority of the Company's customers order the
Company's products through written purchase orders as opposed to long term
supply contracts and, therefore, such customers are generally not obligated to
purchase products from the Company for any specified period. Major customers
also have significant leverage over the Company and may attempt to change the
terms, including pricing, upon which the Company and such customers do business,
which could materially adversely affect the Company's business, financial
condition and results of operations. As the Company's OEM customers are
pressured to reduce prices as a result of competitive factors, the Company may
be required to contractually commit to price reductions for its products before
it knows how, or if, cost reductions can be obtained. If the Company is unable
to achieve such cost reductions, the Company's gross margins could decline and
such decline could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company provides
its major distributors and certain volume purchasers with price protection in
the event that the Company reduces the prices of its products. While the Company
maintains reserves for such price protection, there can be no assurance that the
impact of future price reductions by the Company will not exceed the Company's
reserves in any specific fiscal period. Any price protection in excess of
recorded reserves could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. All of the Company's
products compete with products available from several companies, many of which
have substantially greater research and development, long term guaranteed supply
capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. 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 identify and 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
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is unable to design, develop and introduce competitive new products on a timely
basis, its future operating results would be adversely affected.
The Company currently competes primarily with Adaptec, Inc. and Symbios
Logic, Inc. In the Fibre Channel sector of the I/O market, the Company expects
to compete primarily with Adaptec, Inc., Symbios Logic, Inc. and Hewlett-Packard
Company. In the IDE sector, the Company expects to compete with Adaptec, Inc.
and Cirrus Logic, Inc. The Company may compete with some of its larger disk
drive and computer systems customers, some of which have the capability to
develop I/O controller integrated circuits for use in their products. At least
one large OEM customer in the past decided to vertically integrate and therefore
ceased purchases from the Company.
The Company will have to continue to develop products appropriate to its
markets to remain competitive as its competitors continue to introduce products
with improved performance characteristics. While the Company continues to devote
significant resources to research and development, there can be no assurance
that such efforts will be successful or that the Company will develop and
introduce new technology and products in a timely manner. In addition, while
relatively few competitors offer a full range of SCSI and other I/O products,
additional domestic and foreign manufacturers may increase their presence in,
and resources devoted to, these markets. There can be no assurance that the
Company will compete successfully in the future.
DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS
The Company currently relies on several independent foundries to
manufacture its semiconductor products either in finished form or wafer form.
The Company conducts business with its foundries through written purchase orders
as opposed to long term supply contracts and, therefore, such foundries are
generally not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order. To the extent a foundry terminates its
relationship with the Company or should the Company's supply from a foundry be
interrupted or terminated for any other reason, the Company may not have a
sufficient amount of time to replace the supply of products manufactured by that
foundry. Until recently, there has been a worldwide shortage of advanced process
technology foundry capacity. The manufacture of semiconductor devices is subject
to a wide variety of factors, including the availability of raw materials, the
level of contaminants in the manufacturing environment, impurities in the
materials used, and the performance of personnel and equipment. The Company is
continuously evaluating potential new sources of supply. However, the
qualification process and the production ramp-up for additional foundries has in
the past taken, and could in the future take, longer than anticipated. There can
be no assurance that new supply sources will be able or willing to satisfy the
Company's wafer requirements on a timely basis or at acceptable quality or per
unit prices. While the quality, yield and timeliness of wafer deliveries to date
have been acceptable, there can be no assurance that manufacturing yield
problems will not occur in the future.
The Company is using multiple sources of supply for certain of its
products, which may require the Company's customers to perform separate product
qualifications. The Company has not, however, developed alternate sources of
supply for certain other products and its newly introduced products are
typically produced initially by a single foundry until alternate sources can be
qualified. In particular, the Company's integrated single chip Fibre Channel
controller is manufactured by LSI Logic and integrates LSI Logic's transceiver
technology. In the event that LSI Logic is unable or unwilling to satisfy the
Company's requirements for this technology, the Company's attempt to market
Fibre Channel products would be delayed and, as such, its results of operations
could be materially and adversely affected. The requirement that a customer
perform separate product qualifications or a customer's inability to obtain a
sufficient supply of products from the Company may cause that customer to
satisfy its product requirements from the Company's competitors, which would
adversely affect the Company's results of operations.
The Company's ability to obtain satisfactory wafer and other supplies is
subject to a number of other risks. The Company's suppliers may be subject to
injunctions arising from alleged violations of third party intellectual property
rights. The enforcement of such an injunction could impede a supplier's ability
to provide
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wafers, components or packaging services to the Company. In addition, the
Company's flexibility to move production of any particular product from one
foundry to another can be limited in that such a move can require significant
re-engineering, which may take several quarters. These efforts also divert
engineering resources which otherwise could be dedicated to new product
development and adversely affect new product development schedules. Accordingly,
production may be constrained even though capacity is available at one or more
foundries. In addition, the Company could encounter supply shortages if sales
grow substantially. The Company uses domestic and offshore subcontractors for
die assembly of its semiconductor products purchased in wafer form, and for
assembly of its host adapter board products. The Company's reliance on
independent subcontractors to provide these services involves a number of risks,
including the absence of guaranteed capacity and reduced control over delivery
schedules, quality assurance and costs. The Company is also subject to the risks
of shortages and increases in the cost of raw materials used in the manufacture
or assembly of the Company's products. In addition, the Company may receive
orders for large volumes of products to be shipped within short periods, and the
Company may not have sufficient testing capacity to fill such orders.
