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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 APRIL 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0537669
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
26600 LAGUNA HILLS DRIVE
ALISO VIEJO, CALIFORNIA 92656
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 389-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, VALUE $0.001 PER SHARE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of June 15, 2000 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $3,836,510,787.
As of June 15, 2000, the registrant had 74,676,609 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference in the
Parts of this report indicated below:
Part III, Items 10, 11, 12 and 13 -- Definitive proxy statement for the
2000 Annual Meeting of Stockholders
which will be filed with the
Securities and Exchange Commission
within 120 days after the close of the
2000 year.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
QLogic Corporation was organized as a Delaware corporation in 1992. Unless
the context indicates otherwise, the "Company" and "QLogic" each refer to the
Registrant and its subsidiaries.
All references to years refer to the Company's fiscal years ended April 2,
2000, March 28, 1999 and March 29, 1998 as applicable, unless the calendar years
are specified.
OVERVIEW
QLogic is a leading designer and supplier of semiconductor and board level
input/output, or I/O, and management controller products. Our I/O products
provide a high performance, industry standard interface for the direct
attachment or networking of computer systems and their data storage
environments. We provide these interfaces for all enterprise server and storage
products including proprietary and open systems platforms, hard disk and tape
drives, removable disk drives, RAID, or redundant array of independent disks,
subsystems and tape libraries. In addition, we design and market baseboard and
enclosure management products that monitor and communicate management
information related to components that are critical to computer system and
storage subsystem reliability and availability. We target the high performance
sector of the I/O market, focusing primarily on the Fibre Channel and small
computer system interface, or SCSI, industry standard. In addition, the Company
utilizes its I/O expertise to develop products for emerging I/O standards, such
InfiniBand and intelligent platform management interface, or IPMI.
Our designs are based on multiple I/O standards to service the needs of
manufacturers and end users of various types of computer systems and components,
such as workstations, servers and data storage peripherals. We provide high
performance Fibre Channel and SCSI-based solutions and are using our
technological capabilities to provide solutions based on the integrated drive
electronics standard, or IDE. We believe that our technological leadership,
extensive involvement in our customers' product development process and the ease
of migration of our products between legacy and emerging technologies, position
us to continually expand our delivery of leading edge I/O solutions to our
existing customer base. We believe that these attributes also provide us with
competitive advantages in establishing new relationships with additional
original equipment manufacturers, or OEMs, and channel distributors for computer
systems, data storage peripherals and storage subsystems. We market our 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. Our primary OEM customers are major
domestic and international suppliers and manufacturers of servers, workstations,
storage subsystems and data peripherals, such as Sun Microsystems, Dell
Computer, IBM , Fujitsu Limited and Compaq.
INDUSTRY BACKGROUND
The increasing processing power of computers, the proliferation of
networks, the rapid growth in the usage of the Internet and Intranets, the wider
application of computers in multimedia and telecommunications applications and
the availability of higher performance data storage peripheral devices have
driven the demand for increased bandwidth among servers, workstations and data
storage. The I/O system is the electronic link between the host central
processing unit, or CPU, and the computer's data storage peripheral devices,
such as hard disk drives, tape drives, removable disk drives and RAID and tape
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 CPUs and multiple data storage peripherals and, at the same time,
minimize the consumption of CPU processing power while maintaining 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, open standard for data interchange on 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 serial IDE,
which operates at significantly higher data transfer rates and supports an
increased number of storage devices.
In response to the increased data throughput required by networks and
workstations, SCSI was developed and adopted as the industry's open, 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:
- increased variety of higher performance peripheral devices and the
continual shift toward higher capacity and higher data rate disk drives;
- demand for I/O interfacing capabilities with greater numbers and types of
attached peripherals;
- movement toward more distributed network architectures across greater
distances;
- need for greater volumes of data transfer;
- demand for increased data throughput;
- the "plug and play" standard, that is supported by Windows operating
systems and Intel microprocessor-based systems, which simplifies the
installation process; and
- growing usage of multi-tasking, multi-threading operating systems.
The continuing evolution towards higher performance computer systems has
led to the development of new connectivity solutions that provide even greater
data interchange between computer systems and data storage peripherals. Fibre
Channel is a new industry standard designed to meet the demand for increased
bandwidth and connectivity. Fibre Channel is an advanced I/O standard which
provides data transmission speeds up to approximately 2 gigabits per second. In
addition, Fibre Channel is designed to maintain signal integrity while allowing
for data interchange between a computer system and up to 126 devices in a loop
environment. Furthermore, Fibre Channel supports the use of either a fiber optic
connection or for shorter distances, a copper cable. Fiber optic connection
allows the distance between a computer system and its data storage peripherals
to extend up to 10 kilometers. When applied as a switched fabric topology, Fibre
Channel is the solution of choice for implementation of Storage area networks,
or SANs. SANs link physically separated storage devices to two or more servers
via a dedicated storage network. SANs allow for the consolidation of storage
which increases flexibility, simplifies scalability and reduces the burdensome
cost of managing large storage complexes.
Computer system and peripheral device manufacturers select I/O technologies
for incorporation into their products primarily on the basis of application,
performance and connectivity needs. The I/O products selected must be
specifically tailored to the manufacturer's requirements, in order to be
compatible with the manufacturer's system or peripherals either on a turnkey
basis or with minimum developmental effort. In addition to being compatible with
the present system or peripherals, I/O products ideally must be both "forward"
and "backward" compatible with future and past computers and peripherals. That
is, there must be a ready migration path between the I/O product and other
products sold and under development by the manufacturer. Also, it is critical
that the I/O product be available at a reasonable cost and in a timely manner,
so as not to delay the manufacturer's time to market, which has become
increasingly important in an era of short product life cycles. In order to
achieve these goals, manufacturers increasingly seek to involve I/O product
suppliers in their product validation and development cycles. By including the
I/O system providers in their planning and development process, manufacturers
not only ensure compatibility between product lines but also reduce the average
time to market for their products.
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With the continuing evolution of high performance computer systems and data
storage peripherals, the need for conveying management information about the
status of those components has fueled rapid growth in the deployment of both
baseboard and enclosure management implementations. In calendar 1996, OEMs
adopted the SCSI Accessed Fault -- Tolerant Enclosure, or SAF-TE, standard for
enclosure management, which standardized requirements for server and storage
subsystem vendors. While many of the RAID subsystems shipped contained a
proprietary design for the enclosure management function, they were not SAF-TE
standard compliant. Today, enclosure management solutions, which are SAF-TE
compliant, are becoming a standard feature in the full range of servers and
storage subsystems. In calendar 1999, the IPMI standard for baseboard management
was released and industry participants will deliver implementations in early
calendar 2000. In addition to acceptance by the commercial server manufacturers,
IPMI is also being accepted as the management interface of choice for embedded
computing environments used by telecommunications enclosure and board
manufacturers.
THE QLOGIC SOLUTION
QLogic is a leading designer and supplier of semiconductor and board-level
I/O products. We have been designing and marketing SCSI-based products for over
13 years and are a leading supplier of connectivity solutions to this market
sector. We are leveraging our technological expertise in SCSI into higher and
lower end hardware and software solutions for our OEM and distribution customer
base. In fiscal 1996, we introduced the industry's first fully integrated single
chip peripheral computing interface, or PCI, to Fibre Channel controller. During
fiscal 1997 and 1998, we introduced products and intellectual property based on
IDE standards to address additional I/O needs of our OEM customer base. During
fiscal 1999, our Fibre Channel solutions were selected by several leading server
and storage subsystem OEMs for incorporation into their SAN initiatives. Our
market leading enclosure management products were also selected by the world's
largest server manufacturers for implementation in their server platforms.
We work closely with our customers in order to anticipate and help identify
their needs. Even after a product is identified and validated, we continue 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, we believe that our customers benefit from
significant time-to-market advantages. By gaining insight into the customer's
system needs, we believe that we are in a better position to deliver I/O
products with an easier migration path, thus reducing the customer's firmware
and software development costs and associated implementation risks. In addition,
by utilizing selected wafer fabrication suppliers, we seek to ensure that we
have ready access to the latest developments in wafer fabrication, in addition
to avoiding the fixed costs associated with foundry ownership.
Our I/O 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. We believe our products
offer superior compatibility and ease of migration across multiple I/O standards
due to their use of common software. We believe that our experience and focus on
the Fibre Channel market sector, the ease of migration of our products, our
current development efforts into I/O standards, such as serial IDE and
InfiniBand, and our close customer relationships with leading server,
workstation and peripheral manufacturers provide us with competitive advantages
in the I/O and management product markets.
