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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 29, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0537669
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
3545 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(714) 438-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (a) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of May 24, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $378,842,992.
As of May 24, 1998, the registrant had 8,667,294 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference in
the Parts of this report indicated below:
Part II, Items 10, 11, 12 and 13 -- Definitive proxy statement for the 1998
Annual Meeting of Stockholders which
will be filed with the Securities and
Exchange Commission within 120 days
after the close of the 1998 year.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
QLogic Corporation ("QLogic") was organized as a Delaware corporation in
1992. Unless the context indicates otherwise, the "Company" and "QLogic" each
refer to the Registrant and its subsidiary.
All references to years refer to the Company's fiscal years ended March 29,
1998, March 30, 1997 and March 31, 1996, as applicable, unless the calendar
years are specified. References to dollar amounts, except share and per share
data, are in thousands, unless otherwise specified.
OVERVIEW
QLogic Corporation is a leading designer and supplier of semiconductor and
board level input/output ("I/O") products. The Company's products provide a high
performance interface between computer systems and their attached data storage
peripherals, such as hard disk and tape drives, removable disk drives, CD-ROM
drives and RAID subsystems. QLogic provides complete I/O technology solutions by
designing and marketing single chip controller and adapter board products for
both sides of the computer/peripheral device interlink, or "bus." Historically,
the Company has targeted the high performance sector of the I/O market, focusing
primarily on the SCSI industry standard. The Company is utilizing its I/O
expertise to develop products for emerging I/O standards, such as Fibre Channel.
Fibre Channel is experiencing early industry acceptance as a higher performance
solution that maintains signal integrity while allowing for increased
connectivity between a computer system and its data storage peripherals.
QLogic's products utilize various I/O standards to service the needs of
manufacturers and end users of various types of computer systems and components,
such as workstations, servers and data storage peripherals. The Company provides
high performance SCSI-based solutions and new I/O solutions based on the
emerging Fibre Channel standard, and is leveraging its technological
capabilities to provide solutions based on the IDE standard. 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 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 Digital Equipment Corporation.
INDUSTRY BACKGROUND
The increasing processing power of computers, the proliferation of
networks, the rapid growth in the usage of the Internet and intranets, the wider
application of computers in multimedia and telecommunications applications and
the availability of higher performance data storage peripheral devices have
driven the demand for increased data throughput among servers, workstations and
data storage peripherals and, as a result, for increased I/O system performance.
The I/O system is the electronic link between the host CPU and the computer's
data storage peripheral devices, such as hard disk drives, tape drives,
removable disk drives, CD-ROM drives and RAID subsystems. The I/O system must
utilize industry standard hardware and software interfaces to manage and direct
the flow of large volumes of data at high speeds between the CPU and multiple
data storage peripherals, and, at the same time, minimize the consumption of CPU
processing power and maintain peripheral data storage integrity. As
microprocessors run at higher speeds and levels of performance, they require I/O
systems which support faster and more autonomous data transmission and other
advanced capabilities in order to function optimally.
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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 emerging "plug and play" standard, that is supported by
Windows operating systems and Intel microprocessor-based systems, which
simplifies the installation process, and from the growing usage of
multi-tasking, multi-threading operating systems for which the prevailing IDE
technology is less suited.
The continuing evolution towards higher performance computer systems has
led to the development of new connectivity solutions that provide even greater
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. The Company believes Fibre Channel will likely be the I/O
technology of choice for larger, higher performance data and network
applications while SCSI-based products will continue to be used in applications
requiring less functionality and performance. See "Risk Factors -- Rapid
Technological Change; Dependence on New Products; Industry Standards."
Computer system and peripheral device manufacturers select I/O technologies
for incorporation into their products primarily on the basis of application,
performance and connectivity needs. The I/O products selected must be
specifically tailored to the manufacturer's requirements, in order to be
compatible with the manufacturer's system or peripherals either on a turn-key
basis or with 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 their planning and development process, manufacturers
not only ensure compatibility between product lines but also reduce the average
time to market for their products.
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 11 years and is a leading supplier of
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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.
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 product market.
TECHNOLOGY
The Company develops and markets I/O products for both the host and
peripheral connections of the I/O bus. For the host interface, the Company's
products include a variety of adapters, in both board and single chip integrated
circuit form, which address the server and workstation segments of the computer
market. For peripheral applications, the Company provides single chip
controllers for data storage peripherals, including hard disk drives, tape
drives, removable disk drives, CD-ROM drives and RAID subsystems. The Company's
I/O products are currently based on the three most prevalent interface
standards: IDE, SCSI and Fibre Channel.
The Company has historically focused on the SCSI standard interface for its
I/O product development. The Company's initial design wins for SCSI-based host
products came from manufacturers of workstations and servers using Reduced
Instruction Set Computer ("RISC") processors. The Company developed an embedded
RISC-based controller, which is supplied with executable firmware capable of
being custom tailored. The Company's leading peripheral technological
developments include a broad range of Very Large Scale Integration ("VLSI") SCSI
and IDE controllers, which incorporate intelligent I/O controllers with powerful
data error correction capability, in order to ensure data integrity between the
CPU and its peripherals. After accumulating significant architectural and
systems expertise in designing SCSI devices over successive generations of the
products, the Company expanded its SCSI-based host adapter board and peripheral
controller product lines to address additional computer systems and data storage
peripheral market segments, such as IDE and Fibre Channel.
In 1996, the Company introduced the industry's first fully integrated
single chip PCI to Fibre Channel controller. Fibre Channel is a scaleable data
transfer interface technology (currently implemented at 100 megabytes per
second) that maps multiple standard transport protocols, and utilizes compact
copper cables, or fiber optics to transmit data over a distance of up to 10
kilometers, while supporting various topologies for data transfer. The Company's
single chip design with an embedded transceiver provides certain advantages over
existing multi-chip solutions, including a smaller footprint, increased
reliability and a more cost-effective solution. The Company believes Fibre
Channel will become an important I/O interface for high performance peripherals
and networks over the next several years. See "Risk Factors -- Rapid
Technological Change; Dependence on New Products; Industry Standards."
