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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0537669
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
3545 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 438-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.05 PER SHARE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of May 23, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,016,886,847.
As of May 23, 1999, the registrant had 17,979,467 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference in
the Parts of this report indicated below:
Part III, Items 10, 11, 12 and 13 -- Definitive proxy statement for the 1999
Annual Meeting of Stockholders which will
be filed with the Securities and Exchange
Commission within 120 days after the close
of the 1999 year.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
QLogic Corporation was organized as a Delaware corporation in 1992. Unless
the context indicates otherwise, the "Company" and "QLogic" each refer to the
Registrant and its subsidiaries.
All references to years refer to the Company's fiscal years ended March 28,
1999, March 29, 1998 and March 30, 1997, as applicable, unless the calendar
years are specified. Effective February 15, 1999, the Company completed a
two-for-one stock split. All shares and per share data has been retroactively
adjusted to reflect the stock split.
OVERVIEW
QLogic is a leading designer and supplier of semiconductor and board level
input/output, or I/O, and enclosure management products. The Company's I/O
products provide a high performance interface between computer systems and their
attached data storage peripherals, such as hard disk and tape drives, removable
disk drives and redundant array of independent disks, or 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." In addition, the Company
provides enclosure management products that monitor and communicate management
information related to components that are critical to computer system and
storage subsystem reliability and availability. 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 designs are based on multiple 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 integrated drive
electronics standard, or IDE standard. The Company believes that its
technological leadership, extensive involvement in its customers' product
development process and the ease of migration of its SCSI-based products to its
new I/O products position the Company to provide additional I/O solutions to its
existing customer base. The Company believes that these attributes also provide
it with competitive advantages in establishing new relationships with additional
original equipment manufacturers, or OEMs, for both computer systems and data
storage peripherals. 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
Compaq.
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
increased 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 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 and multiple data
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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 peripherals.
In response to the increased data throughput required by networks and
workstations, SCSI was developed and adopted as the industry high performance
I/O communications 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
following factors: the increased variety of higher performance peripheral
devices and the continual shift toward higher capacity and higher data rate disk
drives; the demand for I/O interfacing capabilities with 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 "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.
The continuing evolution towards higher performance computer systems has
led to the development of new connectivity solutions that provide even greater
data interchange between computer systems and data storage peripherals. 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 peripherals to extend up
to 10 kilometers. Additionally, Fibre Channel is gaining acceptance as a widely
adopted standard in the Storage Area Network (SAN) environment. SANs link
physically separated storage devices to servers via a dedicated network. The
Company believes Fibre Channel will likely be the I/O technology of choice for
larger, higher performance data and network applications, such as in the SAN
environment, while SCSI-based products will continue to be used in applications
requiring less 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 turnkey
basis or with minimum 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 sold and 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 validation and development cycles. By including the
I/O system providers in
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their planning and development process, manufacturers not only ensure
compatibility between product lines but also reduce the average time to market
for their products.
With the continuing evolution of high performance computer systems and data
storage peripherals, the need for conveying management information about the
status of those components has fueled the growth in the enclosure management
market. In 1996, OEMs adopted the SAF-TE (SCSI Accessed Fault -- Tolerant
Enclosure) standard for enclosure management, which standardized requirements
for server and storage subsystem vendors. While many of the RAID subsystems
shipped contained a proprietary design for the enclosure management function,
they were not SAF-TE standard compliant. Today, enclosure management solutions,
which are SAF-TE compliant, are becoming a standard feature in the full range of
servers and storage subsystems.
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 12 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. During fiscal 1997 and 1998 the
Company introduced products and intellectual property based on IDE standards to
address additional I/O needs of its OEM customer base. During 1999, the
Company's Fibre Channel solutions were incorporated into several SAN
environments by server and peripheral OEMs.
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, in addition to 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. 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 and enclosure management product markets.
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PRODUCTS
QLogic designs and supplies semiconductor and board level I/O solutions for
peripheral and computer systems. The Company's I/O products have traditionally
been based on the SCSI standard, and the Company has expanded its product lines
to include products based on the Fibre Channel and IDE standards. The Company
also designs and supplies semiconductor enclosure management solutions.
PRODUCT DESCRIPTION
- ----------------------------------------------------------------------------------------------------
SCSI Fast Architecture (FAS) - First introduced in 1991
- Single chip general purpose controllers
- Integrated DMA controller and SCSI processor
- Supports Fast and Ultra SCSI transfer rates (up to
40MB/sec)
- Supports 8- or 16-bit data handling
- May be used in host or peripheral applications
- ----------------------------------------------------------------------------------------------------
SCSI Triple Embedded Controllers (TEC) - First introduced in 1991
- Single chip disk controllers
- Integrated buffer controller, formatter and SCSI
processor
- Powerful on-chip data error correction
- Supports Fast and Ultra SCSI transfer rates (up to
40MB/sec)
- ----------------------------------------------------------------------------------------------------
Fibre Channel Triple Embedded Controller - First introduced in 1997
(FTEC) - Single chip disk controllers
- Integrated buffer controller, formatter, fibre channel
processor, and dual loop transceivers
- Powerful on-chip data error correction
- Supports FC-AL, 100MB/sec
- ----------------------------------------------------------------------------------------------------
IDE Triple Embedded Controller (ATEC) - First introduced in 1997
- Single chip disk controllers
- Integrated buffer controller, formatter, and IDE
processor
- Powerful on-chip data error correction
- Supports ATA and Ultra/33
- ----------------------------------------------------------------------------------------------------
Intelligent SCSI Processor (ISP) - First introduced in 1992
Host Adapter Chips - Embedded RISC single chip solution
- Supports latest SCSI standards
- Supports transfer rates up to 40MB/sec
- Supports 8- or 16-bit data handling
- Supports direct PCI and SBus connection
- Update Fibre Channel evaluation units, which operate
at transfer rates up to 100 MB/sec
- ----------------------------------------------------------------------------------------------------
QLA Host Adapter Boards - First introduced in 1993
- Full line of host adapter cards with direct PCI and
Sbus connection
- Supports latest SCSI standards
- Incorporates the Company's ISP host adapter chips
- Provides a fully integrated, high performance board
level I/O interface solution
- Update Fibre Channel evaluation units, which operate
at transfer rates up to 100 MB/sec
- ----------------------------------------------------------------------------------------------------
Guardian Enclosure Management (GEM) - First introduced in 1996
- Industry's first single-chip implementation of SAF-TE
specification
- Industry's first enclosure management controller for
Ultra2 SCSI
- ----------------------------------------------------------------------------------------------------
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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.
Throughout 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 may be permitted
to return to the Company a portion of the products purchased by them. In
addition, the Company may provide 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.
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 amount 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.
International sales of the Company's products accounted for approximately
53%, 42%, and 45%, of net revenues for fiscal years 1999, 1998, and 1997,
respectively. See also "Factors That May Affect Future Results -- Risk of Doing
Business in International Markets." See Note (12) to Consolidated Financial
Statements. International sales are denominated in U.S. dollars. Due to its
relatively high proportion of 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
predominantly engaged in the development of integrated circuit I/O controllers
for additional I/O standards and enabling technologies, such as Fibre Channel,
Ultra SCSI, other new parallel SCSI I/Os and Ultra IDE. The Company intends to
broaden its product lines while continuing to allow its customers to transition
rapidly to Fibre Channel and future emerging I/O standards.
At March 28, 1999, the Company employed approximately 153 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.
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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 $28.6 million at March
28, 1999, compared to approximately $22.1 million at March 29, 1998. These
backlog figures include only orders scheduled for shipment within six months, of
which the majority is scheduled for delivery within 90 days. 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.
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. Most 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 effected.
The Company currently competes primarily with Texas Instruments, Adaptec,
Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre Channel
sector of the I/O market, the Company competes primarily with Texas Instruments,
LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the IDE sector,
the Company competes with ST Microelectronics and Cirrus Logic, Inc. In the
enclosure management sector, the Company competes primarily with the Symbios
division of LSI Logic and the Serano division of Vitesse Semiconductor
Corporation. 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 own 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
computer and peripheral Application Specific Integrated Circuit (ASIC) 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
computer and peripheral ASIC's applications, particularly SCSI and Fibre
Channel. The Company believes competitive
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factors in design wins are time to market, performance, product features, price,
quality, technical support and ease of migration path to other computer and
peripheral ASIC's 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 computer and peripheral ASIC's 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 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 a
portion of their foundry capacity sufficient to meet the Company's needs and to
produce products of acceptable quality and with satisfactory 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 all 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 in kit form, and printed circuit boards. The Company
provides these items 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
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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 eight patents issued and three 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 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 289 employees as of March 28, 1999. 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 principal product development, operations, sales and
corporate offices are currently located in three adjacent buildings comprising
approximately 97,000 square feet in Costa Mesa, California. The Company occupies
the buildings pursuant to leases that expire in October 1999. The Company has
six one-month options to extend the Costa Mesa lease through April 2000.
Additionally, the Company has leased a design center in Austin, Texas comprising
a 5,973 square foot facility. In August 1998, the Company entered into a
ten-year lease to relocate its corporate headquarters to an approximately
165,000 square foot campus-style facility in Aliso Viejo, California. The lease
commences upon completion of the construction of the first building, currently
estimated to be completed November 1999.