Constraints or delays in the supply of the Company's products, whether because
of capacity constraints, unexpected disruptions at the Company's foundries or
subcontractors, delays in obtaining additional production at the existing
foundries or in obtaining production from new foundries, shortages of raw
materials, or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including effects
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS
Although the Company is currently not experiencing any difficulties in
obtaining sufficient foundry capacity due to the current abundance of worldwide
semiconductor fabrication capacity, the Company and the semiconductor industry
have in the past experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in or advances to wafer manufacturing companies in
exchange for guaranteed production capacity, or the formation of joint ventures
to own and operate or construct foundries or to develop certain products. Any of
these transactions would involve financial risk to the Company and could require
the Company to commit substantial capital or provide technology licenses in
return for guaranteed production capacity. The need to commit substantial
capital may require the Company to seek additional equity or debt financing. The
sale or issuance of additional equity or convertible debt securities could
result in dilution to the Company's stockholders. There can be no assurance that
such additional financing, if required, will be available when needed or, if
available, will be on terms acceptable to the Company.
RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET
A significant portion of the Company's host adapter board products are
currently used in high-performance file servers, workstations and other office
automation products. The Company's growth has been supported by increasing
demand for sophisticated I/O solutions which support database systems, servers,
workstations, Internet/intranet applications, multimedia and telecommunications.
Should there be a slowing in the growth of demand for such systems, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
As a supplier of controller products to manufacturers of computer
peripherals such as disk drives and other data storage devices, a portion of the
Company's business is dependent on the overall market for computer peripherals.
This market, which itself is dependent on the market for computers, has
historically been characterized by periods of rapid growth followed by periods
of oversupply and contraction. As a result, suppliers to the computer
peripherals industry from time to time experience large and sudden fluctuations
in demand for their products as their customers adjust to changing conditions in
their markets. If these fluctuations are not accurately anticipated, such
suppliers, including the Company, could produce excessive or
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insufficient inventories of various components which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INDUSTRY STANDARDS
The markets in which the Company and its competitors compete are
characterized by rapidly changing technology, evolving industry standards and
continuing improvements in products and services. The Company's future success
depends on its ability to enhance its current products and to develop and
introduce in a timely manner new products that keep pace with technological
developments and industry standards, compete effectively on the basis of price
and performance, adequately address OEM customer and end-user customer
requirements and achieve market acceptance. The Company believes that to remain
competitive in the future it will need to continue to develop new products,
which will require the investment of significant financial resources in new
product development. In anticipation of the implementation of Fibre Channel data
transfer interface technologies, the Company has invested and will continue to
invest significant resources in developing its integrated circuit single chip
PCI to Fibre Channel controllers. There can be no assurance that Fibre Channel
will be adopted as a predominant industry standard. The Company is aware of
products for alternative I/O standards and enabling technologies being developed
by its competitors. The Company believes that certain competitors, including
Symbios Logic, Inc., have extensive development efforts related to products
based on the Low Voltage Differential ("LVD") technology. There can be no
assurance that such technology will not be adopted as an industry standard and
if an alternative standard is adopted, there can be no assurance the Company
will timely develop products for such standard. Further, even if Fibre Channel
is adopted, there can be no assurance that the Company's integrated PCI to Fibre
Channel controller will be fully developed in time to be accepted for use in
Fibre Channel technology or that, if developed, will achieve market acceptance,
or be capable of being manufactured at competitive prices in sufficient volumes.
In the event that Fibre Channel is not adopted as an industry standard, or that
the Company's integrated circuit PCI to Fibre Channel controllers are not timely
developed or do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely affected.
The computer industry is characterized by various standards and protocols
that evolve with time. The Company's current products are designed to conform to
certain industry standards and protocols such as IDE, SCSI, Ultra SCSI and PCI.
In addition, the Company's Fibre Channel products have been designed to conform
with a standard that has yet to be uniformly adopted. The Company's products
must be designed to operate effectively with a variety of hardware and software
products supplied by other manufacturers, including microprocessors, operating
system software and peripherals. The Company depends on significant cooperation
with these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading microprocessor, systems and
peripheral suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability. If industry acceptance of these standards was
to decline or if they were replaced with new standards, and if the Company did
not anticipate these changes and develop new products, the Company's business,
financial condition and results of operations could be materially and adversely
affected.
The Company could experience delays in product development that are common
in the computer and semiconductor industry. Significant delays in product
development and release would adversely affect the Company's business, financial
condition and 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 and moving production
of existing products to different suppliers 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, expedite charges, in addition to lower sales and lower profits.
