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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 33-0537669
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
3545 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(714) 438-2200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.05 PER SHARE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of May 23, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,016,886,847.
As of May 23, 1999, the registrant had 17,979,467 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference in
the Parts of this report indicated below:
Part III, Items 10, 11, 12 and 13 -- Definitive proxy statement for the 1999
Annual Meeting of Stockholders which will
be filed with the Securities and Exchange
Commission within 120 days after the close
of the 1999 year.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
QLogic Corporation was organized as a Delaware corporation in 1992. Unless
the context indicates otherwise, the "Company" and "QLogic" each refer to the
Registrant and its subsidiaries.
All references to years refer to the Company's fiscal years ended March 28,
1999, March 29, 1998 and March 30, 1997, as applicable, unless the calendar
years are specified. Effective February 15, 1999, the Company completed a
two-for-one stock split. All shares and per share data has been retroactively
adjusted to reflect the stock split.
OVERVIEW
QLogic is a leading designer and supplier of semiconductor and board level
input/output, or I/O, and enclosure management products. The Company's I/O
products provide a high performance interface between computer systems and their
attached data storage peripherals, such as hard disk and tape drives, removable
disk drives and redundant array of independent disks, or RAID subsystems. QLogic
provides complete I/O technology solutions by designing and marketing single
chip controller and adapter board products for both sides of the
computer/peripheral device interlink, or "bus." In addition, the Company
provides enclosure management products that monitor and communicate management
information related to components that are critical to computer system and
storage subsystem reliability and availability. Historically, the Company has
targeted the high performance sector of the I/O market, focusing primarily on
the SCSI industry standard. The Company is utilizing its I/O expertise to
develop products for emerging I/O standards, such as Fibre Channel. Fibre
Channel is experiencing early industry acceptance as a higher performance
solution that maintains signal integrity while allowing for increased
connectivity between a computer system and its data storage peripherals.
QLogic's designs are based on multiple I/O standards to service the needs
of manufacturers and end users of various types of computer systems and
components, such as workstations, servers and data storage peripherals. The
Company provides high performance SCSI-based solutions and new I/O solutions
based on the emerging Fibre Channel standard, and is leveraging its
technological capabilities to provide solutions based on the integrated drive
electronics standard, or IDE standard. The Company believes that its
technological leadership, extensive involvement in its customers' product
development process and the ease of migration of its SCSI-based products to its
new I/O products position the Company to provide additional I/O solutions to its
existing customer base. The Company believes that these attributes also provide
it with competitive advantages in establishing new relationships with additional
original equipment manufacturers, or OEMs, for both computer systems and data
storage peripherals. QLogic markets and distributes its products through a
direct sales organization supported by field application engineers, as well as
through a network of independent manufacturers' representatives and regional and
international distributors. The Company's primary OEM customers are major
domestic and international suppliers and manufacturers of servers, workstations
and data peripherals, such as Sun Microsystems, Inc., Fujitsu Limited and
Compaq.
INDUSTRY BACKGROUND
The increasing processing power of computers, the proliferation of
networks, the rapid growth in the usage of the Internet and Intranets, the wider
application of computers in multimedia and telecommunications applications and
the availability of higher performance data storage peripheral devices have
increased the demand for increased data throughput among servers, workstations
and data storage peripherals and, as a result, for increased I/O system
performance. The I/O system is the electronic link between the host CPU and the
computer's data storage peripheral devices, such as hard disk drives, tape
drives, removable disk drives and RAID subsystems. The I/O system must utilize
industry standard hardware and software interfaces to manage and direct the flow
of large volumes of data at high speeds between the CPU and multiple data
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storage peripherals, and, at the same time, minimize the consumption of CPU
processing power and maintain peripheral data storage integrity. As
microprocessors run at higher speeds and levels of performance, they require I/O
systems which support faster and more autonomous data transmission and other
advanced capabilities in order to function optimally.
IDE was an early standard for data interchange for personal computers.
Historically, IDE-based I/O systems managed and directed the flow of data
between personal computers and up to two hard disk drives. As PC-based servers
became increasingly sophisticated, the relatively low data throughput and
minimal connectivity of IDE became a limiting factor for system performance. As
a result, high performance systems, such as servers and workstations, migrated
to faster standards. Nevertheless, it is anticipated that IDE will remain an
important and cost-effective solution to the I/O needs of the personal computer
market due to the large installed base of personal computers and due to the
increasing performance capabilities of new IDE standards, such as EIDE and Ultra
IDE, which operate at higher data transfer rates and support up to four data
storage peripherals.
In response to the increased data throughput required by networks and
workstations, SCSI was developed and adopted as the industry high performance
I/O communications standard. The overall growth of the SCSI marketplace has been
driven by rapid technological change and the evolving dynamics of high
performance computer and computer data storage peripheral devices, including the
following factors: the increased variety of higher performance peripheral
devices and the continual shift toward higher capacity and higher data rate disk
drives; the demand for I/O interfacing capabilities with greater numbers and
types of attached peripherals; the movement toward more distributed network
architectures across greater distances; the need for greater volumes of data
transfer; and the demand for increased data throughput. Additionally, SCSI is
also benefiting from the "plug and play" standard, that is supported by Windows
operating systems and Intel microprocessor-based systems, which simplifies the
installation process, and from the growing usage of multi-tasking,
multi-threading operating systems.
The continuing evolution towards higher performance computer systems has
led to the development of new connectivity solutions that provide even greater
data interchange between computer systems and data storage peripherals. Fibre
Channel is emerging as a new industry standard to meet the demand for increased
connectivity and data transfer rates. Fibre Channel is an advanced I/O standard
which provides data transmission speeds up to approximately two and one-half
times the rate currently provided by the fastest SCSI-based solutions. In
addition, Fibre Channel is designed to maintain signal integrity while allowing
for data interchange between a computer system and up to eight times more
peripherals than SCSI. Furthermore, Fibre Channel is designed to support the use
of either a fibre optic connection or a more compact version of the copper cable
traditionally used for SCSI solutions. Fibre optic connection allows the
distance between a computer system and its data storage peripherals to extend up
to 10 kilometers. Additionally, Fibre Channel is gaining acceptance as a widely
adopted standard in the Storage Area Network (SAN) environment. SANs link
physically separated storage devices to servers via a dedicated network. The
Company believes Fibre Channel will likely be the I/O technology of choice for
larger, higher performance data and network applications, such as in the SAN
environment, while SCSI-based products will continue to be used in applications
requiring less functionality and performance.
Computer system and peripheral device manufacturers select I/O technologies
for incorporation into their products primarily on the basis of application,
performance and connectivity needs. The I/O products selected must be
specifically tailored to the manufacturer's requirements, in order to be
compatible with the manufacturer's system or peripherals either on a turnkey
basis or with minimum developmental effort. In addition to being compatible with
the present system or peripherals, I/O products ideally must be both "forward"
and "backward" compatible with future and past computers and peripherals. That
is, there must be a ready migration path between the I/O product and other
products sold and under development by the manufacturer. Also, it is critical
that the I/O product be available at a reasonable cost and in a timely manner,
so as not to delay the manufacturer's time to market, which has become
increasingly important in an era of short product life cycles. In order to
achieve these goals, manufacturers increasingly seek to involve I/O product
suppliers in their product validation and development cycles. By including the
I/O system providers in
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their planning and development process, manufacturers not only ensure
compatibility between product lines but also reduce the average time to market
for their products.
With the continuing evolution of high performance computer systems and data
storage peripherals, the need for conveying management information about the
status of those components has fueled the growth in the enclosure management
market. In 1996, OEMs adopted the SAF-TE (SCSI Accessed Fault -- Tolerant
Enclosure) standard for enclosure management, which standardized requirements
for server and storage subsystem vendors. While many of the RAID subsystems
shipped contained a proprietary design for the enclosure management function,
they were not SAF-TE standard compliant. Today, enclosure management solutions,
which are SAF-TE compliant, are becoming a standard feature in the full range of
servers and storage subsystems.
THE QLOGIC SOLUTION
QLogic is a leading designer and supplier of semiconductor and board-level
I/O products. The Company has been designing and marketing SCSI-based products
for over 12 years and is a leading supplier of connectivity solutions to this
market sector. The Company is leveraging its technological expertise in SCSI
into higher and lower end hardware and software solutions for its OEM customer
base. In 1996, the Company introduced the industry's first fully integrated
single chip PCI to Fibre Channel controller. During fiscal 1997 and 1998 the
Company introduced products and intellectual property based on IDE standards to
address additional I/O needs of its OEM customer base. During 1999, the
Company's Fibre Channel solutions were incorporated into several SAN
environments by server and peripheral OEMs.