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The Company's host adapter chip product line incorporates its Intelligent
SCSI Processor ("ISP"), which integrates certain controller functions, such as
proprietary RISC processor, host interface (PCI or SBus) and protocol processor
(SCSI or Fibre Channel). By incorporating an I/O processor to control SCSI or
Fibre Channel operations and by including a proprietary RISC processor to
control and direct memory and software activities, the Company's ISP
architecture facilitates faster throughput and is designed to minimize customer
resource requirements as I/O standards evolve. Furthermore, the Company's
product architecture is designed to facilitate both upward and downward
compatibility. Customers' significant software investments can be preserved
during transition from Fast SCSI to Ultra SCSI, with only minimal additional
software design necessary to complete the upward migration to the Company's
Fibre Channel solutions.
For the peripherals market, the Company's triple embedded controller
("TEC") architecture integrates certain control functions such as buffer
controller, powerful data error correction and disk formatting, microprocessor
interface and I/O interface (SCSI, IDE or Fibre Channel). The Company's products
are designed to facilitate backward migration from SCSI to IDE and forward
migration from SCSI to Fibre Channel by ensuring that a substantial portion of a
customer's firmware investments can be preserved during the transition. The
Company's common architecture modules for ISP and TEC products are designed to
benefit the Company's customers by providing faster time to market, reduced
support costs, simplified technology transitions and increased performance.
The markets in which the Company competes are characterized by rapidly
changing technology, evolving industry standards and continuing improvements in
products and services. There can be no assurance that the Company will respond
effectively to technological changes or that the Company's products will conform
to evolving industry standards and protocols. The Company has invested and will
continue to invest significant resources in the development of its Fibre Channel
based products; there can be no assurance that Fibre Channel will be adopted as
a predominant industry standard, or that the Company's Fibre Channel products
will conform to an industry standard which has yet to be uniformly adopted. The
failure of the Company's products to gain acceptance within industry standards
and protocols would adversely effect the Company's business, financial condition
and results of operations.
PRODUCTS
QLogic designs and supplies semiconductor and board level I/O solutions for
peripheral and computer systems products. The Company's 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.
PRODUCT DESCRIPTION
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PERIPHERAL PRODUCTS
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)
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PRODUCT DESCRIPTION
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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, 100MBytes/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
COMPUTER SYSTEMS PRODUCTS
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
- Recently shipped Fibre Channel evaluation
units which operate at transfer rates up to
100MB/sec.
QLA Product Family - First introduced in 1993
Host Adapter Boards - 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
- Recently shipped Fibre Channel evaluation
units which operate at transfer rates up to
100MB/sec.
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 are permitted to
return to the Company a portion of the products purchased by them. In addition,
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the Company provides its distributors with price protection in the event that
the Company reduces the prices of its products. The loss of one or more
manufacturers' representatives or distributors could have an adverse effect on
the Company's business, financial condition and results of operations.
The Company's sales efforts are focused on establishing and developing long
term relationships with OEMs and other potential customers. The sales cycle
typically begins with a design win, which entails a product of the Company being
selected to be incorporated into a potential customer's computer system or data
storage peripherals. Once the Company secures a design win with a given
customer, the time to production shipment can range between six and 18 months.
After winning a design with a potential customer, QLogic works closely with the
customer to integrate its product with the customer's current and next
generation products. Due to the extensive amounts of resources required for each
customer design, typically only one I/O solution is designed into any given
customer product. After being designed into a customer's product, sales are
typically made through purchase orders, which are subject to cancellation,
postponement or other types of delays.
International sales (primarily to the Pacific Rim countries) of the
Company's products accounted for approximately 42%, 45%, and 55% and $34,558,
$31,301 and $29,800 of net revenues for fiscal years 1998, 1997 and 1996,
respectively. International sales are denominated in U.S. dollars. The Company
does not expect the uncertainty in the Southeast Asia foreign currency markets
to have a material adverse effect on the results of the Company's operations.
Due to its international sales, the Company is subject to a number of risks,
including restrictions related to export regulations as well as those related to
political upheaval and economic downturns in foreign nations.
ENGINEERING AND DEVELOPMENT
In order to compete successfully, the Company believes that it must
continually design, develop and introduce new products that take advantage of
market opportunities and address emerging standards. The Company's strategy is
to leverage its substantial base of architectural and systems expertise and
product innovation capabilities to address a broad range of I/O solutions as
well as to develop products for its core SCSI business. The Company is currently
engaged in the development of integrated circuit I/O controllers for additional
I/O standards and enabling technologies, such as Fibre Channel, Ultra SCSI, Low
Voltage Differential (LVD), Ultra IDE. The Company intends to broaden its
product lines while continuing to allow its customers to transition rapidly to
Fibre Channel and other emerging I/O standards.
At March 29, 1998, the Company employed approximately 122 engineers,
including technicians and support personnel engaged in the development of new
products and the improvement of existing products. There can be no assurance
that the Company will continue to be successful in attracting and retaining key
personnel with the skills and expertise necessary to develop new products in the
future. Engineering and development expenses were approximately $15.6 million,
$10.4 million, and $7.2 million for fiscal 1998, 1997 and 1996, respectively.
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and product obsolescence. The
Company's success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. There
can be no assurance that the Company will be able to identify new product
opportunities successfully and develop and bring to market new products in a
timely manner, or that the Company will be able to respond effectively to
technological advancements or new product announcements.