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IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company anticipates that its future growth may depend in part on its
ability to identify and acquire complementary businesses, technologies or
product lines that are compatible to those of the Company. Acquisitions involve
numerous risks, including identifying and pursuing acquisitions, difficulties in
the assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks associated with entering markets or conducting operations with which the
Company has no or limited direct prior experience, and the potential loss of key
employees of the acquired company. Moreover, there can be no assurance that the
anticipated benefits of an acquisition will be realized. There can be no
assurance that the Company will be effective in identifying and effecting
attractive acquisitions, assimilating acquisitions or managing future growth.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, all of which could materially adversely affect the Company's business,
financial condition, results of operations or stock price. With respect to the
possible amortization of goodwill, the Financial Accounting Standards Board
("FASB") has announced that it may make pooling of interests accounting
treatment for merger transactions more difficult to attain, or may abolish such
treatment altogether. If the FASB does limit or eliminate pooling of interests
accounting treatment, the Company's ability to consummate merger transactions
without incurring goodwill would be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the continued services
of its key engineering, sales, marketing and executive personnel, including
highly skilled semiconductor design personnel and software developers, and its
ability to identify and hire additional personnel. The loss of the services of
key personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that the
market for key personnel in the industries in which it competes is highly
competitive. In particular, the Company has experienced difficulty in attracting
and retaining qualified engineers and other technical personnel and anticipates
that competition for such personnel will increase in the future. There can be no
assurance that the Company will be able to attract and retain key personnel with
the skills and expertise necessary to develop new products in the future, or to
manage the Company's business, both in the United States and abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to various risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. The Company's export sales are invoiced in U.S.
dollars and, accordingly, if the relative value of the U.S. dollar in comparison
to the currency of the Company's foreign customers should increase, the
resulting effective price increase of the Company's products to such foreign
customers could result in decreased sales. There can be no assurance that any of
the foregoing factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS
Although the Company has patent protection on certain aspects of its
technology, it relies primarily on trade secrets, copyrights and contractual
provisions to protect its proprietary rights. There can be no assurance that
these protections will be adequate to protect its proprietary rights, that
others will not independently develop or otherwise acquire equivalent or
superior technology or that the Company can maintain such
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technology as trade secrets. There also can be no assurance that any patents the
Company possesses will not be invalidated, circumvented or challenged. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. The failure of the Company to protect
its intellectual property rights could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that patent or other intellectual property
infringement claims will not be asserted against the Company in the future.
Although patent and intellectual property disputes may be settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products, which would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, should the Company decide to, or be forced to, litigate such claims,
such litigation could be expensive and time consuming, could divert management's
attention from other matters or could otherwise have a material adverse effect
on the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation. The Company's supply of wafers and
other components can also be interrupted by intellectual property infringement
claims against its suppliers.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are referenced in Item 14(a).
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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 30, 1997 and March 31, 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended March 30, 1997. 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 30, 1997 and March 31, 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 30, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
May 9, 1997
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 30, 1997 AND MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1997 1996
------- -------
Cash and cash equivalents................................................ $19,091 $ 8,414
Accounts and notes receivable, less allowance for doubtful accounts
of $636 in 1997 and $506 in 1996....................................... 5,720 7,033
Inventories.............................................................. 4,794 6,670
Deferred income taxes.................................................... 1,149 648
Prepaid expenses and other current assets................................ 391 239
------- -------
Total current assets................................................... 31,145 23,004
Property and equipment, net.............................................. 5,043 5,520
Other assets............................................................. 775 15
------- -------
$36,963 $28,539
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................................... $ 3,994 $ 6,177
Accrued expenses......................................................... 7,115 3,218
Current installments of capitalized lease obligations.................... 225 275
------- -------
Total current liabilities.............................................. 11,334 9,670
Capitalized lease obligations, excluding current installments............ 352 576
Other noncurrent liabilities............................................. 924 2,016
------- -------
Total liabilities...................................................... 12,610 12,262
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares authorized (200,000
shares designated as Series A Junior Participating Preferred, $.001
par value); none issued and outstanding............................. -- --
Common stock, $.10 par value; 12,500,000 shares authorized; 5,840,701
and 5,557,598 shares issued and outstanding in 1997 and 1996,
respectively........................................................ 584 556
Additional paid-in capital............................................. 19,001 16,801
Retained earnings (accumulated deficit)................................ 4,768 (1,080)
------- -------
Total stockholders' equity.......................................... 24,353 16,277