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
any current legal proceedings will have a material adverse effect on the
Company's business, financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1999 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...................... 53 Chairman of the Board, Chief Executive Officer and President
Thomas R. Anderson.............. 54 Vice President and Chief Financial Officer
Michael R. Manning.............. 44 Secretary and Treasurer
David Tovey..................... 54 Vice President and General Manager, Peripheral Products
Lawrence F. Fortmuller.......... 50 Vice President and General Manager, Computer Products
David M. Race................... 43 Vice President and General Manger, Enclosure Management
Products
Mark A. Edwards................. 40 Vice President, Sales and Corporate Marketing
Officers of the Company are elected annually by the Board of Directors for
each year period, or portion thereof, and serve at the discretion of the Board
of Directors of the Company.
Mr. Desai joined the Company in August 1995 as President and Chief
Technical Officer of QLogic and President of QLogic Foreign Sales Corporation.
He was subsequently promoted to President and Chief Executive Officer, became a
Director in January 1996 and Chairman of the Board in May 1999. 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 Chief Financial Officer.
Prior to joining the Company, Mr. Anderson was Executive Vice President, Chief
Operating Officer and Chief Financial Officer of HIARC, Inc., a software startup
company. From October 1990 to December 1992, he was corporate Senior Vice
President and Chief Financial Officer at Distributed Logic Corporation, a
manufacturer of tape and disk controllers and subsystems. From June 1982 to
April 1990, he held various positions, the latest of which was corporate Vice
President and Chief Financial Officer with Cipher Data Products, Inc., a
supplier of tape and optical disk drives to the computer industry.
Mr. Manning joined Emulex, a network product manufacturer (QLogic's former
parent company) in July 1983 as Director of Tax. He was named Senior Director
and Treasurer of Emulex in April 1991 and Secretary in August 1992. Mr. Manning
joined the Company in June 1993. Prior to joining Emulex, Mr. Manning was a Tax
Manager at KPMG LLP, independent certified public accountants.
Mr. Tovey joined the Company in April 1994 as Vice President Marketing, and
was named Vice President and General Manager of Peripheral Product in July 1996.
From March 1985 to April 1994, he held various positions with Toshiba America
Information Systems, a computer system manufacturer including director of
technology planning and Vice President of OEM marketing. Prior to Toshiba, Mr.
Tovey held various marketing and sales management positions with Unisys
Corporation.
Mr. Fortmuller joined the Company in October 1996 as Vice President and
General Manager, Computer Products. From June 1987 to October 1996, Mr.
Fortmuller held management positions at AST Research, Inc., a computer
manufacturer, including Vice President, Americas Marketing.
Mr. Race joined the Company in August 1998 as Vice President and General
Manager, Enclosure Management Products. Mr. Race was Co-founder and President of
Silicon Design Resources, Inc. (SDR) from January 1996 until August 1998, when
SDR was acquired by QLogic. From January 1996 to August 1998 Mr. Race held
positions at Software.com, and Distributed Processing Technology from March 1989
to January 1996.
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Mr. Edwards joined the Company in September 1996 as Vice President of Sales
and Corporate Marketing. Prior to joining the Company, Mr. Edwards worked at
Unisys from August 1993 to September 1996 where he was most recently Vice
President, Sales & Marketing for the Storage Systems Division. Mr. Edwards has
held a number of sales and marketing positions in the U.S. and Europe with
Unisys, Digital Equipment Corporation and Zitel.
None of the executive officers of the Company has any family relationship
with any other executive officer of the Company or director of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND PRICES
Shares of common stock of the Company are traded and quoted in the NASDAQ
National Market System under the symbol QLGC. The following table sets forth the
range of high and low sales prices per share of common stock of the Company for
each quarterly period of the two most recent years as reported on NASDAQ.
Share prices have been adjusted to reflect the two-for-one stock split of
the Company's common stock which was effected February 15, 1999.
SALES PRICES
------------------
HIGH LOW
------- -------
FISCAL 1999
First Quarter............................................... 23.5625 17.5000
Second Quarter.............................................. 35.3905 13.9375
Third Quarter............................................... 67.1250 25.2500
Fourth Quarter.............................................. 81.5000 46.5000
FISCAL 1998
First Quarter............................................... 13.2500 9.3750
Second Quarter.............................................. 22.6875 12.3750
Third Quarter............................................... 22.6875 12.2500
Fourth Quarter.............................................. 21.0000 12.0000
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of May 23, 1999 was 345.
DIVIDENDS
The Company has never paid cash dividends on its common stock and has no
current intention to do so.
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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 28, MARCH 29, MARCH 30, MARCH 31, APRIL 2,
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS DATA
Net revenues.......................... $117,182 $ 81,393 $68,927 $53,779 $57,675
Cost of revenues...................... 42,603 34,049 38,151 34,413 34,285
-------- -------- ------- ------- -------
Gross profit........................ 74,579 47,344 30,776 19,366 23,390
-------- -------- ------- ------- -------
Operating expenses:
Engineering and development......... 24,358 15,601 10,422 7,191 7,598
Selling and marketing............... 11,062 8,707 6,372 6,490 7,541
General and administrative.......... 5,794 4,550 4,628 4,501 4,872
-------- -------- ------- ------- -------
Total operating expenses.... 41,214 28,858 21,422 18,182 20,011
-------- -------- ------- ------- -------
Operating income.................... 33,365 18,486 9,354 1,184 3,379
Interest expense...................... 84 109 125 153 146
Interest and other income............. 5,657 3,453 602 172 93
-------- -------- ------- ------- -------
Income before income taxes.......... 38,938 21,830 9,831 1,203 3,326
Income tax provision.................. 13,239 8,422 3,983 537 1,361
-------- -------- ------- ------- -------
Net income............................ $ 25,699 $ 13,408 $ 5,848 $ 666 $ 1,965
======== ======== ======= ======= =======
Basic net income per share (1)........ $ 1.47 $ 0.88 $ 0.51 $ 0.06 $ 0.18
-------- -------- ------- ------- -------
Diluted net income per share (1)...... $ 1.38 $ 0.83 $ 0.48 $ 0.06 $ 0.18
-------- -------- ------- ------- -------
SELECTED BALANCE SHEET DATA
Working capital....................... $110,687 $ 90,749 $19,811 $13,334 $10,564
Total assets.......................... $172,923 $136,242 $36,963 $28,539 $24,592
Long-term capitalized lease
obligations, excluding current
installments........................ $ -- $ 141 $ 352 $ 576 $ 853
Other non-current liabilities......... $ -- $ 466 $ 924 $ 2,016 $ 1,381
Total stockholders' equity............ $152,684 $118,049 $24,353 $16,277 $15,581
- ---------------
(1) Effective February 15, 1999, the Company completed a two-for-one stock
split. All per share data has been retroactively restated to reflect the
stock split.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward-looking statements. The Company undertakes no obligation to update the
information contained in this Item 7.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the dollars and
percentage of total revenues in the Company's consolidated statements of income:
FISCAL YEAR ENDED
---------------------------------------------------------
MARCH 28, 1999 MARCH 29, 1998 MARCH 30, 1997
----------------- ---------------- ----------------
(IN THOUSANDS)
Net revenues........................ $117,182 100.0% $81,393 100.0% $68,927 100.0%
Cost of revenues.................... 42,603 36.4 34,049 41.8 38,151 55.3
-------- ----- ------- ----- ------- -----
Gross profit...................... 74,579 63.6 47,344 58.2 30,776 44.7
-------- ----- ------- ----- ------- -----
Operating expenses:
Engineering and development....... 24,358 20.8 15,601 19.2 10,422 15.1
Selling and marketing............. 11,062 9.4 8,707 10.7 6,372 9.3
General and administrative........ 5,794 4.9 4,550 5.6 4,628 6.7
-------- ----- ------- ----- ------- -----
Total operating expenses....... 41,214 35.1 28,858 35.5 21,422 31.1
-------- ----- ------- ----- ------- -----
Operating income............... $ 33,365 28.5% $18,486 22.7% $ 9,354 13.6%
======== ===== ======= ===== ======= =====
NET REVENUES
The Company's net revenues are derived primarily from the sale of SCSI and
Fibre Channel based I/O products and enclosure management products. License fees
and non-recurring engineering fees also contribute to the Company's net
revenues. Net revenues for fiscal 1999 increased $35.8 million or 44% from
fiscal 1998 to $117.2 million. The increase was the result of a $20.1 million
increase in sales of the Host Board product line, a $10.4 million increase in
sales of the TEC product line, a $3.2 million increase in sales of the GEM
product line and a $1.6 million increase in sales of the FTEC product line.
Net revenues for fiscal 1998 increased $12.5 million or 18% from fiscal
1997 to $81.4 million. The increase was the result of an $8.7 million increase
in sales of the Host Board product line, combined with a $4.4 million increase
in sales in the FAS product line. A partially offsetting decline of $0.6 million
occurred in license fees.
Export revenues for fiscal 1999 increased $27.5 million or 79% from fiscal
1998, to approximately $62.1 million, primarily due to increased sales to
customers in Japan and to a lessor extent, Europe. Export revenues for fiscal
1998 increased $31.3 million or 10% from fiscal 1997, to approximately $34.6
million, primarily due to increased sales to customers in Europe, along with
smaller increases from Southeast Asia.
Countries in the Pacific Rim continue to suffer from the influence of the
Asian economic crisis. This could lead to widespread financial difficulty among
the companies in this region. Export revenues (primarily to the Pacific Rim
countries) of the Company's products amounted to $62.1 million in fiscal year
1999, $34.6 million in fiscal year 1998, and $31.3 million of net revenues for
fiscal year 1997. As a percentage of net revenues, export revenues accounted for
53% in fiscal year 1999, 42% in fiscal year 1998, and 45% in fiscal year 1997.