BACKLOG
The Company's backlog of orders was approximately $22.1 million at March
29, 1998, compared to approximately $20.6 million at March 30, 1997. These
backlog figures include only orders scheduled for shipment within six months, of
which the majority are 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
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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. All of the Company's
products compete with products available from several companies, many of whom
have research and development, long term guaranteed supply capacity, marketing
and financial resources, manufacturing capability and customer support
organizations that are substantially greater than those of the Company. The
Company believes that its future operating results will depend, in part, upon
its ability to continue to improve product and process technologies and develop
new technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, and to identify and adopt emerging industry standards.
Because of the complexity of its products, the Company has experienced delays
from time to time in completing products on a timely basis. If the Company is
unable to design, develop and introduce competitive new products on a timely
basis, its future operating results would be adversely effected.
The Company currently competes primarily with Adaptec, Inc. and Symbios
Logic, Inc. in the SCSI sector of the I/O market. In the Fibre Channel sector of
the I/O market, the Company expects to compete primarily with Adaptec, Inc.,
Symbios Logic, Inc., Hewlett-Packard Company and Emulex Corporation. In the IDE
sector, the Company expects to compete with Adaptec and Cirrus Logic, Inc. The
Company may compete with some of its larger disk drive and computer systems
customers, some of which have the capability to develop I/O controller
integrated circuits for use in their products. At least one large OEM customer
in the past has decided to vertically integrate and has therefore ceased
purchases from the Company.
The Company believes that one of its principal competitive strengths in the
integrated circuit I/O controller market is its ability to obtain major design
wins as the result of its systems level expertise, integrated circuit design
capability and substantial experience in I/O applications, particularly SCSI and
Fibre Channel. The Company believes competitive factors in design wins are time
to market, performance, product features, price, quality, technical support and
ease of migration path to other I/O standards. The Company will have to continue
to develop products appropriate to its markets to remain competitive, as its
competitors continue to introduce products with improved performance
characteristics. While the Company continues to devote significant resources to
research and development, there can be no assurance that such efforts will be
successful or that the Company will develop and introduce new technology and
products in a timely manner. In addition, while relatively few competitors offer
a full range of SCSI and other I/O products, additional domestic and foreign
manufacturers may increase their presence in, and resources devoted to, these
markets. There can be no assurance that the Company will compete successfully in
the future against its existing competitors or potential competitors.
MANUFACTURING
The Company subcontracts the manufacturing of its semiconductor chips and
its host adapter boards to independent foundries and subcontractors, which
allows the Company to avoid the high costs of owning, operating and constantly
upgrading a wafer fabrication facility and a host adapter board assembly
factory. As a result, the Company focuses its resources on product design and
development, quality assurance, sales and marketing and customer support. The
Company designs both its semiconductor and host adapter board products, and
performs final tests on products, including tests required under the Company's
ISO9001/TickIT
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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 any of its foundries, and purchases both wafers
and finished chips on a purchase order basis. Therefore, the foundries generally
are not obligated to supply products to the Company for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order. The Company works with its existing foundries, and
intends to qualify new foundries, as needed, to obtain additional manufacturing
capacity. There can be no assurance, however, that the Company will be able to
obtain additional capacity.
The Company currently purchases its semiconductor products from its
foundries either in finished form or wafer form. The Company uses subcontractors
for die assembly of its semiconductor products purchased in wafer form, and for
assembly of its host adapter board products. In the assembly process for the
Company's semiconductor products, the silicon wafers are separated into
individual die, which are then assembled into packages and tested. Following
assembly, the packaged devices are further tested and inspected by the Company
prior to shipment to customers. For its host adapter board products, the Company
purchases components 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 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 effected 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.
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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. The
Company has received a notice of claimed infringement of patent rights. 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 225 employees as of March 29, 1998. The Company believes
that its future prospects will depend, in part, on its ability to continue to
attract, train, motivate, retain and manage skilled engineering, sales,
marketing and executive personnel. None of QLogic's employees is represented by
a labor union. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company's corporate offices and principal product development, sales
and operational facilities are currently located in two adjacent facilities
comprised of approximately 83,000 square foot building in Costa Mesa,
California. The Company occupies the facility pursuant to leases that expires in
October 1999. While the Company believes that its current facilities are
adequate through fiscal 1999, it is presently evaluating its needs for the
period beyond the expiration of its current leases.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to ordinary disputes arising in
the normal course of business. The Company does not believe that the outcome of
these matters will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1998 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................ 52 President, Chief Executive Officer and Director
Thomas R. Anderson........ 53 Vice President and Chief Financial Officer
Michael R. Manning........ 43 Secretary and Treasurer
David Tovey............... 53 Vice President and General Manager, Peripheral
Products
Lawrence Fortmuller....... 49 Vice President and General Manager, Computer Products
Mark Edwards.............. 39 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 and became
a Director in January 1996. From May 1995 to August 1995, he was Vice
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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 Peat Marwick LLP, independent certified public accountants.
Mr. Tovey joined the Company in April 1994 as Vice President Marketing.
From March 1985 to April 1994, he held various positions with Toshiba America
Information Systems, a computer system manufacturer, including director of
technology planning and Vice President of OEM marketing. Prior to Toshiba, Mr.
Tovey held various marketing and sales management positions with Unisys
Corporation.
Mr. Fortmuller joined the Company in October 1996 as Vice President and
General Manager, Computer Products. Prior to joining the Company, Mr. Fortmuller
held various management positions at AST Research, Inc., a computer
manufacturer.
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 three most recent years as reported on NASDAQ.
SALES PRICES
------------------
FISCAL 1998 HIGH LOW
----------- ------- -------
First Quarter............................................... $26.500 $18.750
Second Quarter.............................................. 45.375 24.750
Third Quarter............................................... 45.375 24.500
Fourth Quarter.............................................. 42.000 24.000
FISCAL 1997 HIGH LOW
----------- ------- -------
First Quarter............................................... 12.000 8.500
Second Quarter.............................................. 13.000 9.000
Third Quarter............................................... 28.380 12.500
Fourth Quarter.............................................. 30.130 18.500
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of May 20, 1998 was 416.