------- -------
$36,963 $28,539
======= =======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
---------- ---------- ----------
Net revenues........................................... $ 68,927 $ 53,779 $ 57,675
Cost of sales.......................................... 38,151 34,413 34,285
--------- --------- ---------
Gross profit......................................... 30,776 19,366 23,390
--------- --------- ---------
Operating expenses:
Engineering and development.......................... 10,422 7,191 7,598
Selling and marketing................................ 6,372 6,490 7,541
General and administrative........................... 4,628 4,501 4,872
--------- --------- ---------
Total operating expenses.......................... 21,422 18,182 20,011
--------- --------- ---------
Operating income.................................. 9,354 1,184 3,379
Interest expense....................................... 125 153 146
Interest and other income.............................. 602 172 93
--------- --------- ---------
Income before income taxes........................... 9,831 1,203 3,326
Income tax provision................................... 3,983 537 1,361
--------- --------- ---------
Net income............................................. $ 5,848 $ 666 $ 1,965
========= ========= =========
Net income per common and equivalent share............. $ 0.93 $ 0.12 $ 0.35
========= ========= =========
Weighted average common and common equivalent shares... 6,315 5,737 5,567
========= ========= =========
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
-------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
----- ------ ---------- ------------ -------------
Balance as of 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 as of 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 as of March 31, 1996............................ 5,558 556 16,801 (1,080) 16,277
Net income.............................................. -- -- -- 5,848 5,848
Issuance of common stock................................ 283 28 2,200 -- 2,228
----- ------ ------- ------- ------
Balance as of March 30, 1997............................ 5,841 $ 584 $ 19,001 $ 4,768 $24,353
===== ====== ======= ======= ======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS)
1997 1996 1995
------- ------- -------
Cash flows from operating activities:
Net income....................................................... $ 5,848 $ 666 $ 1,965
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................... 3,023 2,452 2,445
Provision for doubtful accounts.................................. 129 23 625
Loss on disposals of property and equipment...................... 1,338 11 34
Benefit from deferred income taxes............................... (1,273) (561) (87)
Change in assets and liabilities:
Decrease (increase) in accounts receivable....................... 1,184 2,302 (3,976)
Decrease (increase) in inventories............................... 1,876 (123) (1,372)
Decrease (increase) in prepaid expenses and other current
assets........................................................ (152) (39) 30
Decrease (increase) in other assets.............................. (6) 463 (101)
Increase (decrease) in accounts payable.......................... (2,183) 1,240 (990)
Increase (decrease) in accrued expenses.......................... 3,897 1,681 (100)
Increase (decrease) in other noncurrent liabilities.............. (1,092) 635 1,381
------- ------- -------
Net cash provided by (used in) operating activities........... 12,589 8,750 (146)
------- ------- -------
Cash flows from investing activities -- purchases of property and
equipment........................................................ (3,866) (1,210) (1,282)
------- ------- -------
Cash flows from financing activities:
Principal payments under capital leases.......................... (274) (305) (278)
Proceeds from exercise of stock options.......................... 2,228 30 1
------- ------- -------
Net cash provided by (used in) financing activities........... 1,954 (275) (277)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............... 10,677 7,265 (1,705)
Cash and cash equivalents at beginning of year..................... 8,414 1,149 2,854
------- ------- -------
Cash and cash equivalents at end of year........................... $19,091 $ 8,414 $ 1,149
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest......................................................... $ 133 $ 101 $ 121
======= ======= =======
Income taxes..................................................... $ 3,881 $ 404 $ 252
======= ======= =======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL BUSINESS INFORMATION
QLogic Corporation ("QLogic" or the "Company") designs and supplies
semiconductor and board level I/O products. The Company's products provide a
high performance interface between computer systems and their attached data
storage peripherals, such as hard disk drives, tape drives, removable disk
drives, CD-ROM drives and RAID subsystems. QLogic provides complete input/output
("I/O") technology solutions by designing and marketing single chip controller
and adapter board products for both sides of the computer/peripheral device
interlink or "bus." The Company has targeted the high performance sector of the
I/O market, focusing primarily on the SCSI industry standard. The Company is
utilizing its I/O expertise to develop products for emerging I/O standards, such
as Fibre Channel. QLogic's products utilize various I/O standards to service the
needs of manufacturers and end users of various types of computer systems and
components, such as workstations, servers and data storage peripherals. The
Company provides high performance SCSI-based solutions and new I/O solutions
based on the emerging Fibre Channel standard, and is leveraging its
technological capabilities to provide solutions based on the IDE standard.
QLogic markets and distributes its products through a direct sales organization
supported by field application engineers, as well as through a network of
independent manufacturers' representatives and regional and international
distributors. The Company's primary OEM customers are major domestic and
international suppliers and manufacturers of servers, workstations and data
storage peripherals.
The Company is the successor to the Emulex Micro Devices division of Emulex
Corporation ("Emulex"). The Company was incorporated in Delaware in 1992 as
Emulex Micro Devices Corporation, a wholly owned subsidiary of Emulex, and, in
1993, substantially all of the assets of the Emulex Micro Devices division were
transferred to the Company. In February 1994, pursuant to its spinoff from
Emulex, the Company became a separate publicly-held corporation.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the financial statements of
QLogic Corporation and its wholly owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
QLogic's fiscal year ends on the Sunday nearest March 31. The fiscal years
ended March 30, 1997 ("fiscal 1997"), March 31, 1996 ("fiscal 1996") and April
2, 1995 ("fiscal 1995") each comprised 52 weeks.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with original maturities of
three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the present value of minimum lease payments.