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PRODUCTS
We design and supply semiconductor and board level I/O solutions for
peripheral and computer systems. Our I/O products have traditionally been based
on the SCSI standard, and we have expanded our product lines to include products
based on the Fibre Channel and IDE standards. We also design and supply
semiconductor enclosure management solutions.
PRODUCT DESCRIPTION
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SCSI Fast Architecture (FAS) - First introduced in 1991
- Single chip general purpose controllers
- Integrated DMA controller and SCSI
processor
- Supports Fast and Ultra SCSI transfer
rates (up to 40MB/sec)
- Supports 8- or 16-bit data handling
- May be used in host or peripheral
applications
SCSI Triple Embedded Controllers (TEC) - First introduced in 1991
- Single chip disk controllers
- Integrated buffer controller, formatter
and SCSI processor
- Powerful on-chip data error correction
- Supports Fast and Ultra SCSI transfer
rates (up to 40MB/sec)
Fibre Channel Triple Embedded Controller (FTEC) - First introduced in 1997
- Single chip disk controllers
- Integrated buffer controller, formatter,
Fibre Channel processor, and dual loop
transceivers
- Powerful on-chip data error correction
- Supports FC-AL, 100MB/sec
IDE Triple Embedded Controller (ATEC) - First introduced in 1997
- Single chip disk controllers
- Integrated buffer controller, formatter,
and IDE processor
- Powerful on-chip data error correction
- Supports ATA and Ultra/33
Fibre Channel and SCSI Intelligent System Processor - First introduced in 1992
(ISP) 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
- Fibre Channel units, which operate at
transfer rates up to 100 MB/sec
Fibre Channel and SCSI - 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
- Fibre Channel units, which operate at
transfer rates up to 100 MB/sec
Guardian Enclosure Management (GEM) - First introduced in 1996
- Industry's first single-chip
implementation of SAF-TE specification
- Industry's first enclosure management
controller for Ultra2 SCSI
- Industry's first baseboard management
(IPMI) controller for Servers
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SALES AND MARKETING
We market and distribute our 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, we use 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, we sell directly as well as through a master
distributor. In Europe, we sell our products through distributors. We believe
that it is important to work closely with our large peripheral and computer
system manufacturer OEMs during their design cycles. We support these customers
with extensive applications and system design support, as well as training
classes and seminars both in the field and from our offices in Aliso Viejo,
California. We also maintain a high level of customer support through technical
hotlines and Internet communications.
Our manufacturers' representatives and distributors are not subject to
minimum purchase requirements and can discontinue marketing any of our products
at any time. Our distributors may be permitted to return to us a portion of the
products purchased by them. In addition, we may provide our distributors with
price protection in the event that we reduce the prices of our products. The
loss of one or more manufacturers' representatives or distributors could have an
adverse effect on our business, financial condition and results of operations.
Our 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 ours being
selected to be incorporated into a potential customer's computer system or data
storage peripherals. Once we secure a design win with a given customer, the time
to product shipment can range between six and 18 months. After winning a design
with a potential customer, we work closely with the customer to integrate our
product with the customer's current and next generation products. Due to the
extensive amount of resources required for each customer design, typically only
one I/O solution is designed into any given customer product. After being
designed into a customer's product, sales are typically made through purchase
orders, which are subject to cancellation, postponement or other types of
delays.
International sales of our products accounted for approximately 56% of net
revenues in fiscal year 2000, 53% of net revenues is fiscal year 1999, and 42%
of net revenues in fiscal year 1998. International sales are denominated in U.S.
Dollars. Due to our relatively high proportion of international sales, we are
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. See also "Factors That May Affect Future Results"
and Note (12) to Consolidated Financial Statements.
ENGINEERING AND DEVELOPMENT
In order to compete successfully, we believe that we must continually
design, develop and introduce new products that take advantage of market
opportunities and address emerging standards. Our strategy is to leverage our
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 our core SCSI business. We are predominantly engaged in the
development of integrated circuit I/O controllers for additional I/O standards
and enabling technologies, such as Fibre Channel, Ultra SCSI, other new parallel
SCSI I/Os and Ultra IDE. We intend to broaden our product lines while continuing
to allow our customers to transition rapidly to Fibre Channel and future
emerging I/O standards.
At April 2, 2000, we employed approximately 209 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 we will
continue to be successful in attracting and retaining key personnel with the
skills and expertise necessary to develop new products in the future.
The markets for our products are characterized by rapid technological
change, evolving industry standards and product obsolescence. Our success is
highly dependent upon the timely completion and
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introduction of new products at competitive prices and performance levels. There
can be no assurance that we will be able to identify new product opportunities
successfully and develop and bring to market new products in a timely manner, or
that we will be able to respond effectively to technological advancements or new
product announcements.
BACKLOG
Our backlog of orders was approximately $54.4 million at April 2, 2000,
compared to approximately $28.6 million at March 28, 1999. These backlog figures
include only orders scheduled for shipment within six months, of which the
majority is scheduled for delivery within 90 days. Most orders are subject to
rescheduling and/or cancellation with little or no penalty. Purchase order
release lead times depend upon the scheduling practices of the individual
customer, and the rate of booking new orders fluctuates from month to month. Our
customers have, in the past, encountered uncertain and changing demand for their
products. Orders are typically placed based on customer forecasts. If demand
falls below customers' forecasts, or if customers do not control their
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. In the past, we have 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, our competitors have
increasingly frequent opportunities to achieve design wins in next generation
systems. A design win usually ensures a customer will purchase the product until
a higher performance standard is available or a competitor can demonstrate a
significant price/performance advantage. Most of our 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 ours. We believe that our future operating results
will depend, in part, upon our 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 our competitors.
Due to the complexity of our products, we have periodically experienced delays
in completing products on a timely basis. If we are unable to design, develop
and introduce competitive new products on a timely basis, our future operating
results would be adversely affected.
We currently compete primarily with Adaptec, LSI Logic and Cirrus Logic in
the SCSI sector of the I/O market. In the Fibre Channel sector of the I/O
market, we compete primarily with Agilent Technologies, LSI Logic, Emulex
Corporation, JNI and Adaptec. In the IDE sector, we compete with
STMicroelectronics and Cirrus Logic. In the enclosure management sector, we
compete primarily with the LSI Logic and Vitesse Semiconductor. We may compete
with some of our larger disk drive and computer systems customers, some of which
have the capability to develop I/O controller integrated circuits for use in
their own products. At least one large OEM customer in the past has decided to
vertically integrate and has therefore ceased purchases from us.
We believe that one of our principal competitive strengths in the computer
and peripheral Application Specific Integrated Circuit, or ASIC, market is our
ability to obtain major design wins as the result of our systems level
expertise, integrated circuit design capability and substantial experience in
computer and peripheral ASICs applications. We believe competitive factors in
design wins are time-to-market, performance, product features, price, quality,
technical support and ease of migration path to other computer and peripheral
ASICs standards. We will have to continue to develop products appropriate to our
markets to remain competitive, as our competitors continue to introduce products
with improved performance characteristics. While we continue to devote
significant resources to research and development, there can be no
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assurance that such efforts will be successful or that we will develop and
introduce new technology and products in a timely manner. In addition, while
relatively few competitors offer a full range of SCSI and other computer and
peripheral ASICs products, additional domestic and foreign manufacturers may
increase their presence in, and resources devoted to, these markets. There can
be no assurance that we will compete successfully in the future against our
existing competitors or potential competitors.
MANUFACTURING
We subcontract the manufacturing of our semiconductor chips and our host
adapter boards to independent foundries and subcontractors, which allows us 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, we
focus our resources on product design and development, quality assurance, sales
and marketing and customer support. We design our semiconductor and host adapter
board products, and perform final tests on products, including tests required
under our ISO9001/TickIT Certification. We also provide fabrication process
reliability tests, conduct failure analysis and audit the finished goods
inventory to confirm the integrity of our quality assurance procedures.
Our ASICs are currently manufactured by a number of domestic and offshore
foundries. Our major semiconductor suppliers are Toshiba, NEC Electronics, LSI
Logic and Samsung Semiconductor. Most of our products are manufactured using 0.6
or 0.35 micron process technology.