Export revenues are denominated in U.S. dollars. The Company does not expect the
uncertainty in selected Pacific Rim foreign currency markets to have a material
adverse effect on the results of the Company's operations.
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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 69% of net revenues in fiscal year
1999, and 71% in fiscal years 1998 and 1997. For fiscal 1999, Fujitsu Limited
accounted for 24% of net revenues, and Sun Microsystems, Inc. accounted for 19%
of the Company's net revenues. For fiscal 1998, Fujitsu Limited accounted for
23% of net revenues, Sun Microsystems, Inc. accounted for 20%, of net revenues.
For fiscal 1997, and Sun Microsystems, Inc. accounted for 20% of net revenues,
Tokyo Electron Limited accounted for 19%, and Fujitsu Limited accounted for 16%.
The Company believes that its major customers continually evaluate whether
or not to purchase products from alternate or additional sources. Additionally,
customers' economic and market conditions frequently change. 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.
GROSS PROFIT
Cost of revenues consist primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The gross profit percentage for fiscal 1999 was
64%, an increase from 58% in the prior fiscal year. The percentage increase was
due to the introduction of new, higher margin products and volume related cost
reductions on mature products, combined with improved quality resulting in
reduced scrap expenses.
The gross profit percentage for fiscal 1998 was 58%, an increase from 45%
in the prior fiscal year. The percentage increase was due to a shift in product
mix to products with lower unit costs, as well as increased production volumes.
Additionally, multiple disciplines within the Company worked together to improve
inventory management.
The gross profit percentage for fiscal 1997 was 45%, an increase from 36%
in the prior fiscal year. The percentage increase was due to increased revenue
from products that 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 Company's ability to maintain its current gross profit percentage can
be significantly affected by factors such as supply costs and, in particular,
the cost of silicon wafers, the worldwide semiconductor foundry capacity, 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. As a result, the Company does not
anticipate gross profit percentage to increase 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
material, occupancy costs, and computer support. The Company believes that
continued investments in engineering and development activities are critical to
achieving its strategic objectives. The Company expects that engineering and
development expenses will increase in absolute dollars in fiscal 2000.
Engineering and development expenses were $24.4 million in fiscal year
1999, $15.6 million in fiscal 1998 and $10.4 million in fiscal 1997. As a
percentage of net revenues this amounted to 20.8% in fiscal 1999, 19.2% in
fiscal 1998 and 15.1% in fiscal 1997. The increase in spending each fiscal year
was largely due to increased levels of spending for Fibre Channel and SCSI
design and engineering support. Additionally, in 1999 the Company incurred a
$2.1 million charge for acquired in-process technology relating to the
acquisition of Silicon Design Resources, Inc.
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Selling and Marketing. Selling and marketing expenses consist primarily of
sales and marketing salaries, sales commissions and related expenses,
promotional activities and travel for sales and marketing personnel. The Company
believes continued investments of these type of expenses are critical to the
success of its strategy of expanding relationships with its customers. As a
result, the Company expects sales and marketing expenditures will increase in
absolute dollars in the future.
Sales and marketing expenses were $11.1 million in fiscal 1999, $8.7
million in fiscal 1998 and $6.4 million in fiscal 1997. As a percentage of net
revenues this amounted to 9.4% in fiscal 1999, 10.7% in fiscal 1998 and 9.3% in
fiscal 1997. The increases in dollars reflected an increased level of sales
commissions paid as a result of the increase in revenues. The decrease in sales
and marketing expenses as a percentage of net revenues from fiscal 1998 to
fiscal 1999 relates to economies of scale realized from the growth in net
revenues. As a percentage of net revenues, sales and marketing expenses
increased from fiscal 1997 to fiscal 1998 due to increases in sales and
marketing personnel.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
human resources and information technology personnel. Non-personnel related
expenses consist of recruiting fees, professional services and corporate
expenses. The Company expects general and administrative expenses to increase in
absolute dollars as it adds personnel and incurs additional costs relating to
the growth of the business and its operation as a public company.
General and administrative expenses were $5.8 million in fiscal 1999, and
$4.6 million in fiscal 1998 and 1997. As a percentage of net revenues this
amounted to 4.9% in fiscal 1999, 5.6% in fiscal 1998 and 6.7% in fiscal 1997. In
fiscal 1999, general and administrative expenses increased due to an increase in
outside services related to the acquisition of Silicon Design Resources, Inc.
Additionally, salaries and fringe benefits increased by $0.5 million due to an
increase in general and administrative personnel. The decrease in general and
administrative expenses as a percentage of net revenues is due to the Company
benefiting from economies of scale related to the increases in net revenue.
General and administrative expenses remained relatively consistent in
fiscal year 1998 and 1997.
NON-OPERATING INCOME
Interest and other income, net of interest expense, was $5.6 million in
1999, $3.3 million in fiscal 1998 and $0.5 in fiscal 1997. The increases in
interest and other income in fiscal 1999 and 1998 are largely due to increases
in cash equivalents and investment balances due to $77.5 million in net proceeds
received from a secondary stock offering in the second quarter of fiscal 1998.
Additionally, cash equivalent and investment balances have increased due to cash
flow from operations in each of the last three fiscal years.
INCOME TAX PROVISION
The Company's effective tax rates were approximately 34% in fiscal 1999,
39% in fiscal 1998, and 41% in fiscal 1997. The decrease in tax rate in fiscal
1999 is due to benefits realized from research and development and other tax
credits as well as the movement of a portion of the Company's investments into
tax exempt securities. The decrease in tax rate in fiscal 1998 is due to the
decrease in the valuation allowance relating to the Company's deferred tax
assets, and to a lesser extent, the movement of a portion of the Company's
investments into tax exempt securities.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges, and establishes respective accounting
standards for reporting changes in the fair value of the instruments. The
statement is effective for
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all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not yet determined the impact of adopting this new standard on the
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's combined balances of cash and cash equivalents, short-term
and long-term investments have increased to $130.5 million at March 28, 1999 and
$112.8 million at March 29, 1998. The increases are primarily attributable to
receiving net proceeds of $77.5 million from a secondary stock offering in the
second quarter of fiscal 1998. Additionally, the increase in cash flow from
operations in those fiscal years has increased the combined balances of cash and
cash equivalents, short-term and long-term investments.
The Company's primary source of liquidity is derived from working capital
and a $7.5 million unsecured line of credit with Silicon Valley Bank. Working
capital increased $20.0 million to $110.7 million at March 28, 1999 and
increased $70.9 million to $90.7 million at March 29, 1998. The increase in
working capital in fiscal 1999 is largely attributable to cash flow from
operations. The increase in working capital in fiscal 1998 is attributable to
the increase in cash and cash equivalents and short-term investments as a result
of the proceeds from the secondary stock offering. The $7.5 million line of
credit facility with Silicon Valley Bank allows the Company to borrow at the
bank's prime rate. The credit facility expires on July 5, 1999, and, although
there can be no assurance, the Company currently expects to renew this line of
credit. There are no borrowings under this credit facility at March 28, 1999.
The Company's cash flow provided by operations was $23.5 million in fiscal
1999, $19.0 million for fiscal 1998 and $12.6 million for fiscal 1997. The
growth in cash provided by operations is primarily due to increases in
profitability for those fiscal years. Additionally, in fiscal year 1999, cash
flow from operations was improved by increases in accounts payable and other
accrued liabilities and was offset by an increase in inventories and a decrease
in income taxes payable. In fiscal year 1998, cash flow from operations was
improved by increases to income taxes payable and accounts payable and was
partially offset by an increase to accounts receivable.
The Company's cash flow used in investing activities was $47.4 million in
fiscal 1999, $52.6 million for fiscal 1998 and $3.9 million for fiscal 1997. The
decrease in cash used in investing activities is primarily due to decreases in
purchases of short and long-term investments, net of maturing investments. In
fiscal year 1998, the increase in the cash used in investing activities relates
to purchases of short and long-term investments, net of maturing investments.
Additionally, capital expenditures were $6.8 million in fiscal 1999, and $3.9
million in both fiscal 1998 and fiscal 1997. During fiscal year 2000, the
Company anticipates spending between $2.5 million to $3.5 million for leasehold
improvements and relocation related expenses associated with the corporate
headquarters relocation to Aliso Viejo, California. The Company may exercise its
option to purchase the Aliso Viejo facility which could increase the Company's
potential cash expenditures to approximately $30.0 to $35.0 million.
The Company's cash flow provided by financing activities was $3.0 million
in fiscal 1999, $78.6 million for fiscal 1998 and $2.0 million for fiscal 1997.
The cash provided by financing activities for fiscal years 1999 and 1997 is
primarily due to increases in proceeds from issuance of stock under employee
stock plans. For fiscal year 1998, the majority of the cash provided by
financing activities was generated from a secondary stock offering in the second
quarter of that year.
The Company believes that it has sufficient working capital and an
available credit facility to finance its operations for fiscal year 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the information in
this report constitutes forward-looking statements. When used in this report the
words "shall," "should," "forecast," "all of," "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,
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as well as those discussed above in "Business" or "Management's Discussion and
Analysis of Condition and Results of Operations" or elsewhere in this report.
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 result 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, or field warehouses in 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 effected.
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; adoption of new accounting pronouncements and/or changes in
Company policies and general economic and other conditions effecting 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 is 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 or
cancel 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 effected 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
effected.