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 29, MARCH 30, MARCH 31, APRIL 2, APRIL 3,
1998 1997 1996 1995 1994
--------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS DATA
Net revenues................................... $ 81,393 $68,927 $53,779 $57,675 $44,902
Cost of sales.................................. 34,049 38,151 34,413 34,285 28,148
-------- ------- ------- ------- -------
Gross profit......................... 47,344 30,776 19,366 23,390 16,754
-------- ------- ------- ------- -------
Operating expenses:
Engineering and development.................. 15,601 10,422 7,191 7,598 8,603
Selling and marketing........................ 8,707 6,372 6,490 7,541 6,178
General and administrative................... 4,550 4,628 4,501 4,872 4,356
Impairment of goodwill....................... -- -- -- -- 542
Amortization of goodwill..................... -- -- -- -- 99
Consolidation charges........................ -- -- -- -- 507
-------- ------- ------- ------- -------
Total operating expenses............. 28,858 21,422 18,182 20,011 20,285
-------- ------- ------- ------- -------
Operating income (loss).............. 18,486 9,354 1,184 3,379 (3,531)
Transaction costs.............................. -- -- -- -- 1,142
Interest expense............................... 109 125 153 146 107
Interest and other income...................... 3,453 602 172 93 3
-------- ------- ------- ------- -------
Income (loss) before income taxes............ 21,830 9,831 1,203 3,326 (4,777)
Income tax provision (benefit)................. 8,422 3,983 537 1,361 (28)
-------- ------- ------- ------- -------
Net income (loss).............................. $ 13,408 $ 5,848 $ 666 $ 1,965 $(4,749)
======== ======= ======= ======= =======
Basic earnings per share....................... 1.77 1.02 0.12 0.35
======== ======= ======= =======
Diluted earnings per share(1).................. $ 1.66 $ 0.96 $ 0.12 $ 0.35
======== ======= ======= =======
SELECTED BALANCE SHEET DATA
Working capital................................ $ 90,749 $19,811 $13,334 $10,564 $ 6,424
Total assets................................... $136,242 $36,963 $28,539 $24,592 $22,613
Long-term capitalized lease obligations,
excluding current installments............... $ 141 $ 352 $ 576 $ 853 $ 1,156
Other non-current liabilities.................. $ 466 $ 924 $ 2,016 $ 1,381 $ --
Total stockholders' equity..................... $118,049 $24,353 $16,277 $15,581 $13,615
- - ---------------
(1) Per share data has not been presented for periods prior to fiscal 1995 as
the Company operated as a wholly owned subsidiary of Emulex Corporation. Per
share data for 1998 has been calculated in accordance with SFAS No. 128,
which was effective December 15, 1997, and all prior periods have been
restated to conform to this presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed hereunder,
in "Risk Factors" or "Item 1," as well as those discussed elsewhere in this
report.
OVERVIEW
QLogic Corporation is a leading designer and supplier of semiconductor and
board level I/O products. The Company's products provide a high performance
interface between computer systems and their attached data storage peripherals,
such as hard disk and tape drives, removable disk drives, CD-ROM drives and RAID
subsystems. QLogic provides complete I/O technology solutions by designing and
marketing single chip
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controller and adapter board products for both sides of the computer/peripheral
device interlink, or "bus." Historically, the Company has targeted the high
performance sector of the I/O market, focusing primarily on the SCSI industry
standard. The Company is utilizing its I/O expertise to develop products for
emerging I/O standards, such as Fibre Channel. Fibre Channel is experiencing
early industry acceptance as a higher performance solution that maintains signal
integrity while allowing for increased connectivity between a computer system
and its data storage peripherals.
The Company's products include semiconductors for computer peripheral
devices and semiconductors and adapter boards for computer systems. The
Company's peripheral products are comprised of the FAS and TEC product lines,
and its computer systems products are comprised of the ISP and Host Board
product lines. The Company's products have traditionally been based on the SCSI
standard, but during fiscal 1997 and 1998 the Company introduced products for
the Fibre Channel and IDE I/O standards. Net revenues from the Company's
computer systems products are relatively less subject to fluctuations than those
from the Company's peripheral device products due to generally longer product
life cycles. In addition, the Company's computer systems products are
manufactured to meet the specific solution needs of its OEM customers and, as a
result, tend to carry higher gross margins. The Company is attempting to
increase its proportionate sales of computer systems products. The Company is
also identifying new sectors of the peripheral device market with the goal of
expanding its business. For example, the Company is leveraging its I/O
technological expertise to develop high performance IDE-based peripheral
controllers.
The Company recognizes revenue from the sale of products at the time of
shipment. The Company currently sells a majority of its products directly to
OEMs such as Sun Microsystems, Inc., Fujitsu Limited, Digital Equipment
Corporation, and Hitachi America, Ltd. The Company also sells its products
through a network of independent manufacturers' representatives and regional and
international distributors. The Company believes that by establishing and
developing direct relationships with leading OEMs within the computer industry,
the Company will have greater opportunities to expand its SCSI-based sales and
to leverage these relationships into design wins for its IDE and Fibre Channel
products. The Company believes that sales to OEMs result in lower product return
rates and require a smaller customer support infrastructure. However, there is a
limited number of potential OEM customers. As a result, the loss of a large OEM
customer would have a material adverse effect on the Company's business, results
of operations and financial condition. Also, the Company has historically
experienced seasonality resulting in somewhat lower net revenues in its first
fiscal quarter as compared to the previous quarter, which the Company believes
is due to reduced spending by its OEM customers in advance of scheduled
production slowdowns in the forthcoming summer months. The Company also
generates revenues by licensing certain of its technology. License revenues are
recognized when earned and receipt is assured.