We are dependent on our foundries to allocate to us a portion of their
foundry capacity sufficient to meet our 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. We do not have long-term agreements with all of
our foundries, and purchase both wafers and finished chips on a purchase order
basis. Therefore, the foundries generally are not obligated to supply products
to us for any specific period, in any specific quantity or at any specific
price, except as may be provided in a particular purchase order. We work with
our existing foundries, and intend to qualify new foundries, as needed, to
obtain additional manufacturing capacity. There can be no assurance, however,
that we will be able to obtain additional capacity.
We currently purchase our semiconductor products from our foundries either
in finished form or wafer form. We use subcontractors for die assembly of our
semiconductor products purchased in wafer form, and for assembly of our host
adapter board products. In the assembly process for our 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 us prior to shipment to customers. For our host adapter
board products, we purchase components in kit form. We provide these items to
contract manufacturing companies that work together with our component suppliers
to assemble the boards to our specifications.
We believe most component parts used in our host adapter boards are
standard off-the-shelf items, which are, or can be, purchased from two or more
sources. We select suppliers on the basis of technology, manufacturing capacity,
quality and cost. Whenever possible and practicable, we strive to have at least
two manufacturing locations for each host adapter board and chip product.
Nevertheless, our 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
our suppliers to deliver products of acceptable quality and in a timely manner
or the inability by us to procure adequate supplies of our products could have a
material adverse effect on our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
Although we have eight patents issued and three additional patent
applications pending in the United States, we rely primarily on our trade
secrets, trademarks and copyrights to protect our intellectual property. We
attempt to protect our proprietary information through agreements with our
customers, suppliers,
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employees and consultants, and through other security measures. Although we
intend to protect our rights vigorously, there can be no assurance that these
measures will be successful. In addition, the laws of certain countries in which
our products are or may be developed, manufactured or sold, including various
countries in Asia, may not protect our products and intellectual property rights
to the same extent as the laws of the United States.
While our ability to compete may be affected by our ability to protect our
intellectual property, we believe our technical expertise and ability to
introduce new products on a timely basis will be more important in maintaining
our competitive position than protection of our intellectual property. Although
we continue to implement protective measures and intend to defend vigorously our
intellectual property rights, there can be no assurance that these measures will
be successful.
We have received notices of claimed infringement of trademark rights in the
past. There can be no assurance that third parties will not assert claims of
infringement of trademarks or any other intellectual property rights against us
with respect to existing and future products. In the event of a patent or other
intellectual property dispute, we 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 we
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 us, and divert the efforts of
our technical and management personnel, whether or not such litigation is
determined our favor.
EMPLOYEES
We had 366 employees as of April 2, 2000. We believe our future prospects
will depend, in part, on our ability to continue to attract, train, motivate,
retain and manage skilled engineering, sales, marketing and executive personnel.
None of our employees are represented by a labor union. We believe that our
relations with our employees are good.
ITEM 2. PROPERTIES
Our principal product development, operations, sales and corporate offices
are currently located in three buildings comprising approximately 165,000 square
feet in Aliso Viejo, California. We purchased the Aliso Viejo facility on March
23, 2000 and the facility is held without encumbrance. Additionally, we have
leased design centers in Austin, Texas and Boulder, Colorado comprising 5,973
square feet and 7,750 square feet, respectively.
ITEM 3. LEGAL PROCEEDINGS
Periodically, we are a party to ordinary disputes arising in the normal
course of business. We do not believe that the outcome of any current legal
proceedings will have a material adverse effect on our 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 2000 to a vote
of security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND PRICES
Shares of our common stock are traded and quoted in The NASDAQ National
Market under the symbol QLGC. The following table sets forth the range of high
and low sales prices per share of our common stock for each quarterly period of
the two most recent years as reported on The NASDAQ National Market. The share
prices have been retroactively restated to reflect the two-for-one stock splits
of our common stock which were effected in February 1999, August 1999 and
February 2000.
SALES PRICES
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FISCAL 2000 HIGH LOW
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First Quarter............................................... $34.22 $14.38
Second Quarter.............................................. 49.75 31.25
Third Quarter............................................... 83.75 22.50
Fourth Quarter.............................................. 203.25 68.06
FISCAL 1999 HIGH LOW
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First Quarter............................................... $ 5.89 $ 4.38
Second Quarter.............................................. 8.85 3.49
Third Quarter............................................... 16.78 6.31
Fourth Quarter.............................................. 20.38 11.63
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of our common stock is 454 as of
June 15, 2000.
DIVIDENDS
We have never paid cash dividends on our common stock and currently have no
intention to do so.
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ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding QLogic should be
read in conjunction with the consolidated financial statements and notes
thereto.
FISCAL YEAR ENDED
------------------------------------------------------------
APRIL 2, MARCH 28, MARCH 29, MARCH 30, MARCH 31,
2000 1999 1998 1997 1996
-------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENTS OF OPERATIONS
DATA
Net revenues......................... $203,143 $117,182 $ 81,393 $68,927 $53,779
Cost of revenues..................... 64,241 42,603 34,049 38,151 34,413
-------- -------- -------- ------- -------
Gross profit............... 138,902 74,579 47,344 30,776 19,366
-------- -------- -------- ------- -------
Operating expenses:
Engineering and development(1)..... 39,993 24,358 15,601 10,422 7,191
Selling and marketing.............. 16,724 11,062 8,707 6,372 6,490
General and administrative......... 8,140 5,794 4,550 4,628 4,501
-------- -------- -------- ------- -------
Total operating expenses... 64,857 41,214 28,858 21,422 18,182
-------- -------- -------- ------- -------
Operating income........... 74,045 33,365 18,486 9,354 1,184
Interest expense..................... 19 84 109 125 153
Interest and other income............ 7,722 5,657 3,453 602 172
-------- -------- -------- ------- -------
Income before income taxes......... 81,748 38,938 21,830 9,831 1,203
Income tax provision................. 27,795 13,239 8,422 3,983 537
-------- -------- -------- ------- -------
Net income........................... $ 53,953 $ 25,699 $ 13,408 $ 5,848 $ 666
======== ======== ======== ======= =======
Basic net income per share(2)........ $ 0.74 $ 0.37 $ 0.22 $ 0.13 $ 0.02
-------- -------- -------- ------- -------
Diluted net income per share(2)...... $ 0.70 $ 0.34 $ 0.21 $ 0.12 $ 0.02
-------- -------- -------- ------- -------
SELECTED BALANCE SHEET DATA
Working capital...................... $153,162 $110,687 $ 90,749 $19,811 $13,334
Total assets......................... $267,156 $172,923 $136,242 $36,963 $28,539
Long-term capitalized lease
obligations, excluding current
installments....................... $ -- $ -- $ 141 $ 352 $ 576
Other non-current liabilities........ $ -- $ -- $ 466 $ 924 $ 2,016
Total stockholders' equity........... $242,969 $152,684 $118,049 $24,353 $16,277
- ---------------
(1) Engineering and development expenses in the fiscal year ended April 2, 2000
include a $7,536 acquired in-process technology charge relating to our
acquisition of certain assets of Borg Adaptive Technologies, Inc.
(2) All per share data has been retroactively restated to reflect the stock
splits in February 1999, August 1999, and February 2000.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of our expectations regarding future trends
affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, including, but not
limited to, those set forth under "Factors That May Affect Future Results" and
elsewhere in this document. The Company undertakes no obligation to update the
information contained in this Item 7.
RESULTS OF OPERATIONS
The following table sets forth the results of operations and percentage of
total revenues in our consolidated statements of income:
FISCAL YEAR ENDED
----------------------------------------------------------
APRIL 2, 2000 MARCH 28, 1999 MARCH 29, 1998
----------------- ----------------- ----------------
(IN THOUSANDS)
Net revenues....................... $203,143 100.0% $117,182 100.0% $81,393 100.0%
Cost of revenues................... 64,241 31.6 42,603 36.4 34,049 41.8
-------- ----- -------- ----- ------- -----
Gross profit..................... 138,902 68.4 74,579 63.6 47,344 58.2
-------- ----- -------- ----- ------- -----
Operating expenses:
Engineering and development...... 39,993 19.7 24,358 20.8 15,601 19.2
Selling and marketing............ 16,724 8.2 11,062 9.4 8,707 10.7
General and administrative....... 8,140 4.0 5,794 4.9 4,550 5.6
-------- ----- -------- ----- ------- -----
Total operating expenses...... 64,857 31.9 41,214 35.1 28,858 35.5
-------- ----- -------- ----- ------- -----
Operating income.............. $ 74,045 36.5% $ 33,365 28.5% $18,486 22.7%
======== ===== ======== ===== ======= =====
NET REVENUES
Our net revenues are derived primarily from the sale of SCSI and Fibre
Channel based I/O products and enclosure management products. We also license
certain designs and receive royalty revenues and non-recurring engineering fees.