The Company works closely with its customers in order to anticipate and
help identify their needs. Even after a product is identified and validated, the
Company continues to work with the customer in a joint product development
process to ensure compatibility with the customer's future product designs. As a
result of this partnership oriented approach, the Company believes that its
customers benefit from significant time to market advantages. By gaining insight
into the customers' system needs, the Company believes that it is in a better
position to deliver I/O products with an easier migration path, thus reducing
the customers' firmware and software development costs and associated
implementation risks. In addition, by utilizing selected wafer fabrication
suppliers, the Company seeks to ensure that it has ready access to the latest
developments in wafer fabrication, in addition to avoiding the fixed costs
associated with foundry ownership.
The Company's products are designed to reduce board space requirements on
plug-in cards, computer motherboards and peripheral controller boards by
integrating multiple I/O controller functions on a single chip. The Company
believes its products offer superior compatibility and ease of migration across
multiple I/ O standards due to their use of common software. The Company
believes that its experience and focus on the SCSI market sector, the ease of
migration of its products, its current development efforts into I/O standards
such as IDE and Fibre Channel and its close customer relationships with leading
server, workstation and peripheral manufacturers provide the Company with
competitive advantages in the I/O and enclosure management product markets.
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PRODUCTS
QLogic designs and supplies semiconductor and board level I/O solutions for
peripheral and computer systems. The Company's I/O products have traditionally
been based on the SCSI standard, and the Company has expanded its product lines
to include products based on the Fibre Channel and IDE standards. The Company
also designs and supplies semiconductor enclosure management solutions.
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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 - First introduced in 1997
(FTEC) - Single chip disk controllers
- Integrated buffer controller, formatter, fibre channel
processor, and dual loop transceivers
- Powerful on-chip data error correction
- Supports FC-AL, 100MB/sec
- ----------------------------------------------------------------------------------------------------
IDE Triple Embedded Controller (ATEC) - First introduced in 1997
- Single chip disk controllers
- Integrated buffer controller, formatter, and IDE
processor
- Powerful on-chip data error correction
- Supports ATA and Ultra/33
- ----------------------------------------------------------------------------------------------------
Intelligent SCSI Processor (ISP) - First introduced in 1992
Host Adapter Chips - Embedded RISC single chip solution
- Supports latest SCSI standards
- Supports transfer rates up to 40MB/sec
- Supports 8- or 16-bit data handling
- Supports direct PCI and SBus connection
- Update Fibre Channel evaluation units, which operate
at transfer rates up to 100 MB/sec
- ----------------------------------------------------------------------------------------------------
QLA Host Adapter Boards - First introduced in 1993
- Full line of host adapter cards with direct PCI and
Sbus connection
- Supports latest SCSI standards
- Incorporates the Company's ISP host adapter chips
- Provides a fully integrated, high performance board
level I/O interface solution
- Update Fibre Channel evaluation units, which operate
at transfer rates up to 100 MB/sec
- ----------------------------------------------------------------------------------------------------
Guardian Enclosure Management (GEM) - First introduced in 1996
- Industry's first single-chip implementation of SAF-TE
specification
- Industry's first enclosure management controller for
Ultra2 SCSI
- ----------------------------------------------------------------------------------------------------
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SALES AND MARKETING
QLogic markets and distributes its products through a direct sales
organization supported by field application engineers, as well as through a
network of independent manufacturers' representatives and regional and
international distributors. In North America, the Company uses a tiered sales
and marketing approach, with a direct sales force to serve large and strategic
OEM accounts, OEM representatives that are focused on specific medium-sized
accounts, and regional distributors and resellers that serve smaller accounts.
Throughout the Pacific Rim, the Company sells directly as well as through a
master distributor. In Europe, the Company sells its products through
distributors and through a representative. The Company believes that it is
important to work closely with its large peripheral and computer system
manufacturer OEMs during their design cycles. The Company supports these
customers with extensive applications and system design support, as well as
training classes and seminars both in the field and from its offices in Costa
Mesa, California. The Company also maintains a high level of customer support
through technical hotlines and Internet communications.
The Company's manufacturers' representatives and distributors are not
subject to minimum purchase requirements and can discontinue marketing any of
the Company's products at any time. The Company's distributors may be permitted
to return to the Company a portion of the products purchased by them. In
addition, the Company may provide its distributors with price protection in the
event that the Company reduces the prices of its products. The loss of one or
more manufacturers' representatives or distributors could have an adverse effect
on the Company's business, financial condition and results of operations.
The Company's sales efforts are focused on establishing and developing long
term relationships with OEMs and other potential customers. The sales cycle
typically begins with a design win, which entails a product of the Company being
selected to be incorporated into a potential customer's computer system or data
storage peripherals. Once the Company secures a design win with a given
customer, the time to production shipment can range between six and 18 months.
After winning a design with a potential customer, QLogic works closely with the
customer to integrate its product with the customer's current and next
generation products. Due to the extensive amount of resources required for each
customer design, typically only one I/O solution is designed into any given
customer product. After being designed into a customer's product, sales are
typically made through purchase orders, which are subject to cancellation,
postponement or other types of delays.
International sales of the Company's products accounted for approximately
53%, 42%, and 45%, of net revenues for fiscal years 1999, 1998, and 1997,
respectively. See also "Factors That May Affect Future Results -- Risk of Doing
Business in International Markets." See Note (12) to Consolidated Financial
Statements. International sales are denominated in U.S. dollars. Due to its
relatively high proportion of international sales, the Company is subject to a
number of risks, including restrictions related to export regulations as well as
those related to political upheaval and economic downturns in foreign nations.
ENGINEERING AND DEVELOPMENT
In order to compete successfully, the Company believes that it must
continually design, develop and introduce new products that take advantage of
market opportunities and address emerging standards. The Company's strategy is
to leverage its substantial base of architectural and systems expertise and
product innovation capabilities to address a broad range of I/O solutions as
well as to develop products for its core SCSI business. The Company is
predominantly engaged in the development of integrated circuit I/O controllers
for additional I/O standards and enabling technologies, such as Fibre Channel,
Ultra SCSI, other new parallel SCSI I/Os and Ultra IDE. The Company intends to
broaden its product lines while continuing to allow its customers to transition
rapidly to Fibre Channel and future emerging I/O standards.
At March 28, 1999, the Company employed approximately 153 engineers,
including technicians and support personnel engaged in the development of new
products and the improvement of existing products. There can be no assurance
that the Company will continue to be successful in attracting and retaining key
personnel with the skills and expertise necessary to develop new products in the
future.
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The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and product obsolescence. The
Company's success is highly dependent upon the timely completion and
introduction of new products at competitive prices and performance levels. There
can be no assurance that the Company will be able to identify new product
opportunities successfully and develop and bring to market new products in a
timely manner, or that the Company will be able to respond effectively to
technological advancements or new product announcements.
BACKLOG
The Company's backlog of orders was approximately $28.6 million at March
28, 1999, compared to approximately $22.1 million at March 29, 1998. These
backlog figures include only orders scheduled for shipment within six months, of
which the majority is scheduled for delivery within 90 days. Most orders are
subject to rescheduling and/or cancellation with little or no penalty. Purchase
order release lead times depend upon the scheduling practices of the individual
customer, and the rate of booking new orders fluctuates from month to month. The
Company's customers have in the past encountered uncertain and changing demand
for their products. Orders are typically placed based on customer forecasts. If
demand falls below customers' forecasts, or if customers do not control their
inventories effectively, they may cancel or reschedule shipments previously
ordered from the Company. In the past, the Company has experienced, and may at
any time and with minimal notice in the future experience, cancellations and
postponements of orders. Therefore, the level of backlog at any particular date
is not necessarily indicative of sales for any future period.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. Most of the Company's
products compete with products available from several companies, many of whom
have research and development, long term guaranteed supply capacity, marketing
and financial resources, manufacturing capability and customer support
organizations that are substantially greater than those of the Company. The
Company believes that its future operating results will depend, in part, upon
its ability to continue to improve product and process technologies and develop
new technologies in order to maintain the performance advantages of products and
processes relative to competitors, to adapt products and processes to
technological changes, and to identify and adopt emerging industry standards.
Because of the complexity of its products, the Company has experienced delays
from time to time in completing products on a timely basis. If the Company is
unable to design, develop and introduce competitive new products on a timely
basis, its future operating results would be adversely effected.
The Company currently competes primarily with Texas Instruments, Adaptec,
Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre Channel
sector of the I/O market, the Company competes primarily with Texas Instruments,
LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the IDE sector,
the Company competes with ST Microelectronics and Cirrus Logic, Inc. In the
enclosure management sector, the Company competes primarily with the Symbios
division of LSI Logic and the Serano division of Vitesse Semiconductor
Corporation. The Company may compete with some of its larger disk drive and
computer systems customers, some of which have the capability to develop I/O
controller integrated circuits for use in their own products. At least one large
OEM customer in the past has decided to vertically integrate and has therefore
ceased purchases from the Company.