Depreciation is calculated using the straight-line method over estimated useful
lives of two to seven years. Property and equipment held under capital leases
and leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the related asset.
Stock Option Plan
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
April 1, 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma net income per share disclosures for employee
stock option grants made in fiscal 1996 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
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
Revenue is recognized upon product shipment. Royalty revenue is recognized
when earned and receipt is assured.
The customer's obligation to pay the Company, and the payment terms, are
set at the time of shipment and are not dependent on subsequent resale of the
Company's product. However, certain of the Company's sales were made to
distributors under agreements allowing limited right of return and/or price
protection. The Company warrants its products, on a limited basis, to be free
from defects for periods of one to five years from date of shipment. The Company
estimates and establishes allowances and reserves, by a current charge to
income, for product returns, warranty obligations, doubtful accounts, and price
adjustments.
Research and Development
Research and development costs, including costs related to the development
of new products and process technology, are expensed as incurred.
Capitalized Software Costs
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," provides for the capitalization of certain
software development costs once technological feasibility is established. The
cost so capitalized is then amortized on a straight-line basis over the
estimated product life,
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
or the ratio of current revenues to total projected product revenues, whichever
is greater. No internal costs have been capitalized as the impact on the
consolidated financial statements for all periods presented is immaterial.
Income Taxes
Income taxes are accounted for 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 and operating loss and tax credit carryforwards. 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.
Net Income per Share
Net income per common and equivalent share for the years ended March 30,
1997, 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 10) 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 30, 1997, March 31, 1996 and April 2, 1995.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements and increasing the comparability of EPS
data on an international basis. Some of the changes made to simplify the EPS
computations include: (a) eliminating the presentation of primary EPS and
replacing it with basic EPS, with the principal difference being that common
stock equivalents are not considered in computing basic EPS, (b) eliminating the
modified treasury stock method and the three percent materiality provision and
(c) revising the contingent share provisions and the supplemental EPS data
requirements. SFAS No. 128 also makes a number of changes to existing disclosure
requirements. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. The Company
does not believe the implementation of SFAS No. 128 will have a material effect
on net income per share.
Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 requires all entities to disclose
the fair value of financial instruments, both assets and liabilities recognized
and not recognized on the balance sheet, for which it is practicable to estimate
fair value. SFAS 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 30, 1997, the fair value of all financial
instruments approximated carrying value.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
fiscal 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in
30
31
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations or liquidity.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
NOTE (2) INVENTORIES
Components of inventories are as follows:
1997 1996
------- -------
Raw materials............................................ $ 2,931 $ 2,122
Work in progress......................................... 1,117 1,455
Finished goods........................................... 746 3,093
------- -------
$ 4,794 $ 6,670
======= =======
NOTE (3) PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
1997 1996
------- -------
Product and test equipment............................... $10,970 $ 9,285
Furniture and fixtures................................... 1,219 1,086
Semiconductor designs.................................... 1,802 2,552
Leasehold improvements................................... 447 842
Land and buildings....................................... 358 358
------- -------
14,796 14,123
Less accumulated depreciation and amortization........... 9,753 8,603
------- -------
$ 5,043 $ 5,520
======= =======
NOTE (4) ACCRUED EXPENSES
Components of accrued expenses are as follows:
1997 1996
------- -------
Compensation............................................. $ 3,027 $ 1,850
Taxes.................................................... 1,443 53
Deferred revenue......................................... 999 753
Other.................................................... 1,646 562
------- -------
$ 7,115 $ 3,218
======= =======
31
32
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (5) INCOME TAXES
The components of the income tax provision are as follows:
1997 1996 1995
------- ----- ------
Federal:
Current.................................... $ 4,479 $ 872 $1,216
Deferred................................... (1,059) (453) (64)
State:
Current.................................... 777 226 232
Deferred................................... (214) (108) (23)
------- ----- ------
$ 3,983 $ 537 $1,361
======= ===== ======
The effective income tax on income before income taxes differs from
expected Federal income tax for the following reasons:
1997 1996 1995
------ ----- ------
Expected income tax provision at 34%.............. $3,343 $ 409 $1,130
State income tax, net of Federal tax benefit...... 370 74 138
Tax benefit of net operating loss................. (13) (26) (84)
Tax benefit of research and development and other
credits......................................... -- (391) (729)
Increase (decrease) in valuation allowance........ (14) 312 813
Nondeductible permanent differences............... 20 39 27
Other, net........................................ 277 120 66
------ ----- ------
$3,983 $ 537 $1,361
====== ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
1997 1996
------ ------
Deferred tax assets:
Alternative minimum tax credit........................... $ 92 $ 92
Reserves not currently deductible........................ 2,504 1,555
Depreciation............................................. 980 940
Research and development credit.......................... 1,085 1,085
Other.................................................... 85 101
------ ------
Total gross deferred tax assets..................... 4,746 3,773
Less valuation allowance................................. 1,904 1,918
------ ------
2,842 1,855
------ ------
Deferred tax liabilities:
Research and development expenditures.................... 516 875
State tax expense........................................ 405 332
------ ------
Total gross deferred tax liabilities................ 921 1,207
------ ------
Net deferred tax assets.................................... $1,921 $ 648
====== ======
32
33
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company has approximately $1,085 of research and development credit
carryovers as of March 30, 1997. 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.