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The Company is the successor to the Emulex Micro Devices division of Emulex
Corporation ("Emulex"). On February 24, 1994, Emulex declared a special dividend
consisting of the distribution (the "Distribution") to its stockholders of all
outstanding shares of Common Stock of QLogic. The purpose of the Distribution
was to enable the Company to gain independent access to equity markets so that
it may use its capital stock as a source of funding.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed in absolute terms and as a percentage of the
Company's net revenues.
FISCAL YEAR ENDED
-----------------------------------------------------
MARCH 29, 1998 MARCH 30, 1997 MARCH 31, 1996
--------------- --------------- ---------------
Net revenues............................... $81,393 100.0% $68,927 100.0% $53,779 100.0%
Cost of sales.............................. 34,049 41.8 38,151 55.3 34,413 64.0
------- ----- ------- ----- ------- -----
Gross profit............................. 47,344 58.2 30,776 44.7 19,366 36.0
Operating expenses:
Engineering and development.............. 15,601 19.2 10,422 15.1 7,191 13.4
Selling and marketing.................... 8,707 10.7 6,372 9.3 6,490 12.1
General and administrative............... 4,550 5.6 4,628 6.7 4,501 8.3
------- ----- ------- ----- ------- -----
Total operating expenses......... 28,858 35.5 21,422 31.1 18,182 33.8
------- ----- ------- ----- ------- -----
Operating income......................... $18,486 22.7% $ 9,354 13.6% $ 1,184 2.2%
======= ===== ======= ===== ======= =====
NET REVENUES
The Company's net revenues are derived primarily from the sale of
SCSI-based I/O products. License fees also contribute to the Company's net
revenues. Net revenues for fiscal 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.
Net revenues for fiscal 1997 increased $15.1 million or 28% from fiscal
1996 to $68.9 million. The increase was primarily the result of an increase in
sales of the TEC, Host Board and ISP product lines and increased license fees. A
partially offsetting decline in sales of $4.4 million occurred in the FAS
product line.
Export revenues for fiscal 1998 increased $3.3 million or 10.4% from fiscal
1997, to approximately $34.6 million, primarily due to increased sales to
customers in Europe, along with smaller increases from Southeast Asia. Export
revenues for fiscal 1997 increased $1.5 million or 5% from fiscal 1996, to
approximately $31.3 million, primarily due to increased sales to customers in
Japan.
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, such as Japan. 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.
International sales (primarily to the Pacific Rim countries) of the
Company's products accounted for approximately 42%, 45%, and 55% and $34,558,
$31,301 and $29,800 of net revenues for fiscal years 1998, 1997 and 1996,
respectively. International sales are denominated in U.S. dollars. The Company
does not expect the uncertainty in the Southeast Asia foreign currency markets
to have a material adverse effect on the results of the Company's operations.
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The Company's six largest customers in each
respective period accounted for approximately 71%, 71% and 81% of the Company's
net revenues for fiscal 1998, 1997
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and 1996, respectively. For fiscal 1998, Fujitsu Limited, Sun Microsystems, Inc.
and Digital Equipment Corporation accounted for approximately 23%, 20% and 8% of
the Company's net revenues, respectively.
For fiscal 1997, Sun Microsystems, Inc., Tokyo Electron Limited, and
Fujitsu Limited accounted for approximately 20%, 19%, and 16% of the Company's
net revenues, respectively. For fiscal 1996, Tokyo Electron Limited, Sun
Microsystems, Inc. and Avex Electronics, Inc. accounted for approximately 42%,
13% and 11% of the Company's net revenues, respectively.
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 be no assurance that a major customer will not reduce, delay or eliminate
its purchases from the Company. Any such reduction, delay or loss of purchases
could have a material adverse effect on the Company's business, financial
condition and results of operations.
COST OF SALES
Cost of sales consists primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The cost of sales percentage for fiscal 1998 was
42%, a decrease of 13% from the prior fiscal year. The percentage decrease 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 cost of sales percentage for fiscal 1997 was 55%, a decrease of 9% from
the prior fiscal year. The percentage decrease 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 cost of sales percentage for fiscal 1996 was 64%, an increase of 5%
over fiscal 1995. The increase in the cost of sales percentage was primarily due
to inventory write-down charges being higher in fiscal 1996 compared to the
prior year.
The Company's ability to maintain its current gross margin can be
significantly affected by factors such as supply costs and, in particular, the
cost of silicon wafers, the mix of products shipped, competitive price
pressures, the timeliness of volume shipments of new products and the Company's
ability to achieve manufacturing cost reductions. The Company anticipates that
it will be increasingly more difficult to reduce manufacturing costs. In
addition, the Company believes the cost of sales percentage will be adversely
impacted by sales of IDE-based products, which carry lower margins. As a result,
the Company does not anticipate percentage cost of sales to decrease at a rate
consistent with historic trends.
OPERATING EXPENSES
Engineering and Development. Engineering and development expenses consist
primarily of salaries and other personnel related expenses, development related
material, occupancy costs and depreciation. For fiscal 1998 engineering and
development expenditures increased by $5.2 million from fiscal 1997, primarily
due to salary and occupancy expenses related to increased headcount. The Company
expects that engineering and development expenses will increase in absolute
dollars in fiscal 1999.
In fiscal 1997, engineering and development expenditures increased by $3.2
million from the prior fiscal year, primarily due to increased salary and
occupancy expenses related to increased headcount. In particular, the Company
significantly expanded its engineering staff in fiscal 1997 in connection with
its development of Fibre Channel products. In fiscal 1996, engineering and
development expenditures decreased by $0.4 million from fiscal 1995
expenditures.
Selling and Marketing. Selling and marketing expenses consist primarily of
sales commissions, salaries and other expenses for selling and marketing
personnel, travel expenses and trade shows. During fiscal 1998, selling and
marketing expenses increased by $2.3 million compared to fiscal 1997, primarily
as a result of increased sales, as well as increases in advertising and trade
show expenses. The Company expects that selling and marketing expenses will
increase in absolute dollars in fiscal 1999.