The Company believes that one of its principal competitive strengths in the
computer and peripheral Application Specific Integrated Circuit (ASIC) market is
its ability to obtain major design wins as the result of its systems level
expertise, integrated circuit design capability and substantial experience in
computer and peripheral ASIC's applications, particularly SCSI and Fibre
Channel. The Company believes competitive
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factors in design wins are time to market, performance, product features, price,
quality, technical support and ease of migration path to other computer and
peripheral ASIC's standards. The Company will have to continue to develop
products appropriate to its markets to remain competitive, as its competitors
continue to introduce products with improved performance characteristics. While
the Company continues to devote significant resources to research and
development, there can be no assurance that such efforts will be successful or
that the Company will develop and introduce new technology and products in a
timely manner. In addition, while relatively few competitors offer a full range
of SCSI and other computer and peripheral ASIC's products, additional domestic
and foreign manufacturers may increase their presence in, and resources devoted
to, these markets. There can be no assurance that the Company will compete
successfully in the future against its existing competitors or potential
competitors.
MANUFACTURING
The Company subcontracts the manufacturing of its semiconductor chips and
its host adapter boards to independent foundries and subcontractors, which
allows the Company to avoid the high costs of owning, operating and constantly
upgrading a wafer fabrication facility and a host adapter board assembly
factory. As a result, the Company focuses its resources on product design and
development, quality assurance, sales and marketing and customer support. The
Company designs both its semiconductor and host adapter board products, and
performs final tests on products, including tests required under the Company's
ISO9001/TickIT Certification. The Company also provides fab process reliability
tests, conducts failure analysis and audits its finished goods inventory to
confirm the integrity of its quality assurance procedures.
The Company's semiconductor products are ASICs, currently manufactured for
the Company by a number of domestic and offshore foundries. The Company's major
semiconductor suppliers are Toshiba, NEC Electronics, LSI Logic and Samsung
Semiconductor, Inc. Most of the Company's products are manufactured using 0.8,
0.6 or 0.5 micron process technology.
The Company is dependent on its foundries to allocate to the Company a
portion of their foundry capacity sufficient to meet the Company's needs and to
produce products of acceptable quality and with satisfactory manufacturing
yields in a timely manner. These foundries fabricate products for other
companies and manufacture products of their own design. The Company does not
have long-term agreements with all of its foundries, and purchases both wafers
and finished chips on a purchase order basis. Therefore, the foundries generally
are not obligated to supply products to the Company for any specific period, in
any specific quantity or at any specific price, except as may be provided in a
particular purchase order. The Company works with its existing foundries, and
intends to qualify new foundries, as needed, to obtain additional manufacturing
capacity. There can be no assurance, however, that the Company will be able to
obtain additional capacity.
The Company currently purchases its semiconductor products from its
foundries either in finished form or wafer form. The Company uses subcontractors
for die assembly of its semiconductor products purchased in wafer form, and for
assembly of its host adapter board products. In the assembly process for the
Company's semiconductor products, the silicon wafers are separated into
individual die, which are then assembled into packages and tested. Following
assembly, the packaged devices are further tested and inspected by the Company
prior to shipment to customers. For its host adapter board products, the Company
purchases components in kit form, and printed circuit boards. The Company
provides these items to contract manufacturing companies that work together with
the Company's component suppliers to assemble the boards to the Company's
specifications.
The Company believes most component parts used in its host adapter boards
are standard off-the-shelf items, which are, or can be, purchased from two or
more sources. The Company selects suppliers on the basis of technology,
manufacturing capacity, quality and cost. Whenever possible and practicable, the
Company strives to have at least two manufacturing locations for each host
adapter board and chip product. Nevertheless, the Company's reliance on
third-party manufacturers involves risks, including possible limitations on
availability of products due to market abnormalities, unavailability of, or
delays in obtaining access to, certain product technologies and the absence of
complete control over delivery schedules, manufacturing yields, and total
production costs. The inability of the Company's suppliers to deliver products
of acceptable
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quality and in a timely manner or the inability of the Company to procure
adequate supplies of its products could have a material adverse effect on the
Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY
Although the Company has eight patents issued and three additional patent
applications pending in the United States, the Company relies primarily on its
trade secrets, trademarks and copyrights to protect its intellectual property.
The Company attempts to protect its proprietary information through agreements
with its customers, suppliers, employees and consultants, and through other
security measures. Although the Company intends to protect its rights
vigorously, there can be no assurance that these measures will be successful. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the I/O solutions markets, its technical
expertise and ability to introduce new products on a timely basis will be more
important in maintaining its competitive position than protection of its
intellectual property. Although the Company continues to implement protective
measures and intends to defend vigorously its intellectual property rights,
there can be no assurance that these measures will be successful.
The Company has received notices of claimed infringement of trademark
rights in the past, and there can be no assurance that third parties will not
assert claims of infringement of trademarks or any other intellectual property
rights against the Company with respect to existing and future products. In the
event of a patent or other intellectual property dispute, the Company may be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to the technology, which is the subject of the claim. There
can be no assurance that the Company would be successful in such development or
that any such license would be available on commercially reasonable terms, if at
all. In the event of litigation to determine the validity of any third party's
claims, such litigation could result in significant expense to the Company, and
divert the efforts of the Company's technical and management personnel, whether
or not such litigation is determined in favor of the Company.
EMPLOYEES
The Company had 289 employees as of March 28, 1999. The Company believes
that its future prospects will depend, in part, on its ability to continue to
attract, train, motivate, retain and manage skilled engineering, sales,
marketing and executive personnel. None of QLogic's employees is represented by
a labor union. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
The Company's principal product development, operations, sales and
corporate offices are currently located in three adjacent buildings comprising
approximately 97,000 square feet in Costa Mesa, California. The Company occupies
the buildings pursuant to leases that expire in October 1999. The Company has
six one-month options to extend the Costa Mesa lease through April 2000.
Additionally, the Company has leased a design center in Austin, Texas comprising
a 5,973 square foot facility. In August 1998, the Company entered into a
ten-year lease to relocate its corporate headquarters to an approximately
165,000 square foot campus-style facility in Aliso Viejo, California. The lease
commences upon completion of the construction of the first building, currently
estimated to be completed November 1999.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to ordinary disputes arising in
the normal course of business. The Company does not believe that the outcome of
any current legal proceedings will have a material adverse effect on the
Company's business, financial condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1999 to a vote
of security holders.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive and certain other officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H.K. Desai...................... 53 Chairman of the Board, Chief Executive Officer and President
Thomas R. Anderson.............. 54 Vice President and Chief Financial Officer
Michael R. Manning.............. 44 Secretary and Treasurer
David Tovey..................... 54 Vice President and General Manager, Peripheral Products
Lawrence F. Fortmuller.......... 50 Vice President and General Manager, Computer Products
David M. Race................... 43 Vice President and General Manger, Enclosure Management
Products
Mark A. Edwards................. 40 Vice President, Sales and Corporate Marketing
</TABLE>
Officers of the Company are elected annually by the Board of Directors for
each year period, or portion thereof, and serve at the discretion of the Board
of Directors of the Company.
Mr. Desai joined the Company in August 1995 as President and Chief
Technical Officer of QLogic and President of QLogic Foreign Sales Corporation.
He was subsequently promoted to President and Chief Executive Officer, became a
Director in January 1996 and Chairman of the Board in May 1999. From May 1995 to
August 1995, he was Vice President, Engineering (Systems Products) at Western
Digital Corporation, a manufacturer of disk drives. From July 1990 until May
1995, he served as Director of Engineering, and subsequently Vice President of
Engineering at QLogic. From 1980 until joining the Company in 1990, Mr. Desai
was an Engineering Section Manager at Unisys Corporation, a computer system
manufacturer.
Mr. Anderson joined the Company in July 1993 as Chief Financial Officer.
Prior to joining the Company, Mr. Anderson was Executive Vice President, Chief
Operating Officer and Chief Financial Officer of HIARC, Inc., a software startup
company. From October 1990 to December 1992, he was corporate Senior Vice
President and Chief Financial Officer at Distributed Logic Corporation, a
manufacturer of tape and disk controllers and subsystems. From June 1982 to
April 1990, he held various positions, the latest of which was corporate Vice
President and Chief Financial Officer with Cipher Data Products, Inc., a
supplier of tape and optical disk drives to the computer industry.
Mr. Manning joined Emulex, a network product manufacturer (QLogic's former
parent company) in July 1983 as Director of Tax. He was named Senior Director
and Treasurer of Emulex in April 1991 and Secretary in August 1992. Mr. Manning
joined the Company in June 1993. Prior to joining Emulex, Mr. Manning was a Tax
Manager at KPMG LLP, independent certified public accountants.