The Company also has approximately $150 of net operating loss carryovers as
of March 30, 1997. Utilization of these carryovers will be limited to
approximately $50 a year over the next three 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 as of March 30, 1997. Management believes
the existing net deductible temporary differences will reverse during periods in
which the Company generates net taxable income; however, there can be no
assurance that the Company will generate any earnings or any specific level of
continuing earnings in future years.
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 of 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
30, 1997 and March 31, 1996 totaled $458 and $1,760 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
33
34
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
January 1, 1996, at the rate applicable to underpayments of Federal income
taxes, which was 9% as of March 30, 1997. Interest due Emulex is payable
quarterly. There is no accrued interest payable to Emulex at March 30, 1997. The
total amount of accrued interest payable to Emulex as of March 31, 1996 was $28,
which is included in accounts payable in the accompanying balance sheets.
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 was zero.
NOTE (7) EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
QLogic's export revenues (primarily to Pacific Rim countries) were
approximately $31,301, $29,800 and $35,765, representing 45%, 55% and 62% of net
revenues for 1997, 1996 and 1995, respectively. The following table represents
sales to customers accounting for greater than 10% of Company net revenues, or
customer accounts receivable accounting for greater than 10% of Company accounts
receivable.
ACCOUNTS
NET REVENUES RECEIVABLE
----------------------- --------------
1997 1996 1995 1997 1996
----- ----- ----- ----- -----
Customer 1........................................... 20% 13% N/A 30% 15%
Customer 2........................................... 19% 42% 24% N/A 34%
Customer 3........................................... 16% N/A N/A N/A N/A
Customer 4........................................... 10% 11% N/A 19% 17%
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 25, 1996, the Company obtained an unsecured line of credit from a
bank. Maximum borrowings under the line of credit are $7,500 subject to a
borrowing base based on accounts receivable, with a $3,000 sub-limit for letters
of credit. Interest on outstanding advances is payable monthly at the bank's
prime rate plus 0.5%. The line of credit expires on July 5, 1997. 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 30, 1997. 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 30, 1997. The Company expects to extend the line of credit through the end
of fiscal 1998.
34
35
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Leases
The Company leases certain equipment under long-term noncancelable 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 $1,993 and $2,299 as of March
30, 1997 and March 31, 1996, respectively. The related accumulated amortization
was $1,819 and $1,425 as of March 30, 1997 and March 31, 1996, respectively.
Future minimum noncancelable lease commitments are as follows:
CAPITAL OPERATING
LEASES LEASES
------ ---------
Fiscal year:
1998............................................ $270 $ 712
1999............................................ 234 712
2000............................................ 145 415
---- ------
Total minimum lease payments.............................. 649 1,839
======
Less amounts representing interest (at rates ranging from
4% to 9%)............................................... 72
----
Present value of future minimum capitalized lease
obligations............................................. 577
Less current installments under capitalized lease
obligations............................................. 225
----
Capitalized lease obligations, excluding current
installments............................................ $352
====
Rent expense for fiscal 1997, fiscal 1996 and fiscal 1995 totaled $712,
$653 and $689, respectively.
Contingencies
From time to time, the Company is a party to ordinary disputes arising in
the normal course of business. The Company does not believe that the outcome of
these matters will have a material adverse effect on the Company's financial
position, results of operations or liquidity.
NOTE (9) EMPLOYEE RETIREMENT SAVINGS PLAN
The Company has 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. The Company's contributions match up to 3% of a
participant's compensation. The Company's direct contributions on behalf of its
employees totaled $218, $193 and $205 in fiscal 1997, fiscal 1996 and fiscal
1995, respectively.
NOTE (10) STOCKHOLDERS' EQUITY
Shareholder Rights Plan
On June 4, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan, pursuant to which preferred stock rights (the "Rights") were
distributed in the form of a dividend to stockholders of record on the close of
business on June 20, 1996 (the "Dividend Date") on the basis of one Right for
each share of the Company's common stock (the "Common Stock") held. One Right
will also attach to each share
35
36
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of Common Stock issued subsequent to the Dividend Date and prior to the
Distribution Date (as defined below).