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 loss of any of the Company's major
customers would have a material adverse effect on its business, financial
condition and results of operations. Some of these customers are based in the
Pacific Rim, which is subject to economic and political uncertainties. In
addition, a majority of the Company's customers order the Company's products
through written purchase orders as
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opposed to long term supply contracts and, therefore, such customers are
generally not obligated to purchase products from the Company for any extended
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. This risk is increased
due to the potential for some of these customers merging or acquiring other
customers of the Company. 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 certain
customers 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. Most 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 achieve or 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 materially and adversely effected.
The Company currently competes primarily with Texas Instruments, Adaptec,
Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre Channel
sector of the I/O market, the Company competes primarily with Texas Instruments,
LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the IDE sector,
the Company competes with ST Microelectronics and Cirrus Logic, Inc. In the
enclosure management sector, the Company competes primarily with the Symbios
division of LSI Logic and the Serano division of Vitesse Semiconductor
Corporation. 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 own 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 will need 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. Further, several of
the Company's competitors have greater resources devoted to securing
semiconductor foundry capacity (e.g. long-term agreements regarding supply flow,
equity or financing agreements or direct ownership of a foundry). 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
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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.
Generally, the Company conducts business with some of 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 as may be accepted by a
foundry. 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. Historically, there have
been periods when 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 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 marketing efforts
related to Fibre Channel products would be delayed and, as such, its results of
operations could be materially and adversely effected. 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 effect 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. These risks include that 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 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, which would 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
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materials or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including those
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
The Company is not currently experiencing any difficulties in obtaining
sufficient foundry capacity due to the current availability of worldwide
semiconductor fabrication capacity. However, 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 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 and hard
disk drive controller products are ultimately 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 effected.
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 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
Adaptec, Inc., have extensive development efforts related to
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products based on new parallel SCSI I/O 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 effected.
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, Ultra2
SCSI, Ultra3 SCSI and PCI. In addition, the Company's Fibre Channel products
have been designed to conform to 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 effected.
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 effect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will respond effectively to technological changes, 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 and expedite charges, in addition to lower sales and lower profits.
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 with 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, the
potential loss of current customers and/or retention of the acquired Company's
customers 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 issuance's 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 effect the
Company's business, financial condition, results of operations or stock price.
With respect to recording future business combinations the FASB has announced it
may abolish the pooling-of-interests accounting treatment as well as the
accounting treatment of acquired in-process research and development. The
proposal would effect transactions after January 1, 2001. If the FASB does
eliminate pooling-of-interests accounting treatment, the Company's ability to
consummate a business combination without incurring goodwill, would be adversely
effected.
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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, periodically 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 several 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. A significant amount of the Company's customers and
suppliers are located in Japan. Recently, the Asian markets have suffered
property price deflation. This asset deflation has taken place especially in
countries that have had a collapse in both their currency and stock markets.
These deflationary pressures have reduced liquidity in the banking systems of
the affected countries and, when coupled with spare industrial production
capacity, could lead to widespread financial difficulty among the companies in
this region. 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 in certain jurisdictions, 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
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 or at all. 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.
The Company has experienced intellectual property claims being made against
it in the past. There can be no assurance that patent or other intellectual
property infringement claims will not be asserted against the Company or its
suppliers 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 or similar arrangements 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
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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.
YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 and beyond. The Company relies on
its systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company has initially assessed how it may be
impacted by Year 2000 and has formulated and commenced implementation of a
comprehensive plan to address certain aspects of the Year 2000 problem. The
potential impacts to the Company identified by the plan include internal
information technology ("IT") systems, internal non-IT systems, including
embedded technology, the Company's products, and the readiness of significant
third parties with whom the Company has material relationships.
Internal IT Systems. The Company has formed a Year 2000 committee that
oversees the Company's Year 2000 readiness activities. The Year 2000 committee
has executive sponsorship and periodically reports status to the Audit Committee
of the Board of Directors. The Year 2000 committee is charged with raising
awareness throughout the company, developing tools and methodologies for
internally addressing the Year 2000 issue, developing and monitoring plans to
bring non-compliant applications and infrastructure into compliance and
identifying and resolving high-risk Year 2000 issues.
The Company is addressing Year 2000 issues in a phased approach consisting
of the following phases: (1) assessment, (2) planning, (3) preparation and (4)
implementation. The assessment phase consists of taking an inventory of the
Company's internal IT and non-IT systems and assessing risk, identifying
potential solutions and estimating repair or remediation costs. The planning
phase consists of identifying tasks to ensure Year 2000 readiness, identifying
mission-critical applications and infrastructure, and coordinating testing dates
and remediation timing. The third phase, preparation, includes coordinating the
remediation process and the implementation phase involves testing, repair and/or
replacement of non-compliant application and infrastructure. The implementation
phase is concluded with establishing contingency plans for the Company's
mission-critical systems and infrastructure.
The Company has completed testing and remediation efforts for its critical
information systems and will continue to monitor them to ensure they remain Year
2000 compliant. The Company's non-critical internal IT systems are in the
implementation phase and remediation is expected to be completed by June 30,
1999.
Internal Non-IT Systems. The Company's non-IT systems include, but are not
limited to, those systems that are not commonly thought of as IT systems, such
as telephone and voice mail systems, building access and security systems,
facility environmental systems and other equipment with embedded technology. The
Company has completed remediation efforts for its critical internal non-IT
systems and will continue to monitor them to ensure they remain Year 2000
compliant. The remaining non-critical non-IT systems are in the implementation
phase and remediation is expected to be completed by June 30, 1999.
Products. The Company's products include I/O and enclosure management
semiconductors as well as I/O host bus adapter products. The Company has
completed an assessment of its products and has determined they do not contain
specific date functions that would be impacted by the change in the century.
Material Third-Party Relationships. The Company's material third-party
suppliers include key suppliers, contract manufacturers, vendors and business
partners. The process for evaluating third-party risk includes the following
steps: (1) distribution of an initial readiness assessment, (2) if necessary, a
comprehensive risk
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assessment combined with telephone or on site interviews, and (3) preparing
contingency plans based on the assessed risk for each third party relationship.
The Company has received responses from its initial readiness assessment and is
distributing secondary assessments and conducting necessary interviews. The
assessment and interview phase is expected to be completed by July 31, 1999, and
contingency plans finalized by September 30, 1999.
The Company currently estimates that the costs associated with the Year
2000 should not have a material adverse effect on the results of operations or
financial position of the Company in any given year. Historical amounts spent on
assessment, planning, preparation and implementation have not been material to
the results of operations.
The Company believes its greatest risks related to the Year 2000 issue
involve its relationships with its critical third party suppliers and service
providers. Potential impacts to the Company include an interrupted product flow
from critical suppliers due to their Year 2000 interruptions, supplier
allocation or limiting products and/or sub-assemblies due to unforeseen product
shortages, potential infrastructure collapse such as interruptions in public
utilities, electricity or telecommunications. Any of the foregoing risks, as
well as the fruition of a combination of lesser risks, could adversely impact
the Company's financial condition and results of operations. Contingency plans
to mitigate or reduce these risks are being formulated to address each area of
the Company's Year 2000 compliance plan, and are expected to be completed by
September 30, 1999. However, as many of the third party service providers such
as the public utilities are outside of the Company's control, there can be no
assurance that a material adverse impact to the Company's financial condition or
results of operations would not occur.
VOLATILITY OF STOCK PRICE
The market price of the common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. Future
announcements concerning the Company or its competitors or customers, quarterly
variations in operating results, the introduction of new products or changes in
product pricing policies by the Company or its competitors, conditions in the
semiconductor industry, changes in earnings estimates by analysts, market
conditions for high technology stocks in general, the potential for a
shareholder lawsuit, or changes in accounting policies, among other factors,
could cause the market price of the common stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years and stock prices of technology companies have been especially
volatile. This volatility has had a substantial effect on the market prices of
securities of many smaller public companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations could adversely affect the market price of the Company's common
stock.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Restated Certificate of Incorporation, as
amended, the Board of Directors is authorized to approve the issuance of shares
of currently undesignated preferred stock, to determine the price, powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed on any unissued series of the preferred stock, and to fix
the number of shares constituting any such series and the designation of such
series, without any vote or future action by the stockholders. Pursuant to this
authority, the Board of Directors adopted a Shareholder Rights Plan and declared
a dividend of one preferred stock purchase right for each outstanding share of
the Company's common stock. Concurrently with the February 1999 two-for-one
stock split, each "pre-split" share was adjusted to one-half-right per share of
common stock. The Shareholder Rights Plan, the undesignated preferred stock and
certain provisions of the Delaware law may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Company's common stock at a premium over the market price of the common
stock and may adversely affect the market price of the common stock.
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FACILITIES
The Company currently occupies an 97,000 square foot facility in Costa
Mesa, California containing its corporate, principle product development, and
sales personnel, as well as its operational facilities. QLogic has entered into
a ten-year lease agreement to expand and relocate its Costa Mesa operations to a
165,000 square foot facility in Aliso Viejo, California. The lease commences
upon completion of the construction of the facility expected in November 1999 to
February 2000. There can be no assurance the Company will continue to grow and
fully utilize its expanded facility. As a result, the Company may incur
additional costs associated with carrying facility expansion capabilities, which
could adversely impact future earnings. Additionally, the Company will
experience additional costs associated with the relocation, which may adversely
impact future earnings. The Company may experience an adverse impact to future
earnings due to loss of management focus or business interruption related to
issues surrounding the relocation of operations.