Mr. Tovey joined the Company in April 1994 as Vice President Marketing, and
was named Vice President and General Manager of Peripheral Product in July 1996.
From March 1985 to April 1994, he held various positions with Toshiba America
Information Systems, a computer system manufacturer including director of
technology planning and Vice President of OEM marketing. Prior to Toshiba, Mr.
Tovey held various marketing and sales management positions with Unisys
Corporation.
Mr. Fortmuller joined the Company in October 1996 as Vice President and
General Manager, Computer Products. From June 1987 to October 1996, Mr.
Fortmuller held management positions at AST Research, Inc., a computer
manufacturer, including Vice President, Americas Marketing.
Mr. Race joined the Company in August 1998 as Vice President and General
Manager, Enclosure Management Products. Mr. Race was Co-founder and President of
Silicon Design Resources, Inc. (SDR) from January 1996 until August 1998, when
SDR was acquired by QLogic. From January 1996 to August 1998 Mr. Race held
positions at Software.com, and Distributed Processing Technology from March 1989
to January 1996.
10
<PAGE> 11
Mr. Edwards joined the Company in September 1996 as Vice President of Sales
and Corporate Marketing. Prior to joining the Company, Mr. Edwards worked at
Unisys from August 1993 to September 1996 where he was most recently Vice
President, Sales & Marketing for the Storage Systems Division. Mr. Edwards has
held a number of sales and marketing positions in the U.S. and Europe with
Unisys, Digital Equipment Corporation and Zitel.
None of the executive officers of the Company has any family relationship
with any other executive officer of the Company or director of the Company.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRINCIPAL MARKET AND PRICES
Shares of common stock of the Company are traded and quoted in the NASDAQ
National Market System under the symbol QLGC. The following table sets forth the
range of high and low sales prices per share of common stock of the Company for
each quarterly period of the two most recent years as reported on NASDAQ.
Share prices have been adjusted to reflect the two-for-one stock split of
the Company's common stock which was effected February 15, 1999.
<TABLE>
<CAPTION>
SALES PRICES
------------------
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1999
First Quarter............................................... 23.5625 17.5000
Second Quarter.............................................. 35.3905 13.9375
Third Quarter............................................... 67.1250 25.2500
Fourth Quarter.............................................. 81.5000 46.5000
FISCAL 1998
First Quarter............................................... 13.2500 9.3750
Second Quarter.............................................. 22.6875 12.3750
Third Quarter............................................... 22.6875 12.2500
Fourth Quarter.............................................. 21.0000 12.0000
</TABLE>
NUMBER OF COMMON STOCKHOLDERS
The approximate number of record holders of common stock of the Company as
of May 23, 1999 was 345.
DIVIDENDS
The Company has never paid cash dividends on its common stock and has no
current intention to do so.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following table of certain selected data regarding the Company should
be read in conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
MARCH 28, MARCH 29, MARCH 30, MARCH 31, APRIL 2,
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENTS OF OPERATIONS DATA
Net revenues.......................... $117,182 $ 81,393 $68,927 $53,779 $57,675
Cost of revenues...................... 42,603 34,049 38,151 34,413 34,285
-------- -------- ------- ------- -------
Gross profit........................ 74,579 47,344 30,776 19,366 23,390
-------- -------- ------- ------- -------
Operating expenses:
Engineering and development......... 24,358 15,601 10,422 7,191 7,598
Selling and marketing............... 11,062 8,707 6,372 6,490 7,541
General and administrative.......... 5,794 4,550 4,628 4,501 4,872
-------- -------- ------- ------- -------
Total operating expenses.... 41,214 28,858 21,422 18,182 20,011
-------- -------- ------- ------- -------
Operating income.................... 33,365 18,486 9,354 1,184 3,379
Interest expense...................... 84 109 125 153 146
Interest and other income............. 5,657 3,453 602 172 93
-------- -------- ------- ------- -------
Income before income taxes.......... 38,938 21,830 9,831 1,203 3,326
Income tax provision.................. 13,239 8,422 3,983 537 1,361
-------- -------- ------- ------- -------
Net income............................ $ 25,699 $ 13,408 $ 5,848 $ 666 $ 1,965
======== ======== ======= ======= =======
Basic net income per share (1)........ $ 1.47 $ 0.88 $ 0.51 $ 0.06 $ 0.18
-------- -------- ------- ------- -------
Diluted net income per share (1)...... $ 1.38 $ 0.83 $ 0.48 $ 0.06 $ 0.18
-------- -------- ------- ------- -------
SELECTED BALANCE SHEET DATA
Working capital....................... $110,687 $ 90,749 $19,811 $13,334 $10,564
Total assets.......................... $172,923 $136,242 $36,963 $28,539 $24,592
Long-term capitalized lease
obligations, excluding current
installments........................ $ -- $ 141 $ 352 $ 576 $ 853
Other non-current liabilities......... $ -- $ 466 $ 924 $ 2,016 $ 1,381
Total stockholders' equity............ $152,684 $118,049 $24,353 $16,277 $15,581
</TABLE>
- ---------------
(1) Effective February 15, 1999, the Company completed a two-for-one stock
split. All per share data has been retroactively restated to reflect the
stock split.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The following discussion sets forth certain factors the Company believes
could cause actual results to differ materially from those contemplated by the
forward-looking statements. The Company undertakes no obligation to update the
information contained in this Item 7.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the dollars and
percentage of total revenues in the Company's consolidated statements of income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------
MARCH 28, 1999 MARCH 29, 1998 MARCH 30, 1997
----------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................ $117,182 100.0% $81,393 100.0% $68,927 100.0%
Cost of revenues.................... 42,603 36.4 34,049 41.8 38,151 55.3
-------- ----- ------- ----- ------- -----
Gross profit...................... 74,579 63.6 47,344 58.2 30,776 44.7
-------- ----- ------- ----- ------- -----
Operating expenses:
Engineering and development....... 24,358 20.8 15,601 19.2 10,422 15.1
Selling and marketing............. 11,062 9.4 8,707 10.7 6,372 9.3
General and administrative........ 5,794 4.9 4,550 5.6 4,628 6.7
-------- ----- ------- ----- ------- -----
Total operating expenses....... 41,214 35.1 28,858 35.5 21,422 31.1
-------- ----- ------- ----- ------- -----
Operating income............... $ 33,365 28.5% $18,486 22.7% $ 9,354 13.6%
======== ===== ======= ===== ======= =====
</TABLE>
NET REVENUES
The Company's net revenues are derived primarily from the sale of SCSI and
Fibre Channel based I/O products and enclosure management products. License fees
and non-recurring engineering fees also contribute to the Company's net
revenues. Net revenues for fiscal 1999 increased $35.8 million or 44% from
fiscal 1998 to $117.2 million. The increase was the result of a $20.1 million
increase in sales of the Host Board product line, a $10.4 million increase in
sales of the TEC product line, a $3.2 million increase in sales of the GEM
product line and a $1.6 million increase in sales of the FTEC product line.
Net revenues for fiscal 1998 increased $12.5 million or 18% from fiscal
1997 to $81.4 million. The increase was the result of an $8.7 million increase
in sales of the Host Board product line, combined with a $4.4 million increase
in sales in the FAS product line. A partially offsetting decline of $0.6 million
occurred in license fees.
Export revenues for fiscal 1999 increased $27.5 million or 79% from fiscal
1998, to approximately $62.1 million, primarily due to increased sales to
customers in Japan and to a lessor extent, Europe. Export revenues for fiscal
1998 increased $31.3 million or 10% from fiscal 1997, to approximately $34.6
million, primarily due to increased sales to customers in Europe, along with
smaller increases from Southeast Asia.
Countries in the Pacific Rim continue to suffer from the influence of the
Asian economic crisis. This could lead to widespread financial difficulty among
the companies in this region. Export revenues (primarily to the Pacific Rim
countries) of the Company's products amounted to $62.1 million in fiscal year
1999, $34.6 million in fiscal year 1998, and $31.3 million of net revenues for
fiscal year 1997. As a percentage of net revenues, export revenues accounted for
53% in fiscal year 1999, 42% in fiscal year 1998, and 45% in fiscal year 1997.
Export revenues are denominated in U.S. dollars. The Company does not expect the
uncertainty in selected Pacific Rim foreign currency markets to have a material
adverse effect on the results of the Company's operations.
14
<PAGE> 15
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The Company's six largest customers in each
respective period accounted for approximately 69% of net revenues in fiscal year
1999, and 71% in fiscal years 1998 and 1997. For fiscal 1999, Fujitsu Limited
accounted for 24% of net revenues, and Sun Microsystems, Inc. accounted for 19%
of the Company's net revenues. For fiscal 1998, Fujitsu Limited accounted for
23% of net revenues, Sun Microsystems, Inc. accounted for 20%, of net revenues.