During fiscal 1997, selling and marketing expenses decreased by $0.1
million compared to fiscal 1996, primarily as a result of reduced advertising
and trade show expenses, due to the Company's shift away from
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selling to resellers, which typically requires more advertising and other
promotions. The decrease in advertising cost was partially offset by an increase
in marketing salaries.
In fiscal 1996, selling and marketing expenses decreased by $1.1 million
compared to fiscal 1995, primarily due to a reduction in advertising.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for corporate management, finance,
accounting and human resources. For fiscal 1998, general and administrative
expenses decreased by $0.1 million due to reduced corporate administrative
expenses. For fiscal 1997, general and administrative expenses increased $0.1
million from the prior year, primarily due to expenses related to implementing a
new computer system and salaries.
For fiscal year 1996, general and administrative expenses decreased $0.4
million compared to fiscal 1995, primarily due to decreased bad debt expense.
INTEREST INCOME (EXPENSE)
Interest income, net of expense, increased $2.9 million during fiscal 1998
from fiscal 1997, due to larger balances of cash, cash equivalents, and
investments. In addition, the Company continued to make payments to reduce its
capital lease liabilities. Interest income, net of expense, for fiscal 1997
increased $0.5 million from fiscal 1996, due to larger balances of cash and cash
equivalents and due to lower capital lease commitments outstanding.
Interest income, net of expense, increased in fiscal 1996 to $19 from a net
expense of $53 in fiscal 1995.
INCOME TAX PROVISION
The Company's effective tax rates were approximately 39%, 41%, and 45%, for
fiscal years 1998, 1997, and 1996, respectively.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. (Statement) 130, "Reporting
Comprehensive Income." The new statement is effective for both interim and
annual periods for fiscal years beginning after December 15, 1997. Adoption of
this new standard will not have a significant impact on the consolidated
financial statements.
In June 1997, the FASB issued Statement 131, "Disclosure about Segments of
an Enterprise and Related Information." The new statement is effective for
fiscal years beginning after December 15, 1997. Adoption of this new standard
will not have a significant impact on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
For fiscal years 1998, 1997 and 1996 the Company's cash flow from
operations have exceeded capital expenditures. Capital expenditures on property
and equipment were $3.9 million, $3.9 million, and $1.2 million for fiscal years
1998, 1997 and 1996, respectively. Cash provided by operations was approximately
$19.0 million, $12.6 million, and $8.8 million for fiscal years 1998, 1997, and
1996, respectively. The growth in cash provided by operations is primarily
attributable to improved profitability, accounts receivable collection,
inventory management, cash management and cost reductions in operations.
Cash used in investing activities was approximately $52.6 million, $3.9
million, and $1.2 million, in fiscal 1998, 1997, and 1996 respectively,
primarily reflecting investment of the proceeds of the secondary offering in
fiscal 1998 and expenditures for property and equipment during fiscal 1998, 1997
and 1996.
Cash provided by financing activities was approximately $78.6 million for
fiscal 1998, which reflected the sale of 2,645,000 shares of common stock from
which the Company received net proceeds of $77.5 million and exercise of stock
options, offset in part by principal payments under capital leases. Cash used in
financing activities, reflecting primarily principal payments under capital
leases, was approximately $0.2 million, $0.3 million and $0.3 million in fiscal
1998, 1997 and 1996, respectively.
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Working capital at March 29, 1998 was $90.7 million, as compared to $19.8
million at March 30, 1997. At March 29, 1998, the Company's principal sources of
liquidity included cash and cash equivalents of $64.1 million, and investments
of $48.7 million. In addition, the Company has an unsecured line of credit of up
to $7.5 million with Silicon Valley Bank. The line of credit allows the Company
to borrow at the bank's prime rate. There were no borrowings under the line of
credit as of March 29, 1998. The line of credit with Silicon Valley Bank expires
July 5, 1998, and, although there can be no assurances, the Company currently
expects to renew this line of credit.
The Company believes that existing cash and investment balances, facilities
and equipment leases, cash flow from operating activities and its available line
of credit will provide the Company with sufficient funds to finance its
operations for at least the next 12 months.
YEAR 2000
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. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, infrastructure, embedded
computer chips, networks and telecommunications equipment and end products.
The Company is in the process of upgrading its software to address the year
2000 issue. Because a large portion of the Company's software is obtained from
its vendors on a non-custom basis, the Company believes that upgrades for its
commercial programs are currently available. The Company currently estimates
that the costs associated with the year 2000 issue, and the consequences of
incomplete or untimely resolution of the year 2000 issue, will not have a
material adverse effect on the results of operations or financial position of
the Company in any given year. The Company also relies, directly and indirectly,
on external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governmental entities, both domestic
and international, for accurate exchange of data. Even if the internal systems
of the Company are not materially affected by the year 2000 issue, the Company
could be affected through disruptions in the operation of the enterprises with
which the Company interacts. Despite the Company's efforts to address the year
2000 impact on its internal systems and business operations, there can be no
assurance that such impact will not result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
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RISK FACTORS
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, as well as those discussed above 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 results from orders booked in that quarter. In the past, a significant
percentage of the Company's quarterly bookings and sales to major customers
occurred during the last month of the quarter, and there can be no assurance
that this trend will not return in the future. Orders placed by major customers
are typically based on their forecasted sales and inventory levels for the
Company's products. Changes in purchasing patterns by one or more of the
Company's major customers, customer order changes or rescheduling, gain or loss
of significant customers, customer policies pertaining to desired inventory
levels of the Company's products, negotiations of rebates and extended payment
terms, as well as changes in the ability of the Company to anticipate in advance
the mix of customer orders, could result in material fluctuations in quarterly
operating results. Certain large OEM customers may require the Company to
maintain higher levels of inventory as such customers attempt to minimize their
own inventories. In addition, the Company must order its products and build
inventory substantially in advance of product shipments, and because the markets
for the Company's products are subject to rapid technological and price changes,
there is a risk the Company will forecast incorrectly and produce excess or
insufficient inventory of particular products. To the extent the Company
produces excess or insufficient inventory or is required to hold excess
inventory, the Company's operating results could be adversely 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; 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 are fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer 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.