Net revenues in fiscal 2000 increased $86.0 million or 73% from fiscal 1999 to
$203.1 million. The increase was the result of a $34.4 million increase in sales
of SCSI products, a $40.8 million increase in sales of Fibre Channel products,
and a $10.7 million increase in IDE-based royalties.
Net revenues in fiscal 1999 increased $35.8 million or 44% from fiscal 1998
to $117.2 million. The increase was the result of a $17.5 million increase in
sales of SCSI products, a $17.9 million increase in sales of Fibre Channel
products, and a $0.4 million increase in IDE-based royalties.
Export revenues (primarily to Pacific Rim Countries) in fiscal year 2000
increased $52.1 million or 84% from fiscal 1999 to approximately $114.2 million.
Export revenues in fiscal 1999 increased $27.5 million or 79% from fiscal 1998,
to approximately $62.1 million. As a percentage of net revenues, export revenues
accounted for 56% in fiscal year 2000, 53% in fiscal year 1999, and 42% in
fiscal year 1998. These increases are primarily due to increased sales to
customers in Japan and to a lesser extent, Europe. Export revenues are
denominated in U.S. Dollars. We do not expect the uncertainty in selected
Pacific Rim foreign currency markets to have a material adverse effect on the
results of our operations.
A small number of our customers account for a substantial portion of our
net revenues, and we expect that a limited number of customers will continue to
represent a substantial portion of our net revenues for the foreseeable future.
Our six largest customers accounted for approximately 69% of net revenues in
fiscal years 2000 and 1999, and 71% in fiscal year 1998. In fiscal 2000, Fujitsu
Limited accounted for 30% of net revenues, and Sun Microsystems accounted for
13% of the Companies net revenues. In fiscal 1999, Fujitsu Limited accounted for
24% of net revenues, and Sun Microsystems accounted for 19% of the Company's net
revenues.
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In fiscal 1998, Fujitsu Limited accounted for 23% of net revenues, Sun
Microsystems accounted for 20%, of net revenues.
We believe that our major customers continually evaluate whether or not to
purchase products from alternate or additional sources. Additionally, customers'
economic and market conditions frequently change. Accordingly, there can also be
no assurance that a major customer will not reduce, delay or eliminate its
purchases from us. Any such reduction, delay or loss of purchases could have a
material adverse effect on the Company's business, financial condition and
results of operations.
GROSS PROFIT
Cost of revenues consist primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The gross profit percentage in fiscal 2000 was 68%,
an increase from 64% in fiscal 1999. The percentage growth was due to the
increasing contribution of license fees combined with the continuing
introduction of new, higher margin products and volume related cost reductions
on mature products.
The gross profit percentage in fiscal 1999 was 64%, an increase from 58% in
fiscal 1998. The percentage increase was due to the introduction of new, higher
margin products and volume related cost reductions on mature products, combined
with improved quality resulting in reduced scrap expenses.
The gross profit percentage for fiscal 1998 was 58%, an increase from 45%
in the prior fiscal year. The percentage increase was due to a shift in product
mix to products with lower unit costs, as well as increased production volumes.
Additionally, multiple disciplines within the Company worked together to improve
inventory management.
Our ability to maintain our current gross profit percentage can be
significantly affected by factors such as supply costs and, in particular, the
cost of silicon wafers, the worldwide semiconductor foundry capacity, the mix of
products shipped, competitive price pressures, the timeliness of volume
shipments of new products and our ability to achieve manufacturing cost
reductions. We anticipate that it will be increasingly more difficult to reduce
manufacturing costs. As a result, we do not anticipate gross profit percentage
to increase at a rate consistent with historic trends.
OPERATING EXPENSES
Engineering and Development. Engineering and development expenses consist
primarily of salaries and other personnel related expenses, development related
material, occupancy costs, and computer support. We believe continued
investments in engineering and development activities are critical to achieving
our strategic objectives. As a result, we expect that engineering and
development expenses will increase in absolute dollars in fiscal 2001.
Engineering and development expenses were $40.0 million in fiscal year
2000, $24.4 million in fiscal year 1999, and $15.6 million in fiscal year 1998.
As a percentage of net revenues this amounted to 19.7% in fiscal 2000, 20.8% in
fiscal 1999, and 19.2% in fiscal 1998. The increase in spending each fiscal year
was largely due to increased levels of spending for Fibre Channel, IDE, and SCSI
design and engineering support.
In fiscal year 2000 we incurred a $7.5 million charge for acquired
in-process technology relating to the acquisition of AdaptiveRAID(R) technology
from Borg Adaptive Technologies, Inc., a wholly-owned subsidiary of nStor
Corporation. At the time of the acquisition, the AdaptiveRAID(R) technology was
in the development stage with no completed commercially viable storage solution
products. The technology purchased had, at the time of acquisition, several
in-process research and development projects that were substantially incomplete.
The major projects acquired included: (a) a PCI RAID controller; (b) a RAID
bridge controller; and (c) a storage area network RAID controller for the Intel
Architecture server and workstation market. The Company's primary purpose for
the acquisition was to acquire these in-process projects and complete the
development efforts as the Company believed they had economic value but had not
yet reached technological feasibility and had no alternative future uses.
Therefore, the Company has recorded the purchase price as a one-time charge for
in-process research and development of $7.5 million to engineering and
development
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expense in the fourth fiscal quarter ended April 2, 2000. The Company is
continuing development efforts and does not currently have an estimate as to
when the first new products will begin to ship.
In fiscal year 1999 we incurred a $2.1 million charge for acquired
in-process technology relating to the acquisition of Silicon Design Resources,
Inc.
Selling and Marketing. Selling and marketing expenses consist primarily of
sales and marketing salaries, sales commissions and related expenses,
promotional activities and travel for sales and marketing personnel. We believe
continued investments of these type of expenses are critical to the success of
our strategy of expanding relationships with our customers. As a result, we
expect sales and marketing expenditures will continue to increase in the future.
Sales and marketing expenses were $16.7 million in fiscal 2000, $11.1
million in fiscal 1999, and $8.7 million in fiscal 1998. As a percentage of net
revenues this amounted to 8.2% in fiscal 2000, 9.4% in fiscal 1999, and 10.7% in
fiscal 1998. The increases in dollars reflected an increased level of sales
commissions paid as a result of the increase in revenues. The decrease in sales
and marketing expenses as a percentage of net revenues from fiscal 1998 to
fiscal 1999 and from fiscal 1999 to fiscal 2000 relates to economies of scale
realized from the growth in net revenues.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
human resources and information technology personnel. Non-personnel related
expenses consist of recruiting fees, professional services and corporate
expenses. We expect general and administrative expenses to increase in absolute
dollars as we add personnel and incur additional costs relating to the growth of
the business and our operation as a public company.
General and administrative expenses were $8.1 million in fiscal 2000, $5.8
million in fiscal 1999, and $4.6 million in fiscal 1998. As a percentage of net
revenues this amounted to 4.0% in fiscal 2000, 4.9% in fiscal 1999, and 5.6% in
fiscal 1998. In fiscal 2000 salaries and fringe benefits increased by $1.8
million due to an increase in general and administrative personnel. The decrease
in general and administrative expenses as a percentage of net revenues is due to
our benefits realized from economies of scale related to the increases in net
revenue.
General and administrative expenses increased in fiscal year 1999 from
fiscal year 1998 due to an increase in outside services related to the
acquisition of Silicon Design Resources, Inc. and an increase in general and
administrative personnel.
NON-OPERATING INCOME
Interest and other income, net of interest expense, was $7.7 million in
fiscal 2000, $5.6 million in 1999, and $3.3 million in fiscal 1998. The
increases in interest and other income in fiscal 2000, 1999 and 1998 are largely
due to increases in cash equivalents and investment balances due to $77.5
million in net proceeds received from a secondary stock offering in the second
quarter of fiscal 1998. Additionally, cash equivalent and investment balances
have increased due to cash flow from operations in each of the last three fiscal
years.