For fiscal 1997, and Sun Microsystems, Inc. accounted for 20% of net revenues,
Tokyo Electron Limited accounted for 19%, and Fujitsu Limited accounted for 16%.
The Company believes that its major customers continually evaluate whether
or not to purchase products from alternate or additional sources. Additionally,
customers' economic and market conditions frequently change. Accordingly, there
can also be no assurance that a major customer will not reduce, delay or
eliminate its purchases from the Company. Any such reduction, delay or loss of
purchases could have a material adverse effect on the Company's business,
financial condition and results of operations.
GROSS PROFIT
Cost of revenues consist primarily of raw materials (including wafers and
completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The gross profit percentage for fiscal 1999 was
64%, an increase from 58% in the prior fiscal year. The percentage increase was
due to the introduction of new, higher margin products and volume related cost
reductions on mature products, combined with improved quality resulting in
reduced scrap expenses.
The gross profit percentage for fiscal 1998 was 58%, an increase from 45%
in the prior fiscal year. The percentage increase was due to a shift in product
mix to products with lower unit costs, as well as increased production volumes.
Additionally, multiple disciplines within the Company worked together to improve
inventory management.
The gross profit percentage for fiscal 1997 was 45%, an increase from 36%
in the prior fiscal year. The percentage increase was due to increased revenue
from products that contain higher levels of integration and functionality and
are generally associated with higher average selling prices and gross margins.
The Company continued to focus on reducing component costs as well as
implementing design efficiencies during fiscal 1997.
The Company's ability to maintain its current gross profit percentage can
be significantly affected by factors such as supply costs and, in particular,
the cost of silicon wafers, the worldwide semiconductor foundry capacity, the
mix of products shipped, competitive price pressures, the timeliness of volume
shipments of new products and the Company's ability to achieve manufacturing
cost reductions. The Company anticipates that it will be increasingly more
difficult to reduce manufacturing costs. As a result, the Company does not
anticipate gross profit percentage to increase at a rate consistent with
historic trends.
OPERATING EXPENSES
Engineering and Development. Engineering and development expenses consist
primarily of salaries and other personnel related expenses, development related
material, occupancy costs, and computer support. The Company believes that
continued investments in engineering and development activities are critical to
achieving its strategic objectives. The Company expects that engineering and
development expenses will increase in absolute dollars in fiscal 2000.
Engineering and development expenses were $24.4 million in fiscal year
1999, $15.6 million in fiscal 1998 and $10.4 million in fiscal 1997. As a
percentage of net revenues this amounted to 20.8% in fiscal 1999, 19.2% in
fiscal 1998 and 15.1% in fiscal 1997. The increase in spending each fiscal year
was largely due to increased levels of spending for Fibre Channel and SCSI
design and engineering support. Additionally, in 1999 the Company incurred a
$2.1 million charge for acquired in-process technology relating to the
acquisition of Silicon Design Resources, Inc.
15
<PAGE> 16
Selling and Marketing. Selling and marketing expenses consist primarily of
sales and marketing salaries, sales commissions and related expenses,
promotional activities and travel for sales and marketing personnel. The Company
believes continued investments of these type of expenses are critical to the
success of its strategy of expanding relationships with its customers. As a
result, the Company expects sales and marketing expenditures will increase in
absolute dollars in the future.
Sales and marketing expenses were $11.1 million in fiscal 1999, $8.7
million in fiscal 1998 and $6.4 million in fiscal 1997. As a percentage of net
revenues this amounted to 9.4% in fiscal 1999, 10.7% in fiscal 1998 and 9.3% in
fiscal 1997. The increases in dollars reflected an increased level of sales
commissions paid as a result of the increase in revenues. The decrease in sales
and marketing expenses as a percentage of net revenues from fiscal 1998 to
fiscal 1999 relates to economies of scale realized from the growth in net
revenues. As a percentage of net revenues, sales and marketing expenses
increased from fiscal 1997 to fiscal 1998 due to increases in sales and
marketing personnel.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
human resources and information technology personnel. Non-personnel related
expenses consist of recruiting fees, professional services and corporate
expenses. The Company expects general and administrative expenses to increase in
absolute dollars as it adds personnel and incurs additional costs relating to
the growth of the business and its operation as a public company.
General and administrative expenses were $5.8 million in fiscal 1999, and
$4.6 million in fiscal 1998 and 1997. As a percentage of net revenues this
amounted to 4.9% in fiscal 1999, 5.6% in fiscal 1998 and 6.7% in fiscal 1997. In
fiscal 1999, general and administrative expenses increased due to an increase in
outside services related to the acquisition of Silicon Design Resources, Inc.
Additionally, salaries and fringe benefits increased by $0.5 million due to an
increase in general and administrative personnel. The decrease in general and
administrative expenses as a percentage of net revenues is due to the Company
benefiting from economies of scale related to the increases in net revenue.
General and administrative expenses remained relatively consistent in
fiscal year 1998 and 1997.
NON-OPERATING INCOME
Interest and other income, net of interest expense, was $5.6 million in
1999, $3.3 million in fiscal 1998 and $0.5 in fiscal 1997. The increases in
interest and other income in fiscal 1999 and 1998 are largely due to increases
in cash equivalents and investment balances due to $77.5 million in net proceeds
received from a secondary stock offering in the second quarter of fiscal 1998.
Additionally, cash equivalent and investment balances have increased due to cash
flow from operations in each of the last three fiscal years.
INCOME TAX PROVISION
The Company's effective tax rates were approximately 34% in fiscal 1999,
39% in fiscal 1998, and 41% in fiscal 1997. The decrease in tax rate in fiscal
1999 is due to benefits realized from research and development and other tax
credits as well as the movement of a portion of the Company's investments into
tax exempt securities. The decrease in tax rate in fiscal 1998 is due to the
decrease in the valuation allowance relating to the Company's deferred tax
assets, and to a lesser extent, the movement of a portion of the Company's
investments into tax exempt securities.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges, and establishes respective accounting
standards for reporting changes in the fair value of the instruments. The
statement is effective for
16
<PAGE> 17
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
has not yet determined the impact of adopting this new standard on the
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's combined balances of cash and cash equivalents, short-term
and long-term investments have increased to $130.5 million at March 28, 1999 and
$112.8 million at March 29, 1998. The increases are primarily attributable to
receiving net proceeds of $77.5 million from a secondary stock offering in the
second quarter of fiscal 1998. Additionally, the increase in cash flow from
operations in those fiscal years has increased the combined balances of cash and
cash equivalents, short-term and long-term investments.
The Company's primary source of liquidity is derived from working capital
and a $7.5 million unsecured line of credit with Silicon Valley Bank. Working
capital increased $20.0 million to $110.7 million at March 28, 1999 and
increased $70.9 million to $90.7 million at March 29, 1998. The increase in
working capital in fiscal 1999 is largely attributable to cash flow from
operations. The increase in working capital in fiscal 1998 is attributable to
the increase in cash and cash equivalents and short-term investments as a result
of the proceeds from the secondary stock offering. The $7.5 million line of
credit facility with Silicon Valley Bank allows the Company to borrow at the
bank's prime rate. The credit facility expires on July 5, 1999, and, although
there can be no assurance, the Company currently expects to renew this line of
credit. There are no borrowings under this credit facility at March 28, 1999.
The Company's cash flow provided by operations was $23.5 million in fiscal
1999, $19.0 million for fiscal 1998 and $12.6 million for fiscal 1997. The
growth in cash provided by operations is primarily due to increases in
profitability for those fiscal years. Additionally, in fiscal year 1999, cash
flow from operations was improved by increases in accounts payable and other
accrued liabilities and was offset by an increase in inventories and a decrease
in income taxes payable. In fiscal year 1998, cash flow from operations was
improved by increases to income taxes payable and accounts payable and was
partially offset by an increase to accounts receivable.
The Company's cash flow used in investing activities was $47.4 million in
fiscal 1999, $52.6 million for fiscal 1998 and $3.9 million for fiscal 1997. The
decrease in cash used in investing activities is primarily due to decreases in
purchases of short and long-term investments, net of maturing investments. In
fiscal year 1998, the increase in the cash used in investing activities relates
to purchases of short and long-term investments, net of maturing investments.
Additionally, capital expenditures were $6.8 million in fiscal 1999, and $3.9
million in both fiscal 1998 and fiscal 1997. During fiscal year 2000, the
Company anticipates spending between $2.5 million to $3.5 million for leasehold
improvements and relocation related expenses associated with the corporate
headquarters relocation to Aliso Viejo, California. The Company may exercise its
option to purchase the Aliso Viejo facility which could increase the Company's
potential cash expenditures to approximately $30.0 to $35.0 million.
The Company's cash flow provided by financing activities was $3.0 million
in fiscal 1999, $78.6 million for fiscal 1998 and $2.0 million for fiscal 1997.