The Company's current headquarters in Costa Mesa, California and the future
site in Aliso Viejo, California are located near major earthquake faults. The
Company is not specifically insured for earthquakes, or other such natural
disasters. Any damage to the facilities as a result of such occurrences could
have a material adverse effect on the Company's business, results of operations
and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At March 28, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $87
million (see Note 4 of Notes to Consolidated Financial Statements). The carrying
amount of these securities approximates fair market value. These securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10% from levels as of March 28, 1999, the decline in the fair value of the
portfolio would not be material to the Company's financial position, results of
operations and cash flows.
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 consolidated financial statements of QLogic Corporation
and subsidiaries as listed in Item 14(a). In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in Item 14(a). These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QLogic
Corporation and subsidiaries as of March 28, 1999 and March 29, 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 28, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
KPMG LLP
Orange County, California
May 6, 1999
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 AND MARCH 29, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1999 1998
-------- --------
Cash and cash equivalents................................... $ 43,174 $ 64,090
Short term investments...................................... 57,613 27,746
Accounts and notes receivable, less allowance for doubtful
accounts of $940 as of March 28, 1999 and $746 as of March
29, 1998.................................................. 11,917 7,836
Inventories................................................. 10,623 3,835
Deferred income taxes....................................... 5,649 4,353
Prepaid expenses and other current assets................... 1,950 475
-------- --------
Total current assets.............................. 130,926 108,335
Long term investments....................................... 29,760 20,934
Property and equipment, net................................. 10,409 6,372
Other assets................................................ 1,828 601
-------- --------
$172,923 $136,242
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 6,432 $ 3,765
Accrued compensation........................................ 7,378 4,975
Income taxes payable........................................ 1,358 5,112
Deferred revenue............................................ 1,074 1,913
Other accrued liabilities................................... 3,997 1,821
-------- --------
Total current liabilities......................... 20,239 17,586
Other non-current liabilities............................... -- 607
-------- --------
Total liabilities................................. 20,239 18,193
-------- --------
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, $.05 par value; 50,000,000 shares
authorized, 17,961,058 and 17,301,652 shares issued and
outstanding at March 28, 1999 and March 29, 1998,
respectively........................................... 898 865
Additional paid-in capital................................ 107,911 99,008
Retained earnings......................................... 43,875 18,176
-------- --------
Total stockholders' equity........................ 152,684 118,049
-------- --------
$172,923 $136,242
======== ========
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
-------- ------- -------
Net revenues................................................ $117,182 $81,393 $68,927
Cost of revenues............................................ 42,603 34,049 38,151
-------- ------- -------
Gross profit.............................................. 74,579 47,344 30,776
-------- ------- -------
Operating expenses:
Engineering and development............................... 24,358 15,601 10,422
Selling and marketing..................................... 11,062 8,707 6,372
General and administrative................................ 5,794 4,550 4,628
-------- ------- -------
Total operating expenses.......................... 41,214 28,858 21,422
-------- ------- -------
Operating income............................................ 33,365 18,486 9,354
Interest expense............................................ 84 109 125
Interest and other income................................... 5,657 3,453 602
-------- ------- -------
Income before income taxes.................................. 38,938 21,830 9,831
Income tax provision........................................ 13,239 8,422 3,983
-------- ------- -------
Net income.................................................. $ 25,699 $13,408 $ 5,848
======== ======= =======
Net income per share:
Basic..................................................... $ 1.47 $ 0.88 $ 0.51
-------- ------- -------
Diluted................................................... $ 1.38 $ 0.83 $ 0.48
-------- ------- -------
Number of shares used in per share computations:
Basic..................................................... 17,512 15,183 11,443
-------- ------- -------
Diluted................................................... 18,690 16,198 12,230
-------- ------- -------
See accompanying notes to consolidated financial statements.
29
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ---------- ------------ -------------
Balance as of March 31, 1996................ 11,117 $556 $ 16,801 $(1,080) $ 16,277
Net income................................ -- -- -- 5,848 5,848
Issuance of common stock under employee
stock plans............................ 565 28 2,200 -- 2,228
------ ---- -------- ------- --------
Balance as of March 30, 1997................ 11,682 584 19,001 4,768 24,353
Net income................................ -- -- -- 13,408 13,408
Stock offering............................ 5,290 265 77,271 -- 77,536
Issuance of common stock under employee
stock plans (including tax benefit of
$1,494)................................ 330 16 2,736 -- 2,752
------ ---- -------- ------- --------
Balance as of March 29, 1998................ 17,302 865 99,008 18,176 118,049
Net income................................ -- -- -- 25,699 25,699
Issuance of common stock under employee
stock plans (including tax benefit of
$5,753)................................ 659 33 8,903 -- 8,936
------ ---- -------- ------- --------
Balance as of March 28, 1999................ 17,961 $898 $107,911 $43,875 $152,684
====== ==== ======== ======= ========
See accompanying notes to consolidated financial statements.
30
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS)
1999 1998 1997
--------- -------- -------
Cash flows from operating activities:
Net income............................................... $ 25,699 $ 13,408 $ 5,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 3,366 2,434 3,023
Write-off of acquired in-process technology......... 1,220 -- --
Provision for doubtful accounts..................... 201 200 129
Loss on disposal of property and equipment.......... 89 161 1,338
Benefit from deferred income taxes.................. (1,354) (3,030) (1,273)
Changes in assets and liabilities:
Accounts and notes receivable.................... (4,282) (2,316) 1,184
Inventories...................................... (6,788) 959 1,876
Prepaid expenses and other current assets........ (1,475) (84) (152)
Other assets..................................... (1,158) -- (6)
Accounts payable................................. 2,667 (229) (2,183)
Accrued compensation............................. 2,403 1,750 1,375
Income taxes payable............................. 1,999 5,163 1,391
Other accrued liabilities........................ 2,244 162 885
Deferred revenue................................. (839) 914 246
Other non-current liabilities.................... (466) (458) (1,092)
--------- -------- -------
Net cash provided by operating activities........ 23,526 19,034 12,589
--------- -------- -------
Cash flows from investing activities:
Additions to property and equipment...................... (6,766) (3,924) (3,866)
Purchases of investments................................. (103,448) (53,059) --
Acquisition of business, net of cash acquired............ (1,957) -- --
Maturities of investments................................ 64,755 4,379 --
--------- -------- -------
Net cash used in investing activities............ (47,416) (52,604) (3,866)
--------- -------- -------
Cash flows from financing activities:
Principal payments under capital leases.................. (209) (225) (274)
Proceeds from issuance of stock under employee stock
plans................................................. 3,183 1,258 2,228
Proceeds from sale of common stock....................... -- 77,536 --
--------- -------- -------
Net cash provided by financing activities........ 2,974 78,569 1,954
--------- -------- -------
Net increase (decrease) in cash and cash equivalents....... (20,916) 44,999 10,677
Cash and cash equivalents at beginning of year............. 64,090 19,091 8,414
--------- -------- -------
Cash and cash equivalents at end of year................... $ 43,174 $ 64,090 $19,091
========= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................. $ 65 $ 90 $ 133
========= ======== =======
Income taxes............................................. $ 13,116 $ 6,275 $ 3,881
========= ======== =======
Non-cash investing and financing activities:
During fiscal year 1999, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $5,753, related to the
tax benefit of exercises of stock options under the Company's stock option
plans. Additionally, during fiscal year 1999 the Company recorded an accrual of
$1,321, in accordance with the performance provisions of the Silicon Design
Resources Asset Acquisition Agreement. See Note 2 of Notes to Consolidated
Financial Statements.
During fiscal year 1998, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $1,494 related to
exercises of stock options under the Company's stock option plans.
See accompanying notes to consolidated financial statements.
31
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(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 input/output (I/O) products. The Company's I/O
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 and Redundant Arrary of Independent Disks Subsystems, or
RAID subsystems. The Company also designs and supplies semiconductor enclosure
management products. 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.
Principles of Consolidation and Financial Reporting Period
The consolidated financial statements include the financial statements of
QLogic Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
QLogic's fiscal year ends on the Sunday nearest March 31. The fiscal years ended
March 28, 1999 ("fiscal 1999"), March 29, 1998 ("fiscal 1998") and March 30,
1997 ("fiscal 1997") each comprised 52 weeks.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the Company's consolidated financial statements and
accompanying notes. 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 are 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.
Capitalized Software Costs
Statement of Financial Accounting Standards No. ("SFAS") 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, or the ratio
of current revenues to total projected product revenues, whichever is greater.
No internal costs have been capitalized for all periods presented, as the impact
on the consolidated financial statements is immaterial.
32
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 carry forwards. 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
During the third quarter of 1998, the Company adopted SFAS 128, "Earnings
per Share." All prior periods have been restated accordingly. Basic net income
per common share was computed based on the weighted average number of common
shares outstanding during the periods presented. Diluted net income per share
was computed based on the weighted average number of common and dilutive
potential common shares outstanding during the periods presented. The Company
has granted certain stock options which have been treated as dilutive potential
common shares in computing diluted net income per share. The adoption of SFAS
128 did not have a material impact on the Company's financial statements.