INCOME TAX PROVISION
Our effective tax rates were approximately 34% in fiscal 2000 and fiscal
1999, and 39% in fiscal 1998. The decrease in tax rates in fiscal 2000 and
fiscal 1999 are due to benefits realized from research and development and other
tax credits as well as the movement of a portion of our investments into tax
exempt securities. The decrease in tax rate in fiscal 1998 is due to the
decrease in the valuation allowance relating to our deferred tax assets, and to
a lesser extent, the movement of a portion of the our investments into tax
exempt securities.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS 133 establishes accounting
and reporting standards for derivative instruments, hedging activities, and
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exposure definition. SFAS 133 requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, depending on
the nature of the hedge, changes in fair value will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. In June 1999, the FASB issued SFAS 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133", which defers the effective date of
SFAS 133 to all fiscal quarters for fiscal years beginning after June 15, 2000.
In June 2000, the FASB issued SFAS 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133" ("SFAS 138"). Although we continue to review the effect of the
implementation of SFAS 133 and SFAS 138, we do not currently believe their
adoption will have a material impact on our financial position or overall trends
in results of operations and do not believe adoption will result in significant
changes to our financial risk management practices.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. We are required to follow the
guidance in the SAB no later than fiscal year 2002. The SEC has recently
indicated it intends to issue further guidance with respect to adoption of
specific issues addressed by SAB 101. Until such time as this additional
guidance is issued, we are unable to assess the impact, if any, it may have on
our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an interpretation of APB
Opinion No. 25" ("FIN 44"). This Interpretation clarifies the definition of
employee for purposes of applying Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and the accounting for an exchange of stock compensation awards
in a business combination. This Interpretation is effective July 1, 2000, but
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. We believe that the impact
of FIN 44 will not have a material effect on our financial position or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our combined balances of cash and cash equivalents, short-term and
long-term investments have increased to $162.6 million at April 2, 2000 compared
to $130.5 million at March 28, 1999. The increase was attributable to positive
cash flow from operations, primarily net income growth, during the twelve months
ended April 2, 2000.
Our primary source of liquidity is derived from working capital and cash
from operations. We also have an unused $5.0 million unsecured line of credit
with Silicon Valley Bank. Working capital increased $42.5 million to $153.2
million from March 28, 1999 to April 2, 2000. The increase in working capital in
the fiscal year ended April 2, 2000 was largely attributable to positive cash
flow from operations. The $5.0 million line of credit facility with Silicon
Valley Bank allows us to borrow at the bank's prime rate. The credit facility
expires on July 5, 2000, and, although there can be no assurance, we currently
expect to renew this line of credit. There are no borrowings under this credit
facility at April 2, 2000.
Our cash flow provided by operations was $72.8 million in fiscal 2000, and
$23.5 million in fiscal 1999. The growth in cash provided by operations compared
to the prior year was primarily due to increases in profitability. Additionally,
in fiscal 2000, cash flow from operations was improved by increases in income
taxes payable and accrued compensation balances, and was offset by increases in
accounts and notes receivable, inventories and other current assets. Our
inventory turns decreased to 3.5 in fiscal 2000 from 4.0 in the comparable prior
year period largely due to the increase in inventory at calendar year end for
Year 2000 related contingency plans.
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Our cash flow used in investing activities was $59.9 million in fiscal 2000
compared to $47.4 million in fiscal 1999. The increase in net cash used in
investing activities in fiscal 2000 was primarily due to increases in additions
to property and equipment and the acquisition of AdaptiveRAID(R) technology.
Additions to property and equipment were $40.0 million in fiscal 2000, compared
to $6.8 in fiscal 1999. The fiscal year 2000 additions to property and equipment
included $32.2 million for the new corporate headquarters in Aliso Viejo,
California. In the fourth quarter of fiscal 2000, we also paid $7.5 million for
the acquisition of the AdaptiveRAID(R) technology.
Our cash flow provided by financing activities was $8.1 million in fiscal
2000 compared to $3.0 million in the prior year. The fiscal year 2000 increase
in cash provided by financing activities was primarily due to increases in
proceeds from issuance of stock under employee stock plans.
We believe that existing cash and cash equivalent balances, short term
investments, debt facilities and cash flows from operating activities will
provide the Company with sufficient funds to finance its operations for at least
the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the information in
this report constitutes forward-looking statements. When used in this report the
words "shall," "should," "forecast," "all of," "projected," "believes,"
"anticipates," "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 actual 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 in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" or elsewhere in this report.
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY WHICH COULD CAUSE OUR STOCK PRICE
TO DECLINE IF OUR RESULTS FAIL TO MEET INVESTORS' AND ANALYSTS' EXPECTATIONS.
We have experienced, and expect to continue to experience, fluctuations in
sales and operating results from quarter to quarter. As a result, we believe
that period-to-period comparisons of our 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 we will maintain
our current profitability in the future. A significant portion of our net
revenues in each fiscal quarter result from orders booked in that quarter. In
the past, a significant percentage of our 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
our products. Material fluctuations in our quarterly operating results may be
the result of:
- changes in purchasing patterns by one or more of our major customers;
- customer order changes or rescheduling;
- gain or loss of significant customers;
- customer policies pertaining to desired inventory levels of our products;
- negotiations of rebates and extended payment terms; or
- changes in our ability to anticipate in advance the mix of customer
orders.
Some large original equipment manufacturer customers may require us to
maintain higher levels of inventory or field warehouses in an attempt to
minimize their own inventories. In addition, we must order our products and
build inventory substantially in advance of product shipments, and because the
markets for our products are subject to rapid technological and price changes,
there is a risk we will forecast incorrectly and produce excess or insufficient
inventory of particular products. If we produce excess or insufficient inventory
or are required to hold excess inventory, our operating results could be
adversely affected.
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Other factors that could cause our sales and operating results to vary
significantly from period to period include:
- the time, availability and sale of new products;
- seasonal original equipment manufacturer customer demand;
- 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;
- revenue adjustments related to product returns; or
- adoption of new accounting pronouncements and/or changes in our policies
and general economic and other conditions effecting the timing of
customer orders and capital spending.
Our quarterly results of operations are also influenced by competitive
factors, including the pricing and availability of our products, and our
competitors' products. Although we do not maintain our own wafer manufacturing
facility, large portions of our expenses are fixed and difficult to reduce in a
short period of time. If net revenues do not meet our expectations, our fixed
expenses would exacerbate the effect on net income of such shortfall in net
revenues. Furthermore, announcements regarding new products and technologies
could cause our customers to defer or cancel purchases of our products. Order
deferrals by our customers, delays in our introduction of new products, and
longer than anticipated design-in cycles for our products have in the past
adversely effected our quarterly results of operations. Due to these factors, as
well as other unanticipated factors, it is likely that in some future quarter or
quarters our operating results will be below the expectations of public market
analysts or investors, and as a result, the price of our common stock could
significantly decrease.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ANY DECREASE IN REVENUE FROM ANY
ONE OF OUR CUSTOMERS COULD CAUSE OUR STOCK PRICE TO DECLINE.
A small number of customers account for a substantial portion of our net
revenues, and we expect that a limited number of customers will continue to
represent a substantial portion of our net revenues for the foreseeable future.
The loss of any of our major customers would have a material adverse effect on
our business, financial condition and results of operations. Some of these
customers are based in the Pacific Rim, which is subject to economic and
political uncertainties. In addition, a majority of our customers order products
through written purchase orders as opposed to long-term supply contracts and,
therefore, such customers are generally not obligated to purchase products from
us for any extended period. Major customers also have significant leverage over
us and may attempt to change the terms, including pricing, which could
materially adversely effect our business, financial condition and results of
operations. This risk is increased due to the potential for some of these
customers merging or acquiring another of our customers. As our original
equipment manufacturer customers are pressured to reduce prices as a result of
competitive factors, we may be required to contractually commit to price
reductions for our products before we know how, or if, cost reductions can be
obtained. If we are unable to achieve such cost reductions, our gross margins
could decline and such decline could have a material adverse effect on our
business, financial condition and results of operations. In addition, we provide
some customers with price protection in the event that we reduce the price of
our products. While we maintain reserves for this price protection, the impact
of any future price reductions could exceed our reserves in any specific fiscal
period. Any price protection in excess of recorded reserves could have a
negative impact on our business, financial condition and results of operations.
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COMPETITION WITHIN OUR PRODUCT MARKETS IS INTENSE AND INCLUDES NUMEROUS
ESTABLISHED COMPETITORS.