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DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The loss of any of the Company's major
customers would have a material adverse effect on its business, financial
condition and results of operations. In addition, a majority of the Company's
customers order the Company's products through written purchase orders as
opposed to long term supply contracts and, therefore, such customers are
generally not obligated to purchase products from the Company for any 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 effect the Company's
business, financial condition and results of operations. As the Company's OEM
customers are pressured to reduce prices as a result of competitive factors, the
Company may be required to contractually commit to price reductions for its
products before it knows how, or if, cost reductions can be obtained. If the
Company is unable to achieve such cost reductions, the Company's gross margins
could decline and such decline could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company provides its major distributors and certain volume purchasers with
price protection in the event that the Company reduces the prices of its
products. While the Company maintains reserves for such price protection, there
can be no assurance that the impact of future price reductions by the Company
will not exceed the Company's reserves in any specific fiscal period. Any price
protection in excess of recorded reserves could have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. All of the Company's
products compete with products available from several companies, many of which
have substantially greater research and development, long term guaranteed supply
capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. The Company believes
that its future operating results will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to 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 Adaptec, Inc. and Symbios
Logic, Inc. in the SCSI sector of the I/O market. In the Fibre Channel sector of
the I/O market, the Company expects to compete primarily with Adaptec, Inc.,
Symbios Logic, Inc. and Hewlett-Packard Company. In the IDE sector, the Company
expects to compete with Adaptec, Inc. and Cirrus Logic, Inc.. Adaptec recently
made a bid to acquire Symbios. The Company may compete with some of its larger
disk drive and computer systems customers, some of which have the capability to
develop I/O controller integrated circuits for use in their products. At least
one large OEM customer in the past decided to vertically integrate and therefore
ceased purchases from the Company.
The Company will 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
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products in a timely manner. In addition, while relatively few competitors offer
a full range of SCSI and other I/O products, additional domestic and foreign
manufacturers may increase their presence in, and resources devoted to, these
markets. There can be no assurance that the Company will compete successfully in
the future.
DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS
The Company currently relies on several independent foundries to
manufacture its semiconductor products either in finished form or wafer form.
The Company conducts business with its foundries through written purchase orders
as opposed to long term supply contracts and, therefore, such foundries are
generally not obligated to supply products to the Company for any specific
period, in any specific quantity or at any specified price, except as may be
provided in a particular purchase order 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. Until recently, there has been
a worldwide shortage of advanced process technology foundry capacity. The
manufacture of semiconductor devices is subject to a wide variety of factors,
including the availability of raw materials, the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. The Company is continuously evaluating potential new
sources of supply. However, the qualification process and the production ramp-up
for additional foundries has in the past taken, and could in the future take,
longer than anticipated. There can be no assurance that new supply sources will
be able or willing to satisfy the Company's wafer requirements on a timely basis
or at acceptable quality or 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, without limit, 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
effect 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
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products, whether because of capacity constraints, unexpected disruptions at the
Company's foundries or subcontractors, delays in obtaining additional production
at the existing foundries or in obtaining production from new foundries,
shortages of raw materials, or other reasons, could result in the loss of
customers and other material adverse effects on the Company's operating results,
including 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
Although the Company is currently not experiencing any difficulties in
obtaining sufficient foundry capacity due to the current abundance of worldwide
semiconductor fabrication capacity, the Company and the semiconductor industry
have in the past experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in or advances to wafer manufacturing companies in
exchange for guaranteed production capacity, or the formation of joint ventures
to own and operate or construct foundries or to develop certain products. Any of
these transactions would involve financial risk to the Company and could require
the Company to commit substantial capital or provide technology licenses in
return for guaranteed production capacity.
RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET
A significant portion of the Company's host adapter board products are
currently used in high-performance file servers, workstations and other office
automation products. The Company's growth has been supported by increasing
demand for sophisticated I/O solutions which support database systems, servers,
workstations, Internet/intranet applications, multimedia and telecommunications.
Should there be a slowing in the growth of demand for such systems, the
Company's business, financial condition and results of operations could be
materially and adversely 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
Symbios Logic, Inc., have extensive development efforts related to
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23
products based on the Low Voltage Differential ("LVD") technology. There can be
no assurance that such technology will not be adopted as an industry standard
and if an alternative standard is adopted, there can be no assurance the Company
will timely develop products for such standard. Further, even if Fibre Channel
is adopted, there can be no assurance that the Company's integrated PCI to Fibre
Channel controller will be fully developed in time to be accepted for use in
Fibre Channel technology or that, if developed, will achieve market acceptance,
or be capable of being manufactured at competitive prices in sufficient volumes.
In the event that Fibre Channel is not adopted as an industry standard, or that
the Company's integrated circuit PCI to Fibre Channel controllers are not timely
developed or do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely 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 and PCI.
In addition, the Company's Fibre Channel products have been designed to conform
with a standard that has yet to be uniformly adopted. The Company's products
must be designed to operate effectively with a variety of hardware and software
products supplied by other manufacturers, including microprocessors, operating
system software and peripherals. The Company depends on significant cooperation
with these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading microprocessor, systems and
peripheral suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability. If industry acceptance of these standards was
to decline or if they were replaced with new standards, and if the Company did
not anticipate these changes and develop new products, the Company's business,
financial condition and results of operations could be materially and adversely
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 or new product announcements
by other companies or that the Company's research and development efforts will
be successful. Furthermore, introduction of new products and moving production
of existing products to different suppliers involves substantial business risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses 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, 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 the possible amortization of goodwill, the Financial Accounting
Standards Board ("FASB") is considering making pooling of interests accounting
treatment for merger transactions more difficult to attain, or may abolish such
treatment altogether. If the FASB does limit or eliminate pooling of interests
accounting treatment, the Company's ability to consummate merger transactions
without incurring goodwill would be materially and adversely 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, the Company has experienced difficulty in attracting
and retaining qualified engineers and other technical personnel and anticipates
that competition for such personnel will increase in the future. There can be no
assurance that the Company will be able to attract and retain key personnel with
the skills and expertise necessary to develop new products in the future, or to
manage the Company's business, both in the United States and abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to various risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. 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, such as
Japan. 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 or the currency and economic disruptions in the Asian
markets 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 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 litigation could be
expensive and time consuming, could divert management's attention from other
matters or could
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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
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. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, infrastructure, embedded
computer chips, networks and telecommunications equipment and end products.