The cash provided by financing activities for fiscal years 1999 and 1997 is
primarily due to increases in proceeds from issuance of stock under employee
stock plans. For fiscal year 1998, the majority of the cash provided by
financing activities was generated from a secondary stock offering in the second
quarter of that year.
The Company believes that it has sufficient working capital and an
available credit facility to finance its operations for fiscal year 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the information in
this report constitutes forward-looking statements. When used in this report the
words "shall," "should," "forecast," "all of," "projected," "believes,"
"expects," and similar expressions are intended to identify forward looking
statements. In addition, the Company may from time to time make oral
forward-looking statements. The Company wishes to caution readers that a number
of important factors could cause results to differ materially from those in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below,
17
<PAGE> 18
as well as those discussed above in "Business" or "Management's Discussion and
Analysis of Condition and Results of Operations" or elsewhere in this report.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter to quarter. As a
result, the Company believes that period to period comparisons of its operating
results are not necessarily meaningful, and that such comparisons cannot be
relied upon as indicators of future performance. In addition, there can be no
assurance that the Company will maintain its current profitability in the
future. A significant portion of the Company's net revenues in each fiscal
quarter result from orders booked in that quarter. In the past, a significant
percentage of the Company's quarterly bookings and sales to major customers
occurred during the last month of the quarter, and there can be no assurance
that this trend will not return in the future. Orders placed by major customers
are typically based on their forecasted sales and inventory levels for the
Company's products. Changes in purchasing patterns by one or more of the
Company's major customers, customer order changes or rescheduling, gain or loss
of significant customers, customer policies pertaining to desired inventory
levels of the Company's products, negotiations of rebates and extended payment
terms, as well as changes in the ability of the Company to anticipate in advance
the mix of customer orders, could result in material fluctuations in quarterly
operating results. Certain large OEM customers may require the Company to
maintain higher levels of inventory, or field warehouses in attempt to minimize
their own inventories. In addition, the Company must order its products and
build inventory substantially in advance of product shipments, and because the
markets for the Company's products are subject to rapid technological and price
changes, there is a risk the Company will forecast incorrectly and produce
excess or insufficient inventory of particular products. To the extent the
Company produces excess or insufficient inventory or is required to hold excess
inventory, the Company's operating results could be adversely effected.
Other factors that could cause the Company's sales and operating results to
vary significantly from period to period include: the time, availability and
sale of new products; seasonal OEM customer demand, such as the decline
experienced in the fiscal quarter ended June 30, 1996; changes in the mix of
products having differing gross margins; variations in manufacturing capacities,
efficiencies and costs; the availability and cost of components, including
silicon wafers; warranty expenses; variations in product development and other
operating expenses; adoption of new accounting pronouncements and/or changes in
Company policies and general economic and other conditions effecting the timing
of customer orders and capital spending. The Company's quarterly results of
operations are also influenced by competitive factors, including pricing and
availability of the Company's and its competitors' products. Although the
Company does not maintain its own wafer manufacturing facility, a large portion
of the Company's expenses is fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer or
cancel purchases of the Company's products. Order deferrals by the Company's
customers, delays in the Company's introduction of new products and longer than
anticipated design-in cycles for the Company's products have in the past
adversely effected the Company's quarterly results of operations. Due to all of
the foregoing factors, as well as other unanticipated factors, it is likely that
in some future quarter or quarters the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's common stock would likely be materially and adversely
effected.
DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The loss of any of the Company's major
customers would have a material adverse effect on its business, financial
condition and results of operations. Some of these customers are based in the
Pacific Rim, which is subject to economic and political uncertainties. In
addition, a majority of the Company's customers order the Company's products
through written purchase orders as
18
<PAGE> 19
opposed to long term supply contracts and, therefore, such customers are
generally not obligated to purchase products from the Company for any extended
period. Major customers also have significant leverage over the Company and may
attempt to change the terms, including pricing, upon which the Company and such
customers do business, which could materially adversely affect the Company's
business, financial condition and results of operations. This risk is increased
due to the potential for some of these customers merging or acquiring other
customers of the Company. As the Company's OEM customers are pressured to reduce
prices as a result of competitive factors, the Company may be required to
contractually commit to price reductions for its products before it knows how,
or if, cost reductions can be obtained. If the Company is unable to achieve such
cost reductions, the Company's gross margins could decline and such decline
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Company provides certain
customers with price protection in the event that the Company reduces the prices
of its products. While the Company maintains reserves for such price protection,
there can be no assurance that the impact of future price reductions by the
Company will not exceed the Company's reserves in any specific fiscal period.
Any price protection in excess of recorded reserves could have a material
adverse effect on the Company's business, financial condition and results of
operations.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. Most of the Company's
products compete with products available from several companies, many of which
have substantially greater research and development, long term guaranteed supply
capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. The Company believes
that its future operating results will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to achieve or maintain the performance advantages of
products and processes relative to competitors, to adapt products and processes
to technological changes, and to identify and adopt emerging industry standards.
Because of the complexity of its products, the Company has experienced delays
from time to time in completing products on a timely basis. If the Company is
unable to design, develop and introduce competitive new products on a timely
basis, its future operating results would be materially and adversely effected.
The Company currently competes primarily with Texas Instruments, Adaptec,
Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre Channel
sector of the I/O market, the Company competes primarily with Texas Instruments,
LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the IDE sector,
the Company competes with ST Microelectronics and Cirrus Logic, Inc. In the
enclosure management sector, the Company competes primarily with the Symbios
division of LSI Logic and the Serano division of Vitesse Semiconductor
Corporation. The Company may compete with some of its larger disk drive and
computer systems customers, some of which have the capability to develop I/O
controller integrated circuits for use in their own products. At least one large
OEM customer in the past has decided to vertically integrate and has therefore
ceased purchases from the Company.
The Company will need to continue to develop products appropriate to its
markets to remain competitive as its competitors continue to introduce products
with improved performance characteristics. While the Company continues to devote
significant resources to research and development, there can be no assurance
that such efforts will be successful or that the Company will develop and
introduce new technology and products in a timely manner. Further, several of
the Company's competitors have greater resources devoted to securing
semiconductor foundry capacity (e.g. long-term agreements regarding supply flow,
equity or financing agreements or direct ownership of a foundry). In addition,
while relatively few competitors offer a full range of SCSI and other I/O
products, additional domestic and foreign manufacturers may increase their
19
<PAGE> 20
presence in, and resources devoted to, these markets. There can be no assurance
that the Company will compete successfully in the future.
DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS
The Company currently relies on several independent foundries to
manufacture its semiconductor products either in finished form or wafer form.
Generally, the Company conducts business with some of its foundries through
written purchase orders as opposed to long-term supply contracts and, therefore,
such foundries are generally not obligated to supply products to the Company for
any specific period, in any specific quantity or at any specified price, except
as may be provided in a particular purchase order as may be accepted by a
foundry. To the extent a foundry terminates its relationship with the Company or
should the Company's supply from a foundry be interrupted or terminated for any
other reason, the Company may not have a sufficient amount of time to replace
the supply of products manufactured by that foundry. Historically, there have
been periods when there has been a worldwide shortage of advanced process
technology foundry capacity. The manufacture of semiconductor devices is subject
to a wide variety of factors, including the availability of raw materials, the
level of contaminants in the manufacturing environment, impurities in the
materials used, and the performance of personnel and equipment. The Company is
continuously evaluating potential new sources of supply. However, the
qualification process and the production ramp-up for additional foundries has in
the past taken, and could in the future take, longer than anticipated. There can
be no assurance that new supply sources will be able or willing to satisfy the
Company's wafer requirements on a timely basis or at acceptable quality or unit
prices. While the quality, yield and timeliness of wafer deliveries to date have
been acceptable; there can be no assurance that manufacturing yield problems
will not occur in the future.
The Company is using multiple sources of supply for certain of its
products, which may require the Company's customers to perform separate product
qualifications. The Company has not, however, developed alternate sources of
supply for certain other products and its newly introduced products are
typically produced initially by a single foundry until alternate sources can be
qualified. In particular, the Company's integrated single chip Fibre Channel
controller is manufactured by LSI Logic and integrates LSI Logic's transceiver
technology. In the event that LSI Logic is unable or unwilling to satisfy the
Company's requirements for this technology, the Company's marketing efforts
related to Fibre Channel products would be delayed and, as such, its results of
operations could be materially and adversely effected. The requirement that a
customer perform separate product qualifications or a customer's inability to
obtain a sufficient supply of products from the Company may cause that customer
to satisfy its product requirements from the Company's competitors, which would
adversely effect the Company's results of operations.