Segment Information
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The managements approach is based on the way that management organizes
its operating segments within the enterprise. Operating segments, as defined by
SFAS 131, are components of an enterprise for which separate financial
information is available and is evaluated regularly by the Company in deciding
how to allocate resources and in assessing performance. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The Company operates in one operating segment, for purposes of SFAS 131.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
accrued liabilities, the carrying amounts approximate fair value due to their
short maturities. Long-term investments are carried at cost which approximates
fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
marketable securities, and trade accounts receivable. The Company places its
marketable securities primarily in municipal bonds, corporate bonds and
government securities, all of which are of high investment grade. The Company,
by policy, limits the amount of credit exposure through diversification and
investment in highly rated securities. Sales to customers are denominated in
U.S. dollars. As a result, the Company believes its foreign currency risk is
minimal.
The Company sells its products to original equipment manufacturers and
distributors throughout the world, however, the Company expects to sell a
significant amount of product in the Pacific Rim. The
33
34
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. The Company has not historically
experienced significant losses on accounts receivable.
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 on their acquisition date to be cash equivalents.
Investments in Debt Securities
The Company determines the appropriate balance sheet classification of its
investments in debt securities based on maturity date at the time of purchase
and evaluates the classifications at each balance sheet date. Debt securities
are classified as held to maturity as the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income. Realized gains and losses are included in
interest and other income in the consolidated statements of income. The cost of
securities sold is based on the specific identification method.
The Company's investments in debt securities are diversified among high
credit quality securities in accordance with the Company's investment policy.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by the 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 exceeds 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.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of two to seven years.
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 Based Compensation
The Company accounts for its employee and director stock options and
employee stock purchase plan in accordance with provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." SFAS 123, "Accounting for Stock-Based Compensation," which was
effective
34
35
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
for fiscal years beginning after December 31, 1995, provided an alternative to
APB 25, but allowed companies to account for employee and director stock-based
compensation under the current intrinsic value method as prescribed by APB 25.
The Company has continued to account for its employee and director stock plans
in accordance with APB 25. Additional pro forma disclosures as required under
SFAS 123 are presented in Note 8 of notes to consolidated financial statements.
Comprehensive Income
During fiscal 1999, the Company adopted SFAS 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
Comprehensive income equals net income as there are no non-owner sources of
equity.
Research and Development
Research and development costs, including costs related to the development
of new products and process technology, are expensed as incurred.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
NOTE (2) BUSINESS COMBINATION
On August 20, 1998, the Company acquired the net assets of Silicon Design
Resources, Inc. ("SDR") for $2,000 in cash. In addition, the Company is
obligated to pay up to an additional $8,000 in cash provided that certain
performance targets are achieved through fiscal year 2002. These payments will
be accounted for as additional purchase price and allocated to the intangible
assets acquired, specifically the in-process technology and the completed
technology. The Company accounted for the transaction using the purchase method
of accounting, and excluding the initial write-off of the acquired in-process
technology in the quarter ended September 27, 1998, the impact to the Company's
financial position and results of operations from the acquisition date was not
material. Additionally, the Company incurred approximately $413 in professional
fees related to the acquisition.
The Company allocated the purchase price to the tangible and identifiable
intangible net assets as of August 20, 1998 based on the fair market values of
the assets; such fair values were derived from an independent third party
appraisal. The fair value of the net assets acquired exceeded the initial
payment, resulting in negative goodwill. This negative goodwill was allocated to
the intangible assets acquired, based on their relative fair values. The
allocation of the initial purchase price included $558 of net tangible assets,
$635 of completed technology and $1,220 of in-process technology.
At the time of the acquisition, SDR was a startup company which had two
products which were in full production, and three research and development
projects which were in the development stage. The primary purpose of the
acquisition was to acquire these in-process projects and complete the
development efforts. The Company believes the developmental projects had
economic value, but had not reached technological feasibility and had no
alternative future uses. In accordance with applicable accounting literature,
the acquired in-process technology was written-off to engineering and
development expense during the quarter ended September 27, 1998, and will
continue to be written-off to engineering and development when future
performance payments are earned. Acquired completed technology has been
capitalized and is included in
35
36
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
other assets in the accompanying consolidated balance sheet. The acquired
completed technology is being amortized on a straight-line basis over a period
of three years from the acquisition date. At March 28,1999, a performance
payment to the former shareholders of SDR of $1,321 was included in other
accrued liabilities in the accompanying consolidated balance sheet. The payment
was allocated to the intangible assets acquired: $870 was written-off as
acquired in-process technology and $451 was capitalized as completed technology.
NOTE (3) NET INCOME PER SHARE
The Company computed basic net income per share based on the weighted
average number of common shares outstanding during the periods presented.
Diluted income per share was computed based on the weighted average number of
common and dilutive potential common shares outstanding during the periods
presented. The Company has granted certain stock options which have been treated
as dilutive potential common shares.
The following table sets forth the computations of basic and diluted net
income per share (in thousands, except per share amounts):
1999 1998 1997
------- ------- -------
Numerator:
Net income.......................................... $25,699 $13,408 $ 5,848
======= ======= =======
Denominator:
Denominator for basic net income per
share -- weighted average shares................. 17,512 15,183 11,443
Dilutive potential common shares, using treasury
stock method..................................... 1,178 1,015 787
------- ------- -------
Denominator for diluted net income per share........ 18,690 16,198 12,230
======= ======= =======
Basic net income per share............................ $ 1.47 $ 0.88 $ 0.51
------- ------- -------
Diluted net income per share.......................... $ 1.38 $ 0.83 $ 0.48
------- ------- -------
Options to purchase 38,348, 28,546 and 36,266 shares of common stock were
outstanding as of March 28, 1999, March 29, 1998, and March 30, 1997,
respectively, but were not included in the computation of diluted net income per
share, as the effect would be antidilutive.
NOTE (4) INVESTMENTS
The Company's portfolio of investments consists of the following:
1999 1998
-------- --------
U.S. Government securities.................................. $ 6,981 $ 10,474
Municipal securities........................................ 61,305 47,825
Corporate debt securities................................... 35,253 21,625
Other debt securities....................................... 26,673 32,064
-------- --------
$130,212 $111,988
======== ========
36
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At March 28, 1999 and March 29, 1998, the net unrealized holding gains and
losses on securities were immaterial. Investments at March 28, 1999 and March
29, 1998 were classified as shown below:
1999 1998
-------- --------
Cash equivalents............................................ $ 42,839 $ 63,308
Short-term investments...................................... 57,613 27,746
Long-term investments (with maturities from 1 to 2 years)... 29,760 20,934
-------- --------
$130,212 $111,988
======== ========
NOTE (5) INVENTORIES
Components of inventories, net of reserves, are as follows:
1999 1998
------- ------
Raw materials............................................... $ 7,716 $2,720
Work in progress............................................ 833 585
Finished goods.............................................. 2,074 530
------- ------
$10,623 $3,835
======= ======
NOTE (6) PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
1999 1998
------- -------
Product and test equipment.................................. $20,238 $13,855
Furniture and fixtures...................................... 1,907 1,543
Semiconductor tooling....................................... 2,119 1,957
Leasehold improvements...................................... 590 575
Land and buildings.......................................... 358 358
------- -------
25,212 18,288
Less accumulated depreciation and amortization.............. 14,803 11,916
------- -------
$10,409 $ 6,372
======= =======
NOTE (7) CAPITAL ACCOUNTS
Common Stock
At March 28, 1999 and March 29, 1998, the Company's authorized common stock
was 50,000,000 and 25,000,000 shares, respectively, with 17,961,058 and
17,301,652 shares issued and outstanding, respectively. At March 28, 1999,
3,870,000 shares were reserved for the exercise of issued and unissued common
stock options, and 600,000 shares were reserved for issuance in connection with
the Company's Employee Stock Purchase Plan.
Preferred Stock
In fiscal 1994, the Company's stockholders approved an amendment and
restatement of the certificate of incorporation which authorized the future
issuance of 1,000,000 shares of preferred stock, $0.10 par value, with rights
and preferences to be determined by the Board of Directors.
37
38
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Shareholder Rights Plan
On June 4, 1996, the Board of Directors of the Company unanimously adopted
a Shareholder Rights Plan (the "Rights Plan") pursuant to which it declared a
dividend distribution of preferred stock purchase rights (a "Right") upon all of
the outstanding shares of the common stock.
The Rights dividend was paid on June 20, 1996 to the holders of record of
shares of common stock on that date, at the rate of one-half of one whole Right
per one share of common stock, as adjusted pursuant to the February 1999 stock
split. Each share of common stock presently outstanding that had been issued
since June 20, 1996 also includes one-half Right, and each share of common stock
that may be issued after the date hereof and prior to the Distribution Date (as
defined below) also will include one-half Right.
The Rights become exercisable (i) the 10th business day following the date
of a public announcement that a person or a group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more
of the outstanding shares of common stock, or (ii) the 10th business day
following the commencement of, or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the person or
group making the offer becoming an Acquiring Person (the earlier of the dates
described in clauses (i) and (ii) being called the "Distribution Date").
The Rights held by an Acquiring Person or its affiliates are not
exercisable. All shares of common stock that will be issued prior to the
Distribution Date will include such Rights. The Rights will expire at the close
of business on June 4, 2006 (the "Scheduled Expiration Date"), unless prior
thereto the Distribution Date occurs, or unless the Scheduled Expiration Date is
extended.
Pursuant to the Rights Plan, as so amended, each one-half Right initially
entitles the registered holder, on and after the Distribution Date and until
redemption of all Rights, to purchase from the Company 1/200th of one whole
share (a "Unit") of the Company's Series A Junior Participating Preferred Stock,
par value $.001 per share (the "Series A Preferred Stock"). The purchase price
is $112.50 per Unit. In the event of certain acquisitions involving the
Acquiring Person , directly or indirectly, the holder of one-half Right will be
entitled to purchase for $112.50 certain shares or assets of the Company or an
Acquiring person that have a market value of $225.00 at such time.