The Company is in the process of upgrading its software to address the year
2000 issue. Because a large portion of the Company's software is obtained from
its vendors on a non-custom basis, the Company believes that upgrades for its
commercial programs are currently available. The Company currently estimates
that the costs associated with the year 2000 issue, and the consequences of
incomplete or untimely resolution of the year 2000 issue, will not have a
material adverse effect on the results of operations or financial position of
the Company in any given year. The Company also relies, directly and indirectly,
on external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governmental entities, both domestic
and international, for accurate exchange of data. Even if the internal systems
of the Company are not materially affected by the year 2000 issue, the Company
could be affected through disruptions in the operation of the enterprises with
which the Company interacts. Despite the Company's efforts to address the year
2000 impact on its internal systems and business operations, there can be no
assurance that such impact will not result in a material disruption of its
business or have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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 subsidiary 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 subsidiary as of March 29, 1998 and March 30, 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 29, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Orange County, California
May 12, 1998
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 29, 1998 AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1998 1997
-------- -------
Cash and cash equivalents................................... $ 64,090 $19,091
Short term investments...................................... 27,746 --
Accounts and notes receivable, less allowance for doubtful
accounts of $746 and $636 as of March 29, 1998 and March
30, 1997, respectively.................................... 7,836 5,720
Inventories................................................. 3,835 4,794
Deferred income taxes....................................... 4,353 1,149
Prepaid expenses and other current assets................... 475 391
-------- -------
Total current assets.............................. 108,335 31,145
Long term investments....................................... 20,934 --
Property and equipment, net................................. 6,372 5,043
Other assets................................................ 601 775
-------- -------
$136,242 $36,963
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 3,765 $ 3,994
Accrued expenses............................................ 13,610 7,115
Current installments of capitalized lease obligations....... 211 225
-------- -------
Total current liabilities......................... 17,586 11,334
Capitalized lease obligations, excluding current
installments.............................................. 141 352
Other non-current liabilities............................... 466 924
-------- -------
Total liabilities................................. 18,193 12,610
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.10 par value; 1,000,000 shares
authorized (200,000 shares designated as Series A
Junior Participating Preferred, $0.001 par value); none
issued and outstanding................................. -- --
Common stock, $0.10 par value; 12,500,000 shares
authorized; 8,650,826 and 5,840,701 shares issued and
outstanding at March 29, 1998, and March 30, 1997,
respectively........................................... 865 584
Additional paid-in capital................................ 99,008 19,001
Retained earnings......................................... 18,176 4,768
-------- -------
Total stockholders' equity........................ 118,049 24,353
-------- -------
$136,242 $36,963
======== =======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 29, 1998, MARCH 30, 1997, AND MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996
------- ------- -------
Net revenues................................................ $81,393 $68,927 $53,779
Cost of sales............................................... 34,049 38,151 34,413
------- ------- -------
Gross profit.............................................. 47,344 30,776 19,366
------- ------- -------
Operating expenses
Engineering and development............................... 15,601 10,422 7,191
Selling and marketing..................................... 8,707 6,372 6,490
General and administrative................................ 4,550 4,628 4,501
------- ------- -------
Total operating expenses.......................... 28,858 21,422 18,182
------- ------- -------
Operating income.................................. 18,486 9,354 1,184
Interest expense............................................ 109 125 153
Interest and other income................................... 3,453 602 172
------- ------- -------
Income before income taxes................................ 21,830 9,831 1,203
Income tax provision........................................ 8,422 3,983 537
------- ------- -------
Net income.................................................. $13,408 $ 5,848 $ 666
======= ======= =======
Basic earnings per common share............................. $ 1.77 $ 1.02 $ 0.12
======= ======= =======
Diluted earnings per share.................................. $ 1.66 $ 0.96 $ 0.12
======= ======= =======
Common shares used in the calculation of basic earnings per
share..................................................... 7,592 5,722 5,554
======= ======= =======
Shares used in the calculation of diluted earnings per
share..................................................... 8,099 6,115 5,612
======= ======= =======
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 29, 1998, MARCH 30, 1997, AND MARCH 31, 1996
(IN THOUSANDS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ---------- ------------ -------------
Balance as of April 2, 1995................... 5,552 $555 $16,772 $ (1,746) $ 15,581
Net income.................................. -- -- -- 666 666
Issuance of common stock.................... 6 1 29 -- 30
----- ---- ------- -------- --------
Balance as of March 31, 1996.................. 5,558 556 16,801 (1,080) 16,277
Net income.................................. -- -- -- 5,848 5,848
Issuance of common stock.................... 283 28 2,200 -- 2,228
----- ---- ------- -------- --------
Balance as of March 30, 1997.................. 5,841 584 19,001 4,768 24,353
Net income.................................. -- -- -- 13,408 13,408
Issuance of common stock (net of tax benefit
of $1,494)............................... 165 16 2,736 -- 2,752
Stock offering.............................. 2,645 265 77,271 -- 77,536
----- ---- ------- -------- --------
Balance as of March 29, 1998.................. 8,651 $865 $99,008 $ 18,176 $118,049