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. We currently compete primarily with Adaptec, LSI
Logic, and Cirrus Logic in the SCSI sector of the I/O market. In the Fibre
Channel sector of the I/O market, we compete primarily with Agilent
Technologies, LSI Logic, Emulex Corporation, JNI and Adaptec. In the integrated
drive electronics, or IDE sector, we compete with STMicroelectronics and Cirrus
Logic. In the enclosure management sector, we compete primarily with LSI Logic
and Vitesse Semiconductor. We may compete with some of our larger disk drive and
computer systems customers, some of which have the capability to develop I/O
controller integrated circuits for use in their own products. At least one large
original equipment manufacturer customer in the past has decided to vertically
integrate and has therefore stopped purchasing from us.
We will need to continue to develop products appropriate to our markets to
remain competitive as our competitors continue to introduce products with
improved performance characteristics. While we continue to devote significant
resources to research and development, these efforts may not be successful or
may not be developed and introduced in a timely manner. Further, several of our
competitors have greater resources devoted to securing semiconductor foundry
capacity because of long-term agreements regarding supply flow, equity or
financing agreements or direct ownership of a foundry. In addition, while
relatively few competitors offer a full range of SCSI and other I/O products,
additional domestic and foreign manufacturers may increase their presence in
these markets. We may not be able to compete successfully against these
competitors.
Competition typically occurs at the design stage, where the customer
evaluates alternative design approaches. Because of short product life cycles
and even shorter design cycles, our competitors have increasingly frequent
opportunities to achieve design wins in next generation systems. A design win
usually ensures a customer will purchase the product until a higher performance
standard is available or a competitor can demonstrate a significant
price/performance advantage. Most of our 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 ours. Because of the complexity of our products, we have
experienced delays from time to time in completing products on a timely basis.
If we are unable to design, develop and introduce competitive new products on a
timely basis, our future operating results will be materially and adversely
affected.
WE DEPEND ON OUR RELATIONSHIPS WITH WAFER SUPPLIERS AND OTHER SUBCONTRACTORS AND
A LOSS OF THESE RELATIONSHIPS MAY LEAD TO UNPREDICTABLE CONSEQUENCES WHICH MAY
HARM OUR RESULTS OF OPERATIONS IF ALTERNATIVE SUPPLY SOURCES ARE NOT AVAILABLE.
We currently rely on several independent foundries to manufacture our
semiconductor products either in finished form or wafer form. Generally, we
conduct business with some of our foundries through written purchase orders as
opposed to long-term supply contracts. Therefore, these foundries are generally
not obligated to supply products to us for any specific period, in any specific
quantity or at any specified price. If a foundry terminates its relationship
with us or if our supply from a foundry is otherwise interrupted, we may not
have a sufficient amount of time to replace the supply of products manufactured
by that foundry. As a result, we may not be able to meet customer demands which
could harm our business.
Historically, there have been periods when there has been a worldwide
shortage of advanced process technology foundry capacity. The manufacture of
semiconductor devices is subject to a wide variety of factors, including the
availability of raw materials, the level of contaminants in the manufacturing
environment, impurities in the materials used, and the performance of personnel
and equipment. We are 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. New supply
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sources may not be able or willing to satisfy our wafer requirements on a timely
basis or at acceptable quality or unit prices.
We use multiple sources of supply for some of our products which may
require customers to perform separate product qualifications. We have not
developed alternate sources of supply for all of our products and our newly
introduced products are typically produced initially by a single foundry until
alternate sources can be qualified. In particular, our 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 our requirements for this technology, our marketing efforts related to
Fibre Channel products would be delayed and, as such, our 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 us may cause that customer to satisfy its
product requirements from our competitors.
Our ability to obtain satisfactory wafer and other supplies is subject to a
number of other risks. These risks include the possibility that our suppliers
may be subject to injunctions arising from alleged violations of third party
intellectual property rights. The enforcement of this kind of injunction could
impede a supplier's ability to provide wafers, components or packaging services
to us. In addition, our flexibility to move production of any particular product
from one foundry to another is limited because such a move can require
significant re-engineering, which may take several quarters. These efforts also
divert engineering resources that could otherwise be dedicated to new product
development, which would adversely affect new product development schedules.
Therefore, our production could be constrained even though capacity is available
at one or more foundries. In addition, we could encounter supply shortages if
sales grow substantially. We use domestic and offshore subcontractors for die
assembly of our semiconductor products purchased in wafer form, and for assembly
of our host adapter board products. Our 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. We are also subject to the risks of shortages and increases
in the cost of raw materials used in the manufacture or assembly of our
products. In addition, we may receive orders for large volumes of products to be
shipped within short periods, and we may not have sufficient testing capacity to
fill these orders. Constraints or delays in the supply of our products, whether
because of capacity constraints, unexpected disruptions at our 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.
WE MAY NEED TO ENGAGE IN FINANCIALLY RISKY TRANSACTIONS TO GUARANTEE WE HAVE
PRODUCTION CAPACITY WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING AND RESULT
IN DILUTION TO OUR STOCKHOLDERS.
The semiconductor industry and we 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, we may consider various possible transactions, including the use
of "take or pay" contracts that commit us 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 us and could require us to commit a substantial amount of our funds or
provide technology licenses in return for guaranteed production capacity. The
need to commit our own funds may require us to seek additional equity or debt
financing. The sale or issuance of additional equity or convertible debt
securities could result in dilution to our stockholders. This kind of additional
financing, if necessary, may not be available on terms acceptable to us.
WE RELY ON THE HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKETS AND ANY
UNPREDICTABLE FLUCTUATIONS OR REDUCTIONS IN DEMAND FOR PRODUCTS IN THESE MARKETS
MAY ADVERSELY EFFECT OUR RESULTS OF OPERATIONS.
A significant portion of our host adapter board products and hard disk
drive controller products are ultimately used in high-performance file servers,
workstations and other office automation products. Our growth has been supported
by increasing demand for sophisticated I/O solutions which support database
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systems, servers, workstations, Internet/Intranet applications, multimedia and
telecommunications. If the demand for these systems slows, our business could be
adversely affected.
As a supplier of controller products to manufacturers of computer
peripherals such as disk drives and other data storage devices, a portion of our
business is dependent on the overall market for computer peripherals. This
market is itself dependent on the market for computers, and 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 us,
could produce excessive or insufficient inventories of various components, which
could have a negative impact on our business.
OUR FINANCIAL CONDITION WILL BE MATERIALLY HARMED IF WE DO NOT MAINTAIN AND GAIN
MARKET OR INDUSTRY ACCEPTANCE OF OUR PRODUCTS.
The markets in which our competitors and we compete involve rapidly
changing technology, evolving industry standards and continuing improvements in
products and services. Our future success depends on our ability to do the
following:
- enhance our 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; and
- adequately address original equipment manufacturer customer and end-user
customer requirements and achieve market acceptance.
We believe that to remain competitive in the future we will need to
continue to develop new products, which will require a significant investment in
new product development. In anticipation of the implementation of Fibre Channel
data transfer interface technologies, we have invested, and will continue to
invest, significant resources in developing our integrated circuit single chip
peripheral computer interface, or PCI to Fibre Channel controllers. However,
Fibre Channel may not be adopted as a predominant industry standard. We are
aware of products for alternative I/O standards and enabling technologies being
developed by our competitors. We believe that some competitors, including
Adaptec, have extensive development efforts related to products based on new
parallel SCSI I/O technology. If this kind of alternative standard is adopted by
the industry, we may not be able to develop products for the new standard in a
timely manner. Further, even if Fibre Channel is adopted, our integrated PCI to
Fibre Channel controller may not be fully developed in time to be accepted for
use in Fibre Channel technology. If it is developed on time, we may not be able
to manufacture it at competitive prices in sufficient volumes. In the event that
Fibre Channel is not adopted as an industry standard, or our integrated circuit
PCI to Fibre Channel controllers are not timely developed or do not gain market
acceptance, our business could be materially and adversely affected.
Our Fibre Channel products have been designed to conform to a standard that
has yet to be uniformly adopted. Our 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. We depend on significant cooperation with these manufacturers in
order to achieve our design objectives and produce products that interoperate
successfully. While we believe that we generally have good relationships with
leading microprocessor, systems and peripheral suppliers, there can be no
assurance that these suppliers will not make it more difficult for us to design
our products for successful interoperability. If industry acceptance of these
standards was to decline or if they were replaced with new standards, and if we
did not anticipate these changes and develop new products, our business could be
adversely affected.