The Company's ability to obtain satisfactory wafer and other supplies is
subject to a number of other risks. These risks include that the Company's
suppliers may be subject to injunctions arising from alleged violations of third
party intellectual property rights. The enforcement of such an injunction could
impede a supplier's ability to provide wafers, components or packaging services
to the Company. In addition, the Company's flexibility to move production of any
particular product from one foundry to another can be limited in that such a
move can require significant re-engineering, which may take several quarters.
These efforts also divert engineering resources which otherwise could be
dedicated to new product development, which would adversely affect new product
development schedules. Accordingly, production may be constrained even though
capacity is available at one or more foundries. In addition, the Company could
encounter supply shortages if sales grow substantially. The Company uses
domestic and offshore subcontractors for die assembly of its semiconductor
products purchased in wafer form, and for assembly of its host adapter board
products. The Company's reliance on independent subcontractors to provide these
services involves a number of risks, including the absence of guaranteed
capacity and reduced control over delivery schedules, quality assurance and
costs. The Company is also subject to the risks of shortages and increases in
the cost of raw materials used in the manufacture or assembly of the Company's
products. In addition, the Company may receive orders for large volumes of
products to be shipped within short periods, and the Company may not have
sufficient testing capacity to fill such orders. Constraints or delays in the
supply of the Company's products, whether because of capacity constraints,
unexpected disruptions at the Company's foundries or subcontractors, delays in
obtaining additional production at the existing foundries or in obtaining
production from new foundries, shortages of raw
20
<PAGE> 21
materials or other reasons, could result in the loss of customers and other
material adverse effects on the Company's operating results, including those
that may result should the Company be forced to purchase products from higher
cost foundries or pay expediting charges to obtain additional supply.
TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS
The Company is not currently experiencing any difficulties in obtaining
sufficient foundry capacity due to the current availability of worldwide
semiconductor fabrication capacity. However, the Company and the semiconductor
industry have, in the past, experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in, or advances to, wafer manufacturing companies
in exchange for guaranteed production capacity, or the formation of joint
ventures to own and operate or construct foundries or to develop certain
products. Any of these transactions would involve financial risk to the Company
and could require the Company to commit substantial capital or provide
technology licenses in return for guaranteed production capacity. The need to
commit substantial capital may require the Company to seek additional equity or
debt financing. The sale or issuance of additional equity or convertible debt
securities could result in dilution to the Company's stockholders. There can be
no assurance that such additional financing, if required, will be available on
terms acceptable to the Company.
RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET
A significant portion of the Company's host adapter board products and hard
disk drive controller products are ultimately used in high-performance file
servers, workstations and other office automation products. The Company's growth
has been supported by increasing demand for sophisticated I/O solutions which
support database systems, servers, workstations, Internet/Intranet applications,
multimedia and telecommunications. Should there be a slowing in the growth of
demand for such systems, the Company's business, financial condition and results
of operations could be materially and adversely effected.
As a supplier of controller products to manufacturers of computer
peripherals such as disk drives and other data storage devices, a portion of the
Company's business is dependent on the overall market for computer peripherals.
This market, which itself is dependent on the market for computers, has
historically been characterized by periods of rapid growth followed by periods
of oversupply and contraction. As a result, suppliers to the computer
peripherals industry from time to time experience large and sudden fluctuations
in demand for their products as their customers adjust to changing conditions in
their markets. If these fluctuations are not accurately anticipated, such
suppliers, including the Company, could produce excessive or insufficient
inventories of various components, which could have a material adverse effect on
the Company's business, financial condition, and results of operations.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INDUSTRY STANDARDS
The markets in which the Company and its competitors compete are
characterized by rapidly changing technology, evolving industry standards and
continuing improvements in products and services. The Company's future success
depends on its ability to enhance its current products and to develop and
introduce in a timely manner new products that keep pace with technological
developments and industry standards, compete effectively on the basis of price
and performance, adequately address OEM customer and end-user customer
requirements and achieve market acceptance. The Company believes that to remain
competitive in the future it will need to continue to develop new products,
which will require the investment of significant financial resources in new
product development. In anticipation of the implementation of Fibre Channel data
transfer interface technologies, the Company has invested, and will continue to
invest, significant resources in developing its integrated circuit single chip
PCI to Fibre Channel controllers. There can be no assurance that Fibre Channel
will be adopted as a predominant industry standard. The Company is aware of
products for alternative I/O standards and enabling technologies being developed
by its competitors. The Company believes that certain competitors, including
Adaptec, Inc., have extensive development efforts related to
21
<PAGE> 22
products based on new parallel SCSI I/O technology. There can be no assurance
that such technology will not be adopted as an industry standard and if an
alternative standard is adopted, there can be no assurance the Company will
timely develop products for such standard. Further, even if Fibre Channel is
adopted, there can be no assurance that the Company's integrated PCI to Fibre
Channel controller will be fully developed in time to be accepted for use in
Fibre Channel technology or that, if developed, will achieve market acceptance,
or be capable of being manufactured at competitive prices in sufficient volumes.
In the event that Fibre Channel is not adopted as an industry standard, or that
the Company's integrated circuit PCI to Fibre Channel controllers are not timely
developed or do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely effected.
The computer industry is characterized by various standards and protocols
that evolve with time. The Company's current products are designed to conform to
certain industry standards and protocols such as IDE, SCSI, Ultra SCSI, Ultra2
SCSI, Ultra3 SCSI and PCI. In addition, the Company's Fibre Channel products
have been designed to conform to a standard that has yet to be uniformly
adopted. The Company's products must be designed to operate effectively with a
variety of hardware and software products supplied by other manufacturers,
including microprocessors, operating system software and peripherals. The
Company depends on significant cooperation with these manufacturers in order to
achieve its design objectives and produce products that interoperate
successfully. While the Company believes that it generally has good
relationships with leading microprocessor, systems and peripheral suppliers,
there can be no assurance that such suppliers will not from time to time make it
more difficult for the Company to design its products for successful
interoperability. If industry acceptance of these standards was to decline or if
they were replaced with new standards, and if the Company did not anticipate
these changes and develop new products, the Company's business, financial
condition and results of operations could be materially and adversely effected.
The Company could experience delays in product development that are common
in the computer and semiconductor industry. Significant delays in product
development and release would adversely effect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will respond effectively to technological changes, new product announcements by
other companies or that the Company's research and development efforts will be
successful. Furthermore, introduction of new products and moving production of
existing products to different suppliers involves substantial business risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses and expedite charges, in addition to lower sales and lower profits.
IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company anticipates that its future growth may depend in part on its
ability to identify and acquire complementary businesses, technologies or
product lines that are compatible with those of the Company. Acquisitions
involve numerous risks, including identifying and pursuing acquisitions,
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks associated with entering markets or conducting
operations with which the Company has no or limited direct prior experience, the
potential loss of current customers and/or retention of the acquired Company's
customers and the potential loss of key employees of the acquired company.
Moreover, there can be no assurance that the anticipated benefits of an
acquisition will be realized. There can be no assurance that the Company will be
effective in identifying and effecting attractive acquisitions, assimilating
acquisitions or managing future growth. Future acquisitions by the Company could
result in potentially dilutive issuance's of equity securities, the incurrence
of debt and contingent liabilities and amortization expenses related to goodwill
and other intangible assets, all of which could materially adversely effect the
Company's business, financial condition, results of operations or stock price.
With respect to recording future business combinations the FASB has announced it
may abolish the pooling-of-interests accounting treatment as well as the
accounting treatment of acquired in-process research and development. The
proposal would effect transactions after January 1, 2001. If the FASB does
eliminate pooling-of-interests accounting treatment, the Company's ability to
consummate a business combination without incurring goodwill, would be adversely
effected.
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<PAGE> 23
DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the continued services
of its key engineering, sales, marketing and executive personnel, including
highly skilled semiconductor design personnel and software developers, and its
ability to identify and hire additional personnel. The loss of the services of
key personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that the
market for key personnel in the industries in which it competes is highly
competitive. In particular, periodically the Company has experienced difficulty
in attracting and retaining qualified engineers and other technical personnel
and anticipates that competition for such personnel will increase in the future.
There can be no assurance that the Company will be able to attract and retain
key personnel with the skills and expertise necessary to develop new products in
the future, or to manage the Company's business, both in the United States and
abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to several risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements, such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. A significant amount of the Company's customers and
suppliers are located in Japan. Recently, the Asian markets have suffered
property price deflation. This asset deflation has taken place especially in
countries that have had a collapse in both their currency and stock markets.