In general, the Rights become exercisable or transferable only upon the
occurrence of certain events related to changes in ownership of the Common
Stock. Once exercisable, each Right entitles its holder to purchase from the
Company one one-hundredth of a share ("Unit") of the Company's Series A Junior
Participating Preferred Stock, par value $0.001 per share, 200,000 shares
authorized and no shares issued or outstanding (the "Series A Preferred Stock")
at a purchase price of $45.00 per Unit, subject to adjustment. The Rights will
separate from the Common Stock and become exercisable or transferable on a
distribution date (the "Distribution Date"), which will occur on the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired beneficial ownership
of securities representing 15% or more of the Common Stock or (ii) 10 business
days following the commencement of a tender or exchange offer that would result
in a person or group of related persons becoming an Acquiring Person. Upon the
occurrence of certain other events related to changes in the ownership of the
Common Stock, each holder of a Right would be entitled to purchase shares of the
Common Stock, or an acquiring corporation's common stock, having a market value
equal to two times the exercise value of the Right.
The Rights expire on the earliest of (i) June 4, 2006, (ii) consummation of
a merger transaction with a person or group who acquires Common Stock pursuant
to a transaction approved by a majority of the disinterested members of the
Company's Board of Directors, and (iii) redemption of the Rights. Subject to
certain conditions, the Rights may be redeemed by the Company's Board of
Directors at any time at a price of $0.001 per Right. The Rights are not
currently exercisable and trade together with the shares of Common Stock
associated therewith.
The Rights, if exercised, will cause a substantial dilution to the equity
interest in QLogic to a person's or group's ownership interest in the Company's
Common Stock that attempts to acquire the Company on terms not approved by the
Company's Board of Directors.
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"). Additionally, the Company issues
options on an ad hoc basis from time to time.
The Stock Awards Plan provides for the issuance of incentive and
nonqualified 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
1,350,000 shares are reserved for issuance under the Stock Awards Plan. As of
March 30, 1997, no shares of restricted stock were issued, options to purchase
773,089 shares of Common Stock were outstanding, and there were 332,749 shares
available for future grants.
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 as of March 30, 1997. All stock options granted under the
Company's Stock Awards Plan have ten-year terms and vest ratably over four years
from the date of grant.
Under the terms of the Director Plan, new directors receive an option grant
at fair market value to purchase 8,000 shares of Common Stock upon election to
the Board, nonemployee directors (other than the
36
37
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Chairman of the Board) receive annual grants of options to purchase 3,000 shares
of Common Stock, and the Chairman of the Board receives annual grants of options
to purchase 5,000 shares of Common Stock. A total of 200,000 shares have been
reserved for issuance under the Director Plan. As of March 30, 1997, options for
a total of 55,666 shares were outstanding and the remaining 98,500 shares were
available for grant. All stock options granted under the Director Plan have
10-year terms and vest immediately upon grant.
As of March 30, 1997, options to purchase 10,000 shares of Common Stock
granted outside of the Stock Option Plans are outstanding.
Stock option activity in fiscal 1997, fiscal 1996 and fiscal 1995 under the
Company's Stock Option Plans was as follows:
AVERAGE
OPTION
PRICE
SHARES PER SHARE
-------- -----------
Options outstanding as of April 3, 1994.............. 757,927 $ 8.31
Granted............................................ 193,900 5.27
Canceled........................................... (79,073) 8.40
Exercised.......................................... (1,753) 1.16
-------- ------
Options outstanding as of April 2, 1995.............. 871,001 7.66
Granted............................................ 395,983 5.66
Canceled........................................... (407,346) 7.35
Exercised.......................................... (5,140) 5.72
-------- ------
Options outstanding as of March 31, 1996............. 854,498 6.89
Granted............................................ 309,410 13.71
Canceled........................................... (42,800) 8.00
Exercised.......................................... (282,353) 7.88
-------- ------
Options outstanding as of March 30, 1997............. 838,755 $ 9.00
======== ======
As of March 30, 1997 and March 31, 1996, the number of options exercisable
was 282,273 and 365,553, respectively, and the weighted-average exercise price
of those options was $6.63 and $7.89, respectively.
WEIGHTED- WEIGHTED-
OUTSTANDING AVERAGE EXERCISABLE AVERAGE
AS OF EXERCISE REMAINING AS OF EXERCISE
MARCH 30, PRICE CONTRACTUAL MARCH 30, PRICE
RANGE OF EXERCISE PRICES 1997 PER OPTION LIFE (YEARS) 1997 PER OPTION
-------------------------------- ------------ ----------- ------------- ------------- -----------
$ 4.50 to $ 5.00................ 184,426 $ 4.83 7.90 84,604 $ 4.86
$ 5.01 to $ 7.56................ 206,601 6.13 7.68 101,317 6.23
$ 7.57 to $11.13................ 217,728 8.92 7.68 88,352 8.34
$11.14 to $24.38................ 230,000 14.98 9.35 8,000 11.49
------- ------ ---- ------- ------
$ 4.50 to $24.38................ 838,755 $ 9.00 8.19 282,273 $ 6.63
======= ====== ==== ======= ======
37
38
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company applies APB Opinion No. 25 in accounting for its Stock Option
Plans and, accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
1997 1996
------ ------
Net income as reported..................................... $5,848 $ 666
Assumed stock compensation cost............................ 2,329 1,244
------ ------
Pro forma net income (loss)................................ $3,519 $ (578)
====== ======
Net income per share as reported........................... $ 0.93 $ 0.12
Pro forma net income (loss) per share...................... $ 0.56 $(0.10)
====== ======
Pro forma net income (loss) reflects only options granted in fiscal 1997
and fiscal 1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net income
(loss) amounts presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options granted
prior to April 3, 1995 is not considered.