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WE ANTICIPATE ENGAGING IN ACQUISITIONS, HOWEVER THESE ACQUISITIONS MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS AND STOCK PRICE IF THEY DO NOT COMPLEMENT OUR
BUSINESS.
We anticipate that our future growth may depend in part on our ability to
identify and acquire complementary businesses, technologies or product lines
that are compatible with ours. Acquisitions involve numerous risks, including:
- uncertainties in 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 we have no or limited direct prior experience;
- the potential loss of current customers and/or retention of the acquired
company's customers; and
- the potential loss of key employees of the acquired company.
Further, we may never enjoy the perceived benefits of an acquisition. We
may not be effective in identifying and completing attractive acquisitions or
managing future growth. Future acquisitions by us could dilute stockholders, and
cause us to incur debt and contingent liabilities and amortization expense
related to goodwill and other intangible assets, all of which could materially
adversely affect our business. With respect to accounting for future business
combinations, the Financial Accounting Standards Board, or FASB, has announced
it may abolish the pooling-of-interests accounting treatment. The standard, as
currently proposed would affect transactions after January 1, 2001. If the FASB
does eliminate pooling-of-interests accounting treatment, we may not be able to
complete a business combination without incurring goodwill or other intangible
assets, which would reduce our reported earnings.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO
SUSTAIN OR GROW OUR BUSINESS.
Our future success largely depends on our key engineering, sales, marketing
and executive personnel, including highly skilled semiconductor design personnel
and software developers. We also must identify and hire additional personnel. If
we lose the services of key personnel, our business would be adversely affected.
We believe that the market for key personnel in the industries in which we
compete is highly competitive. In particular, periodically we have experienced
difficulty in attracting and retaining qualified engineers and other technical
personnel and anticipate that competition for such personnel will increase in
the future. We may not be able to attract and retain key personnel with the
skills and expertise necessary to develop new products in the future, or to
manage our business, both in the United States and abroad.
BECAUSE WE DEPEND ON FOREIGN CUSTOMERS AND SUPPLIERS, WE ARE SUBJECT TO
INTERNATIONAL ECONOMIC, REGULATORY AND POLITICAL RISKS WHICH COULD HARM OUR
FINANCIAL CONDITION.
We expect that export revenues will continue to account for a significant
percentage of our net revenues for the foreseeable future. As a result, we are
subject to several risks, which include:
- a greater difficulty of administering our 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;
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- overlapping or differing tax structures;
- political and economic instability; and
- general trade restrictions.
A significant number of our customers and suppliers are located in Japan.
Recently, the Asian markets have suffered property price deflation. This asset
deflation has taken place especially in countries that have had a collapse in
both their currency and stock markets. These deflationary pressures have reduced
liquidity in the banking systems of the affected countries and, when coupled
with spare industrial production capacity, could lead to widespread financial
difficulty among the companies in this region. Our 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 our foreign customers should increase, the
resulting effective price increase of our products to such foreign customers
could result in decreased sales. There can be no assurance that any of the
foregoing factors will not have a material adverse effect on our business,
financial condition and results of operations.
OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS OR
ADVERSE JUDGMENTS COULD HARM OUR COMPETITIVE POSITION.
Although we have patent protection on some aspects of our technology in
some jurisdictions, we rely primarily on trade secrets, copyrights and
contractual provisions to protect our proprietary rights. There can be no
assurance that these protections will be adequate to protect our proprietary
rights, that others will not independently develop or otherwise acquire
equivalent or superior technology or that we can maintain such technology as
trade secrets. There also can be no assurance that any patents we possess will
not be invalidated, circumvented or challenged. In addition, the laws of certain
countries in which our products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect our products and
intellectual property rights to the same extent as the laws of the United States
or at all. If we fail to protect our intellectual property rights, our business
would be negatively impacted.
Intellectual property claims have been made against us in the past, and
patent or other intellectual property infringement claims could be made against
us in the future. Although patent and intellectual property disputes may be
settled through licensing or similar arrangements, costs associated with these
arrangements may be substantial and the necessary licenses or similar
arrangements may not be available to us on satisfactory terms or at all. As a
result, we could be prevented from manufacturing and selling some of our
products. In addition, if we litigate these kinds of claims, the litigation
could be expensive and time consuming and could divert management's attention
from other matters. Our business could suffer regardless of the outcome of the
litigation. Our supply of wafers and other components can also be interrupted by
intellectual property infringement claims against our suppliers.
OUR STOCK PRICE MAY BE VOLATILE WHICH COULD AFFECT THE VALUE OF YOUR INVESTMENT.
The market price of our common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. From January
1, 2000 through May 26, 2000, the market price has ranged from a low of $39.69
per share to a high of $203.25 per share. Future announcements concerning us or
our competitors or customers, quarterly variations in operating results, the
introduction of new products or changes in product pricing policies by us or our
competitors, conditions in the semiconductor industry, changes in earnings
estimates by analysts, market conditions for high technology stocks in general,
and the potential for a shareholder lawsuit, or changes in accounting policies,
among other factors, could cause the market price of the common stock to
fluctuate substantially. In addition, stock markets have experienced extreme
price and volume volatility in recent years and stock prices of technology
companies have been especially volatile. This volatility has had a substantial
effect on the market prices of securities of many smaller public companies for
reasons frequently unrelated to the operating performance of the specific
companies. These broad market fluctuations could adversely affect the market
price of our common stock.
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OUR CHARTER DOCUMENT AND SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE COMPANIES FROM
ACQUIRING US AND OFFERING OUR STOCKHOLDERS A PREMIUM FOR THEIR STOCK.
Pursuant to our certificate of incorporation, our board of directors is
authorized to approve the issuance of shares of currently undesignated preferred
stock, to determine the price, powers, preferences and rights and the
qualifications, limitations or restrictions granted to or imposed on any
unissued series of the preferred stock, and to fix the number of shares
constituting any such series and the designation of such series, without any
vote or future action by the stockholders. Pursuant to this authority, in June
1996 the board of directors adopted a shareholder rights plan and declared a
dividend of a right to purchase one one-hundredths of a share of preferred stock
for each outstanding share of our common stock. After adjustment for each of the
three two-for-one stock splits effected by us to date, our common stock now
carries one-eighth of the preferred stock purchase right per share. The
shareholder rights plan, the undesignated preferred stock and certain provisions
of the Delaware law may have the effect of delaying, deferring or preventing a
change in control of us, may discourage bids for our common stock at a premium
over the market price of the common stock and may adversely affect the market
price of the common stock.
OUR CORPORATE HEADQUARTERS AND PRINCIPAL DESIGN FACILITIES ARE LOCATED IN A
REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS.
Our California facilities, including our principal executive offices, our
principal design facilities, and our critical business operations are located
near major earthquake faults. The Company is not specifically insured for
earthquakes, or other such natural disasters. Any personal injury or damage to
the facilities as a result of such occurrences could have a material adverse
effect on the Company's business, results of operations and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At April 2, 2000, our investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents, of $98 million (see
Note 4 of Notes to Consolidated Financial Statements). The carrying amount of
these securities approximates fair market value. These securities are subject to
interest rate risk and will decline in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10% from
levels as of April 2, 2000, the decline in the fair value of the portfolio would
not be material to our financial position, results of operations and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are referenced in Item 14(a).