The Company has 200,000 whole shares of Series A Preferred Stock authorized
(40,000,000 Units authorized), of which no shares or Units are issued or
outstanding at March 31, 1999. Each Unit would entitle the holder to (A) one
vote, voting together with the shares of common stock; (B) in the event the
Company's assets are liquidated, a payment of one dollar ($1.00) or an amount
equal to the payment to be distributed per share of common stock, whichever is
greater; and (C) in the event of any merger, consolidation or other transaction
in which shares of common stock are exchanged, a payment in an amount equal to
the payment received per share of common stock. The number of Rights per share
of common stock, and the purchase price, is subject to adjustment in the event
of each and any stock split, stock dividend or similar event.
Holders of Rights will be entitled to purchase shares or assets of the
Company or an Acquiring Person with a value that is double the exercise price in
the event of certain acquisitions involving the Acquiring Person, directly or
indirectly.
Common Stock Split
On February 3, 1999, the stockholders of the Company approved an amendment
to the Certificate of Incorporation to increase the number of authorized shares
of common stock from 12.5 million to 50 million, and to effect a two-for-one
stock split. These actions were ratified by the Company's Board of Directors on
February 3, 1999, and became effective on February 15, 1999. In addition, the
amendments served to reduce
38
39
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the par value of the common stock from $0.10 to $0.05 per share. Stockholders of
record at the close of business on February 15, 1999 received one additional
share for each share held. All share and per share data presented in the
consolidated financial statements and footnotes has been retroactively adjusted
to reflect the two-for-one stock split.
Stock Offering
In the second quarter of fiscal 1998, the Company completed a secondary
offering of 5,290,000 shares of the Company's common stock at a price of $15.63
per share. The Company received proceeds of $77.5 million net of underwriter's
discount and expenses.
NOTE (8) STOCK PLANS
Employee Stock Purchase Plan
In fiscal year 1999, the Company's Board of Directors adopted an Employee
Stock Purchase Plan (the "ESPP"). Under the ESPP, employees of the Company who
elect to participate are granted options to purchase common stock at a 15%
discount from the lower of the market value of the common stock at the beginning
or end of each three month offering period. The ESPP permits an enrolled
employee to make contributions to purchase shares of common stock by having
withheld from their salary an amount between 1% and 10% of compensation. The
ESPP is administered by the Compensation Committee of the Board of Directors.
The total number of shares of common stock that may be issued pursuant to
options granted under the ESPP is 600,000. As of March 28, 1999, a total of
5,934 shares of common stock have been issued under the ESPP.
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
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. The Stock Awards Plan permits the
Compensation Committee of the Board of Directors to select eligible employees to
receive awards and to determine the terms and conditions of awards. As of March
28, 1999, a total of 3,450,000 shares were reserved for issuance under the Stock
Awards Plan, no shares of restricted stock were issued, options to purchase
1,334,434 shares of Common Stock were outstanding, and there were 676,520 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 28, 1999. 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 16,000 shares of common stock of the
Company upon election to the Board, and the plan provides for annual grants to
each non-employee director (other than the Chairman of the Board) of options to
purchase 6,000 shares of common stock. The plan also provides for annual grants
to the Chairman of the Board of options to purchase 10,000 shares of common
stock. A total of 400,000 shares have been reserved for
39
40
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
issuance under the Director Plan. As of March 28, 1999, options for a total of
138,332 shares were outstanding, and 141,000 shares were available for grant.
All stock options granted under the Director Plan have ten-year terms and vest
ratably over three years from the date of grant.
As of March 28, 1999, ad hoc stock options have been issued representing
options to purchase 20,000 shares, with a total of 16,000 options outstanding.
Stock option activity in fiscal 1999, 1998 and 1999 under the Company's
Stock Option Plans was as follows:
AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
Options outstanding as of March 31, 1996................... 1,708,996 $ 3.45
Granted.................................................... 618,820 6.86
Canceled................................................... (85,600) 4.00
Exercised.................................................. (564,706) 3.94
--------- ------
Options outstanding as of March 30, 1997................... 1,677,510 4.50
Granted.................................................... 305,500 14.74
Canceled................................................... (51,104) 6.34
Exercised.................................................. (330,250) 3.81
--------- ------
Options outstanding as of March 29, 1998................... 1,601,656 6.54
Granted.................................................... 565,200 33.04
Canceled................................................... (24,618) 16.16
Exercised.................................................. (653,472) 4.51
--------- ------
Options outstanding as of March 28, 1999................... 1,488,766 $17.33
========= ======
As of March 28, 1999, March 29, 1998, and March 30, 1997, the number of
options exercisable was 445,226, 677,560 and 564,546, respectively, and the
weighted average exercise price of those options was $6.39, $3.96 and $3.32,
respectively.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
WEIGHTED REMAINING WEIGHTED
OUTSTANDING AVERAGE CONTRACTUAL EXERCISABLE AVERAGE
RANGE OF AS OF EXERCISE PRICE LIFE AS OF EXERCISE PRICE
EXERCISE PRICES MARCH 28,1999 PER OPTION (YEARS) MARCH 28,1999 PER OPTION
- ---------------- -------------- -------------- ----------- -------------- --------------
$ 2.34 to
$ 5.25........ 374,900 $ 3.59 6.25 247,070 $ 3.49
$ 5.29 to
$12.75........ 466,392 $ 9.13 7.77 174,171 $ 8.70
$15.13 to
$26.56........ 379,474 $19.74 9.09 23,985 $19.53
$30.13 to
$65.50........ 268,000 $47.38 9.63 -- $ --
--------- -------
$ 2.34 to
$65.50........ 1,488,766 $17.33 8.06 445,226 $ 6.39
========= ====== ==== ======= ======
40
41
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Information
The Company applies APB 25 in accounting for its Stock Option Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
1999 1998 1997
------- ------- ------
Net income as reported................................. $25,699 $13,408 $5,848
Assumed stock compensation cost, net of tax............ $ 8,325 $ 2,576 $2,329
------- ------- ------
Pro forma net income................................... $17,374 $10,832 $3,519
------- ------- ------
Diluted net income per share as reported............... $ 1.38 $ 0.83 $ 0.48
Pro forma diluted net income per share................. $ 0.93 $ 0.67 $ 0.29
Pro forma net income reflects only options granted in fiscal years 1996
through 1999. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net income
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 the Black-Scholes option-pricing model for estimating the
fair value of its equity instruments. The following represents the
weighted-average fair value of options granted and the assumptions used for the
calculations:
1999 1998 1997
------ ------ -----
Estimated fair value per option granted................... $22.32 $ 8.43 $3.82
Average exercise price per option granted................. $33.04 $14.74 $6.86
Stock volatility.......................................... 79.5% 60.4% 56.4%
Risk-free interest rate................................... 5.6% 6.0% 6.7%
Annual rate of forfeiture................................. 14% 17% 20%
Expected life (years)..................................... 5.00 5.00 5.00
Stock dividend yield...................................... 0.0% 0.0% 0.0%
The fair value of each option grant, as defined by SFAS 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 effect the calculated fair value on the grant
date.
NOTE (9) EMPLOYEE RETIREMENT SAVINGS PLAN
QLogic 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 15%
of their compensation. QLogic contributions match up to 3% of a participant's
compensation. QLogic's direct contributions on behalf of its employees were
$458, $349, and $218, in fiscal 1999, 1998, and 1997, respectively.
41
42
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (10) COMMITMENTS AND CONTINGENCIES
Line of Credit
On July 6, 1998, the Company renewed its unsecured line of credit from a
bank. Maximum borrowings under the line of credit are $7.5 million, subject to a
borrowing base based on accounts receivable, with a $3.0 million sub-limit for
letters of credit. Interest on outstanding advances is payable monthly at the
bank's prime rate. The line of credit expires on July 5, 1999. 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 28, 1999. There were no borrowings under the line of
credit as of March 28, 1999. The Company expects to extend the line of credit
through the end of fiscal year 2000.
Leases
The Company leases certain equipment and facilities under non-cancelable
operating lease agreements, which expire at various dates through fiscal year
2010. Future minimum non-cancelable lease commitments are as follows:
OPERATING
LEASES
---------
Fiscal year:
2000...................................................... $ 1,451
2001...................................................... 2,732
2002...................................................... 2,732
2003...................................................... 2,910
2004...................................................... 2,914
All other................................................. 15,520
-------
Total minimum lease payments...................... $28,259
=======
Rent expense for fiscal 1999, 1998, and 1997 was $1,430, $820 and $712,
respectively.
Aliso Viejo
The Company has entered into a ten-year lease agreement to relocate and
expand its corporate headquarters to a 165,000 square foot facility located in
Aliso Viejo, California. The lease commences upon completion of the construction
of the first of three buildings, currently estimated in November 1999.
Construction of the second and third buildings is estimated to be completed in
February 2000. For purposes of the operating lease disclosure above, lease
payments are assumed to commence in November 1999, however, actual lease
commencement is contingent on construction completion. The lease contains two
five-year extension options (these extensions have not been included in the
operating lease disclosure above), as well as an option to purchase the land and
buildings along with an adjacent undeveloped piece of land, and will be
accounted for as an operating lease.