The Company uses Black-Scholes option-pricing model for estimating the fair
value of its compensation instruments. The following represents the
weighted-average fair value of options granted and the assumptions used for the
calculation:
1997 1996
-------- -------
Weighted-average fair value per option granted.......... $ 7.6416 $3.1214
Average exercise price per option granted............... $13.7131 $5.6802
Stock volatility........................................ 0.5644 0.5644
Risk-free interest rate................................. 6.69% 6.11%
Annual rate of forfeiture............................... 20% 20%
Expected life (in years)................................ 5.00 5.00
Stock dividend yield.................................... 0.00% 0.00%
The fair value of each option grant, as defined by SFAS No. 123, is
estimated on the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated fair value on the grant
date.
38
39
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (11) CONDENSED QUARTERLY RESULTS (UNAUDITED)
The following summarizes certain unaudited quarterly financial information
for fiscal 1997, fiscal 1996 and fiscal 1995.
THREE MONTHS ENDED
----------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
------- --------- -------- -------
FISCAL 1997:
Net revenues....................... $15,740 $16,725 $17,431 $19,031
Operating income................... 1,592 1,872 2,656 3,234
Net income......................... 967 1,178 1,677 2,026
Net income per share............... 0.16 0.20 0.26 0.32
======= ======= ======= =======
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
======= ======= ======= =======
39
40
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 1997
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, for information
relating to certain relationships and related transactions. Such information is
incorporated herein by reference.
40
41
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 30, 1997, March 31, 1996 and April 2, 1995 are filed as part
of this report:
FINANCIAL STATEMENT INDEX
FINANCIAL STATEMENT PAGE NUMBER
------------------- -----------
Independent Auditors' Report.................................................... 23
Consolidated Balance Sheets as of March 30, 1997 and March 31, 1996............. 24
Consolidated Statements of Income for the years ended March 30, 1997, March 31,
1996 and April 2, 1995........................................................ 25
Consolidated Statements of Stockholders' Equity for the years ended March 30,
1997, March 31, 1996 and April 2, 1995........................................ 26
Consolidated Statements of Cash Flows for the years ended March 30, 1997, March
31, 1996 and April 2, 1995.................................................... 27
Notes to Consolidated Financial Statements...................................... 28
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company for
the years ended March 30, 1997, March 31, 1996 and April 2, 1995 is filed as
part of this report:
PAGE NUMBER OF THIS REPORT
--------------------------
Schedule II -- Valuation and Qualifying Accounts...... 44
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.
41
42
(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 Stocks 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 Corporating Savings Plan.*
10.9 Form of QLogic Corporating 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.***
22.1 Subsidiary of the registrant.
23.1 Consent of Independent Auditors.
(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.
- ---------------
* 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 exhibits to Registrant's Annual Report on Form 10-K for
the year ended April 2, 1995.
**** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended March 31, 1996 and is incorporated herein by reference.
42
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QLOGIC CORPORATION
By: /s/ H.K. DESAI
------------------------------------
H.K. Desai
President and Chief Executive
Officer
Date: June 20, 1997
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 20, 1997.
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 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
43
44
SCHEDULE II
QLOGIC CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 30, 1997, MARCH 31, 1996 AND APRIL 2, 1995
(IN THOUSANDS)
ADDITIONS DEDUCTIONS--
BALANCE AT CHARGED TO AMOUNTS
BEGINNING COSTS AND WRITTEN OFF/ BALANCE AT
OF PERIOD EXPENSES RECOVERED END OF PERIOD
---------- ---------- ------------ -------------
CLASSIFICATION:
Year ended March 30, 1997
Allowance for doubtful accounts................. $ 506 $ 129 $ 1 $ 636
Inventory reserves.............................. $1,841 $2,964 $ (2,483) $ 2,322
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
44
45
EXHIBIT INDEX
PAGE IN
SEQUENTIALLY
EXHIBIT NUMBERED
NO. ITEM CAPTION COPY
- ------- -------------------------------------------------------------------- ------------
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 Stocks 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 Corporating Savings Plan.*...........................
10.9 Form of QLogic Corporating 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***........................
22.1 Subsidiary of the registrant........................................
23.1 Consent of Independent Auditors.....................................
- ---------------
* 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 exhibits to Registrant's Annual Report on Form 10-K for
the year ended April 2, 1995.
**** Previously filed as an exhibit to Registrant's annual Report on Form 10-K
for the year ended March 31, 1996 and is incorporated herein by reference.
46