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
QLogic Corporation:
We have audited the consolidated financial statements of QLogic Corporation
and subsidiaries as listed in Item 14(a). In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in Item 14(a). These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QLogic
Corporation and subsidiaries as of April 2, 2000 and March 28, 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended April 2, 2000, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Orange County, California
May 10, 2000
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
APRIL 2, 2000 AND MARCH 28, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
2000 1999
-------- --------
Cash and cash equivalents................................... $ 64,134 $ 43,174
Short term investments...................................... 58,671 57,613
Accounts and notes receivable, less allowance for doubtful
accounts of $950 as of April 2, 2000 and $940 as of March
28, 1999.................................................. 21,647 11,917
Inventories................................................. 22,330 10,623
Deferred income taxes....................................... 9,211 5,649
Prepaid expenses and other current assets................... 1,356 1,950
-------- --------
Total current assets.............................. 177,349 130,926
Long term investments....................................... 39,797 29,760
Property and equipment, net................................. 45,775 10,409
Other assets................................................ 4,235 1,828
-------- --------
$267,156 $172,923
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 5,743 $ 6,432
Accrued compensation........................................ 10,224 7,378
Deferred revenue............................................ 3,023 1,074
Accrued warranty............................................ 2,000 910
Income taxes payable........................................ 163 1,358
Other accrued liabilities................................... 3,034 3,087
-------- --------
Total current liabilities......................... 24,187 20,239
-------- --------
Commitments and contingencies
Subsequent event
Stockholders' equity:
Preferred stock, $0.001 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, $0.001 par value; 150,000,000 shares
authorized, 74,292,949 and 71,844,232 shares issued and
outstanding at April 2, 2000 and March 28, 1999,
respectively........................................... 74 72
Additional paid-in capital................................ 145,067 108,737
Retained earnings......................................... 97,828 43,875
-------- --------
Total stockholders' equity........................ 242,969 152,684
-------- --------
$267,156 $172,923
======== ========
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED APRIL 2, 2000, MARCH 28, 1999, AND MARCH 29, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
-------- -------- -------
Net revenues................................................ $203,143 $117,182 $81,393
Cost of revenues............................................ 64,241 42,603 34,049
-------- -------- -------
Gross profit.............................................. 138,902 74,579 47,344
-------- -------- -------
Operating expenses:
Engineering and development............................... 39,993 24,358 15,601
Selling and marketing..................................... 16,724 11,062 8,707
General and administrative................................ 8,140 5,794 4,550
-------- -------- -------
Total operating expenses.......................... 64,857 41,214 28,858
-------- -------- -------
Operating income............................................ 74,045 33,365 18,486
Interest expense............................................ 19 84 109
Interest and other income................................... 7,722 5,657 3,453
-------- -------- -------
Income before income taxes................................ 81,748 38,938 21,830
Income tax provision........................................ 27,795 13,239 8,422
-------- -------- -------
Net income.................................................. $ 53,953 $ 25,699 $13,408
======== ======== =======
Net income per share:
Basic..................................................... $ 0.74 $ 0.37 $ 0.22
-------- -------- -------
Diluted................................................... $ 0.70 $ 0.34 $ 0.21
-------- -------- -------
Number of shares used in per share computations:
Basic..................................................... 72,950 70,047 60,732
-------- -------- -------
Diluted................................................... 77,497 74,760 64,792
-------- -------- -------
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 2, 2000, MARCH 28, 1999, AND MARCH 29, 1998
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
Balance as of March 30, 1997........... 46,728 $47 $ 19,538 $ 4,768 $ 24,353
Net income........................... -- -- -- 13,408 13,408
Stock offering....................... 21,160 21 77,515 -- 77,536
Issuance of common stock under
employee stock plans (including
tax benefit of $1,494)............ 1,320 1 2,751 -- 2,752
------ --- -------- ------- --------
Balance as of March 29, 1998........... 69,208 69 99,804 18,176 118,049
Net income........................... -- -- -- 25,699 25,699
Issuance of common stock under
employee stock plans (including
tax benefit of $5,753)............ 2,636 3 8,933 -- 8,936
------ --- -------- ------- --------
Balance as of March 28, 1999........... 71,844 72 108,737 43,875 152,684
Net income........................... -- -- -- 53,953 53,953
Issuance of common stock under
employee stock plans (including
tax benefit of $28,085)........... 2,449 2 36,330 -- 36,332
------ --- -------- ------- --------
Balance as of April 2, 2000............ 74,293 $74 $145,067 $97,828 $242,969
====== === ======== ======= ========
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 2, 2000, MARCH 28, 1999, AND MARCH 29, 1998
(IN THOUSANDS)
2000 1999 1998
-------- --------- --------
Cash flows from operating activities:
Net income................................................ $ 53,953 $ 25,699 $ 13,408
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 4,799 3,366 2,434
Write-off of acquired in-process technology........... 8,410 1,220 --
Provision for doubtful accounts....................... 10 201 200
Loss on disposal of property and equipment............ 219 89 161
Benefit from deferred income taxes.................... (6,264) (1,354) (3,030)
Changes in assets and liabilities:
Accounts and notes receivable....................... (9,740) (4,282) (2,316)
Inventories......................................... (11,707) (6,788) 959
Prepaid expenses and other current assets........... 594 (1,475) (84)
Other assets........................................ (137) (1,158) --
Accounts payable.................................... (689) 2,667 (229)
Accrued compensation................................ 2,846 2,403 1,750
Income taxes payable................................ 26,890 1,999 5,163
Accrued warranty.................................... 1,090 300 185
Other accrued liabilities........................... 540 1,944 (23)
Deferred revenue.................................... 1,949 (839) 914
Other non-current liabilities....................... -- (466) (458)
-------- --------- --------
Net cash provided by operating activities........... 72,763 23,526 19,034
-------- --------- --------
Cash flows from investing activities:
Additions to property and equipment....................... (39,952) (6,766) (3,924)
Purchases of investments.................................. (96,438) (103,448) (53,059)
Acquisition of business, net of cash acquired............. (8,860) (1,957) --
Maturities of investments................................. 85,343 64,755 4,379
-------- --------- --------
Net cash used in investing activities............... (59,907) (47,416) (52,604)
-------- --------- --------
Cash flows from financing activities:
Principal payments under capital leases................... (143) (209) (225)
Proceeds from issuance of stock under employee stock
plans................................................... 8,247 3,183 1,258
Proceeds from sale of common stock........................ -- -- 77,536
-------- --------- --------
Net cash provided by financing activities........... 8,104 2,974 78,569
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 20,960 (20,916) 44,999
Cash and cash equivalents at beginning of year.............. 43,174 64,090 19,091
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 64,134 $ 43,174 $ 64,090
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 19 $ 65 $ 90
======== ========= ========
Income taxes.............................................. $ 6,068 $ 13,116 $ 6,275
======== ========= ========
Non-cash investing and financing activities:
During fiscal year 2000, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $28,085, related to the
tax benefit of exercises of stock options under the Company's stock options
plans. Additionally, during fiscal year 2000 the Company recorded an accrual of
$841, in accordance with the performance provisions of the Silicon Design
Resources Asset Acquisition Agreement. See Note 2 of Notes to Consolidated
Financial Statements.
During fiscal year 1999, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $5,753, related to the
tax benefit of exercises of stock options under the Company's stock option
plans. Additionally, during fiscal year 1999 the Company recorded an accrual of
$1,321, in accordance with the performance provisions of the Silicon Design
Resources Asset Acquisition Agreement. See Note 2 of Notes to Consolidated
Financial Statements.
During fiscal year 1998, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $1,494 related to
exercises of stock options under the Company's stock option plans.
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Business Information
QLogic Corporation ("QLogic" or the "Company") designs and supplies
semiconductor and board level input/output (I/O) products. The Company's I/O
products provide a high performance interface between computer systems and their
attached data storage peripherals, such as hard disk drives, tape drives,
removable disk drives and redundant array of independent disks subsystems, or
RAID subsystems. The Company also designs and supplies semiconductor enclosure
management products. QLogic markets and distributes its products through a
direct sales organization supported by field application engineers, as well as
through a network of independent manufacturers' representatives and regional and
international distributors. The Company's primary OEM customers are major
domestic and international suppliers and manufacturers of servers, workstations
and data storage peripherals.
Principles of Consolidation and Financial Reporting Period
The consolidated financial statements include the financial statements of
QLogic Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
QLogic's fiscal year ends on the Sunday nearest March 31. The fiscal year ended
April 2, 2000 ("fiscal 2000") comprised 53 weeks. The fiscal years ended March
28, 1999 ("fiscal 1999") and March 29, 1998 ("fiscal 1998") each comprised 52
weeks.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the Company's consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized upon product shipment. Royalty revenue is recognized
when earned and receipt is assured. The customer's obligation to pay the
Company, and the payment terms, are set at the time of shipment and are not
dependent on subsequent resale of the Company's product. However, certain of the
Company's sales are made to distributors under agreements allowing limited right
of return and/or price protection. The Company warrants its products, on a
limited basis, to be free from defects for periods of one to five years from
date of shipment. The Company estimates and establishes allowances and reserves
for product returns, warranty obligations, doubtful accounts, and price
adjustments.
Capitalized Software Costs
Statement of Financial Accounting Standards No. ("SFAS") 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
provides for the capitalization of certain software development costs once
technological feasibility is established. The cost so capitalized is then
amortized on a straight-line basis over the estimated product life, or the ratio
of current revenues to total projected product revenues, whichever is greater.
No such costs have been capitalized for all periods presented, as the impact on
the consolidated financial statements is immaterial.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
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30
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to taxable income in the years in which those temporary differences are expecte