As part of the lease for the Aliso Viejo facility, the Company has
committed to provide short-term advances to the lesser of a maximum of $1,544
which will bear interest at 4.5% per year. At March 28, 1999, the Company had
advanced $553 under this agreement, which is recorded in other current assets in
the accompanying consolidated balance sheet.
42
43
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Litigation
QLogic is involved in various legal proceedings, which have arisen in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
NOTE (11) INCOME TAXES
The components of the income tax provision are as follows:
1999 1998 1997
------- ------- -------
Federal:
Current............................................. $12,892 $ 9,888 $ 4,479
Deferred............................................ (1,398) (2,264) (1,059)
State:
Current............................................. 1,701 1,564 777
Deferred............................................ 44 (766) (214)
------- ------- -------
$13,239 $ 8,422 $ 3,983
======= ======= =======
A reconciliation of the income tax provision with the amount computed by
applying the federal statutory tax rate to pretax income is as follows:
1999 1998 1997
------- ------- ------
Expected income tax provision at the statutory rate.... $13,628 $ 7,641 $3,343
State income tax, net of Federal tax benefit........... 1,910 1,991 370
Tax benefit of net operating loss...................... (13) (13) (13)
Tax benefit of research and development and other
credits.............................................. (1,240) -- --
Foreign Sales Corporation tax benefit.................. (431) -- --
Increase (decrease) in valuation allowance............. -- (1,904) (14)
Tax exempt income...................................... (882) (315) --
Nondeductible permanent differences.................... 37 26 20
Other, net............................................. 230 996 277
------- ------- ------
$13,239 $ 8,422 $3,983
======= ======= ======
43
44
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
1999 1998
------ ------
Deferred tax assets:
Alternative minimum tax credit............................ $ -- $ 19
Reserves not currently deductible......................... 5,572 4,569
Property and equipment.................................... 789 836
Acquired technology....................................... 897 --
Research and development credit........................... -- 238
State tax expense......................................... 122 --
Other..................................................... 12 87
------ ------
Total gross deferred tax assets................... 7,392 5,749
------ ------
Deferred tax liabilities:
Research and development expenditures..................... 882 404
State tax expense......................................... -- 394
Other..................................................... 205 --
------ ------
Total gross deferred tax liabilities.............. 1,087 798
------ ------
Net deferred tax assets................................... $6,305 $4,951
------ ------
Based upon 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 28, 1999. Management
believes the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income or that there would be
sufficient tax carrybacks available; however, there can be no assurance that the
Company will generate any earnings or any specific level of continuing earnings
in future years.
The tax benefit associated with dispositions from employee stock purchase
plans reduced taxes currently payable by $5,753 and $1,494 for the years ended
March 28, 1999 and March 29, 1998, respectively. These benefits were recorded
directly to additional paid-in capital.
During fiscal 1999, the Company's U.S. income tax returns for fiscal 1995
through 1997 were under examination by the Internal Revenue Service (IRS). The
Company settled all tax and related interest for fiscal years 1995 through 1997
with the IRS. The settlement did not have a material impact on the Company's
consolidated financial statements.
NOTE (12) EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
Export Revenues
QLogic's export revenues (primarily to Pacific Rim countries) were
approximately $62,076 for 1999, $34,558 for 1998 and $31,301 for 1997. This
represented 53%, 42% and 45% of net revenues for fiscal 1999, 1998 and 1997,
respectively.
44
45
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Product Revenues
The Company designs and supplies semiconductor and board I/O and enclosure
management products. These products utilize one of three technology standards:
Fibre Channel, SCSI and IDE. Net revenues for the Company's products are grouped
by technology standard as they function using similar technologies.
1999 1998 1997
-------- ------- -------
Fibre Channel................................ $ 19,288 $ 1,398 $ 14
SCSI......................................... 97,269 79,745 68,538
IDE.......................................... 625 250 375
-------- ------- -------
$117,182 $81,393 $68,927
======== ======= =======
Significant Customers
The following table represents sales to customers accounting for greater
than 10% of Company net revenue, or customer accounts receivable accounting for
greater than 10% of Company accounts receivable.
ACCOUNTS
NET REVENUES RECEIVABLE
-------------------- ------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Customer 1........................... 24% 23% 16% 31% 40%
Customer 2........................... 19% 20% 20% 10% 22%
Customer 3........................... N/A N/A N/A 12% 11%
Customer 4........................... N/A N/A 10% N/A N/A
Customer 5........................... N/A N/A 19% N/A N/A
With the exception of these customers, management believes that the loss of
any one customer would not have a material adverse effect on its business.
45
46
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (13) CONDENSED QUARTERLY RESULTS (UNAUDITED)
The following summarizes certain unaudited quarterly financial information
for fiscal 1999, 1998, and 1997.
THREE MONTHS ENDED
-------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
------- --------- -------- -------
FISCAL 1999:
Net revenues..................................... $24,115 $27,692 $30,299 $35,076
Operating income................................. 5,888 6,535 9,368 11,574
Net income....................................... 4,775 5,238 7,148 8,538
Net income per diluted share..................... 0.26 0.28 0.38 0.45
======= ======= ======= =======
FISCAL 1998:
Net revenues..................................... $18,172 $19,625 $20,856 $22,740
Operating income................................. 3,367 4,225 5,184 5,710
Net income....................................... 2,244 3,041 3,946 4,177
Net income per diluted share..................... 0.18 0.20 0.22 0.23
======= ======= ======= =======
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 diluted share..................... 0.08 0.10 0.14 0.16
======= ======= ======= =======
46
47
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 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to the Company's Directors under the heading "Nomination and Election
of 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 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to executive compensation under the heading "Executive Compensation and
Other Information" excluding the "Report of Executive Compensation Committee"
and the "Stockholder Return Performance Presentation." 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 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to security ownership of certain beneficial owners and management under
the heading "Principal Stockholders and Stock Ownership of 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 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to certain relationships and related transactions, if any, under the
headings "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions." Such information is incorporated herein by reference.
47
48
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 28, 1999, March 29, 1998, and March 30, 1997 are filed as part
of this report:
FINANCIAL STATEMENT INDEX
PAGE
STATEMENT NUMBER
--------- ------
QLogic Corporation:
Independent Auditors' Report.............................. 27
Consolidated Balance Sheets as of March 28, 1999 and March
29, 1998............................................... 28
Consolidated Statements of Income for the years ended
March 28, 1999, March 29, 1998 and March 30, 1997...... 29
Consolidated Statements of Stockholders' Equity for the
years ended March 28, 1999, March 29, 1998 and March
30, 1997............................................... 30
Consolidated Statements of Cash Flows for the years ended
March 28, 1999, March 29, 1998 and March 30, 1997...... 31
Notes to Consolidated Financial Statements................ 32
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company for
the years ended March 28, 1999, March 29, 1998, and March 30, 1997 is filed as
part of this report:
PAGE NUMBER OF THIS REPORT
--------------------------
Schedule II -- Valuation and Qualifying Accounts............ 52
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.
48
49
(3) Exhibits Index
EXHIBIT
NUMBER 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.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
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.(1)
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.(1)
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.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
21.1 Subsidiaries of the registrant.(9)
23.1 Consent of Independent Auditors.(9)
27 Financial Data Schedule.(9)
49
50
- ---------------
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
(2) 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.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 2, 1995.
(4) 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.
(5) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A filed June 19, 1996, and is incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A/A filed November 25, 1997, and is incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 28, 1998.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended December 27,1998.
(9) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(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.
50
51
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
Chairman of the Board , Chief
Executive Officer, President and
Director
Date: June 28, 1999
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.
SIGNATURE TITLE
--------- -----
PRINCIPAL EXECUTIVE OFFICER:
/s/ H.K. DESAI Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer, President and Director
H.K. Desai
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ THOMAS R. ANDERSON Vice President and Chief Financial Officer
- -----------------------------------------------------
Thomas R. Anderson
/s/ JAMES A. BIXBY Director
- -----------------------------------------------------
James A. Bixby
/s/ CAROL L. MILTNER Director
- -----------------------------------------------------
Carol L. Miltner
/s/ GEORGE D. WELLS Director
- -----------------------------------------------------
George D. Wells
51
52
QLOGIC CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
(IN THOUSANDS)
ADDITIONS DEDUCTIONS --
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
BEGINNING OF COSTS AND WRITTEN OFF/ END OF
PERIOD EXPENSES RECOVERED PERIOD
------------ ---------- ------------- ----------
CLASSIFICATION:
Year ended March 28, 1999
Allowance for doubtful accounts........... $ 746 $ 201 $ (7) $ 940
Inventory reserves........................ $2,574 $ 688 $ (642) $2,620
Year ended March 29, 1998
Allowance for doubtful accounts........... $ 636 $ 200 $ (90) $ 746
Inventory reserves........................ $2,322 $ 628 $ (376) $2,574
Year ended March 30, 1997
Allowance for doubtful accounts........... $ 506 $ 129 $ (1) $ 636
Inventory reserves........................ $1,841 $2,964 $(2,483) $2,322
52
53
EXHIBIT INDEX
EXHIBIT
NUMBER 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.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
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.(1)
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.(1)
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.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
21.1 Subsidiaries of the registrant.(9)
23.1 Consent of Independent Auditors.(9)
27 Financial Data Schedule.(9)
- ---------------
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
54
(2) 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.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 2, 1995.
(4) 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.
(5) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A filed June 19, 1996, and is incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A/A filed November 25, 1997, and is incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 28, 1998.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended December 27,1998.
(9) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.