These deflationary pressures have reduced liquidity in the banking systems of
the affected countries and, when coupled with spare industrial production
capacity, could lead to widespread financial difficulty among the companies in
this region. The Company's export sales are invoiced in U.S. dollars and,
accordingly, if the relative value of the U.S. dollar in comparison to the
currency of the Company's foreign customers should increase, the resulting
effective price increase of the Company's products to such foreign customers
could result in decreased sales. There can be no assurance that any of the
foregoing factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS
Although the Company has patent protection on certain aspects of its
technology in certain jurisdictions, it relies primarily on trade secrets,
copyrights and contractual provisions to protect its proprietary rights. There
can be no assurance that these protections will be adequate to protect its
proprietary rights, that others will not independently develop or otherwise
acquire equivalent or superior technology or that the Company can maintain such
technology as trade secrets. There also can be no assurance that any patents the
Company possesses will not be invalidated, circumvented or challenged. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States or at all. The failure of the Company to
protect its intellectual property rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has experienced intellectual property claims being made against
it in the past. There can be no assurance that patent or other intellectual
property infringement claims will not be asserted against the Company or its
suppliers in the future. Although patent and intellectual property disputes may
be settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and there can be no assurance that necessary
licenses or similar arrangements would be available to the Company on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and selling certain of its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, should the Company
decide to, or be forced to, litigate such claims, such
23
<PAGE> 24
litigation could be expensive and time consuming, could divert management's
attention from other matters or could otherwise have a material adverse effect
on the Company's business, financial condition and results of operations,
regardless of the outcome of the litigation. The Company's supply of wafers and
other components can also be interrupted by intellectual property infringement
claims against its suppliers.
YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the year 2000 and beyond. The Company relies on
its systems, applications and devices in operating and monitoring all major
aspects of its business, including financial systems, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company has initially assessed how it may be
impacted by Year 2000 and has formulated and commenced implementation of a
comprehensive plan to address certain aspects of the Year 2000 problem. The
potential impacts to the Company identified by the plan include internal
information technology ("IT") systems, internal non-IT systems, including
embedded technology, the Company's products, and the readiness of significant
third parties with whom the Company has material relationships.
Internal IT Systems. The Company has formed a Year 2000 committee that
oversees the Company's Year 2000 readiness activities. The Year 2000 committee
has executive sponsorship and periodically reports status to the Audit Committee
of the Board of Directors. The Year 2000 committee is charged with raising
awareness throughout the company, developing tools and methodologies for
internally addressing the Year 2000 issue, developing and monitoring plans to
bring non-compliant applications and infrastructure into compliance and
identifying and resolving high-risk Year 2000 issues.
The Company is addressing Year 2000 issues in a phased approach consisting
of the following phases: (1) assessment, (2) planning, (3) preparation and (4)
implementation. The assessment phase consists of taking an inventory of the
Company's internal IT and non-IT systems and assessing risk, identifying
potential solutions and estimating repair or remediation costs. The planning
phase consists of identifying tasks to ensure Year 2000 readiness, identifying
mission-critical applications and infrastructure, and coordinating testing dates
and remediation timing. The third phase, preparation, includes coordinating the
remediation process and the implementation phase involves testing, repair and/or
replacement of non-compliant application and infrastructure. The implementation
phase is concluded with establishing contingency plans for the Company's
mission-critical systems and infrastructure.
The Company has completed testing and remediation efforts for its critical
information systems and will continue to monitor them to ensure they remain Year
2000 compliant. The Company's non-critical internal IT systems are in the
implementation phase and remediation is expected to be completed by June 30,
1999.
Internal Non-IT Systems. The Company's non-IT systems include, but are not
limited to, those systems that are not commonly thought of as IT systems, such
as telephone and voice mail systems, building access and security systems,
facility environmental systems and other equipment with embedded technology. The
Company has completed remediation efforts for its critical internal non-IT
systems and will continue to monitor them to ensure they remain Year 2000
compliant. The remaining non-critical non-IT systems are in the implementation
phase and remediation is expected to be completed by June 30, 1999.
Products. The Company's products include I/O and enclosure management
semiconductors as well as I/O host bus adapter products. The Company has
completed an assessment of its products and has determined they do not contain
specific date functions that would be impacted by the change in the century.
Material Third-Party Relationships. The Company's material third-party
suppliers include key suppliers, contract manufacturers, vendors and business
partners. The process for evaluating third-party risk includes the following
steps: (1) distribution of an initial readiness assessment, (2) if necessary, a
comprehensive risk
24
<PAGE> 25
assessment combined with telephone or on site interviews, and (3) preparing
contingency plans based on the assessed risk for each third party relationship.
The Company has received responses from its initial readiness assessment and is
distributing secondary assessments and conducting necessary interviews. The
assessment and interview phase is expected to be completed by July 31, 1999, and
contingency plans finalized by September 30, 1999.
The Company currently estimates that the costs associated with the Year
2000 should not have a material adverse effect on the results of operations or
financial position of the Company in any given year. Historical amounts spent on
assessment, planning, preparation and implementation have not been material to
the results of operations.
The Company believes its greatest risks related to the Year 2000 issue
involve its relationships with its critical third party suppliers and service
providers. Potential impacts to the Company include an interrupted product flow
from critical suppliers due to their Year 2000 interruptions, supplier
allocation or limiting products and/or sub-assemblies due to unforeseen product
shortages, potential infrastructure collapse such as interruptions in public
utilities, electricity or telecommunications. Any of the foregoing risks, as
well as the fruition of a combination of lesser risks, could adversely impact
the Company's financial condition and results of operations. Contingency plans
to mitigate or reduce these risks are being formulated to address each area of
the Company's Year 2000 compliance plan, and are expected to be completed by
September 30, 1999. However, as many of the third party service providers such
as the public utilities are outside of the Company's control, there can be no
assurance that a material adverse impact to the Company's financial condition or
results of operations would not occur.
VOLATILITY OF STOCK PRICE
The market price of the common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. Future
announcements concerning the Company or its competitors or customers, quarterly
variations in operating results, the introduction of new products or changes in
product pricing policies by the Company or its competitors, conditions in the
semiconductor industry, changes in earnings estimates by analysts, market
conditions for high technology stocks in general, the potential for a
shareholder lawsuit, or changes in accounting policies, among other factors,
could cause the market price of the common stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years and stock prices of technology companies have been especially
volatile. This volatility has had a substantial effect on the market prices of
securities of many smaller public companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations could adversely affect the market price of the Company's common
stock.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Restated Certificate of Incorporation, as
amended, the Board of Directors is authorized to approve the issuance of shares
of currently undesignated preferred stock, to determine the price, powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed on any unissued series of the preferred stock, and to fix
the number of shares constituting any such series and the designation of such
series, without any vote or future action by the stockholders. Pursuant to this
authority, the Board of Directors adopted a Shareholder Rights Plan and declared
a dividend of one preferred stock purchase right for each outstanding share of
the Company's common stock. Concurrently with the February 1999 two-for-one
stock split, each "pre-split" share was adjusted to one-half-right per share of
common stock. The Shareholder Rights Plan, the undesignated preferred stock and
certain provisions of the Delaware law may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Company's common stock at a premium over the market price of the common
stock and may adversely affect the market price of the common stock.
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<PAGE> 26
FACILITIES
The Company currently occupies an 97,000 square foot facility in Costa
Mesa, California containing its corporate, principle product development, and
sales personnel, as well as its operational facilities. QLogic has entered into
a ten-year lease agreement to expand and relocate its Costa Mesa operations to a
165,000 square foot facility in Aliso Viejo, California. The lease commences
upon completion of the construction of the facility expected in November 1999 to
February 2000. There can be no assurance the Company will continue to grow and
fully utilize its expanded facility. As a result, the Company may incur
additional costs associated with carrying facility expansion capabilities, which
could adversely impact future earnings. Additionally, the Company will
experience additional costs associated with the relocation, which may adversely
impact future earnings. The Company may experience an adverse impact to future
earnings due to loss of management focus or business interruption related to
issues surrounding the relocation of operations.
The Company's current headquarters in Costa Mesa, California and the future
site in Aliso Viejo, California are located near major earthquake faults. The
Company is not specifically insured for earthquakes, or other such natural
disasters. Any damage to the facilities as a result of such occurrences could
have a material adverse effect on the Company's business, results of operations
and financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
At March 28, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $87
million (see Note 4 of Notes to Consolidated Financial Statements). The carrying
amount of these securities approximates fair market value. These securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10% from levels as of March 28, 1999, the decline in the fair value of the
portfolio would not be material to the Company's financial position, results of
operations and cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are referenced in Item 14(a).
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
QLogic Corporation:
We have audited the consolidated financial statements of QLogic Corporation
and subsidiaries as listed in Item 14(a). In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule as listed in Item 14(a). These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QLogic
Corporation and subsidiaries as of March 28, 1999 and March 29, 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 28, 1999, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
KPMG LLP
Orange County, California
May 6, 1999
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QLOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 28, 1999 AND MARCH 29, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents................................... $ 43,174 $ 64,090
Short term investments...................................... 57,613 27,746
Accounts and notes receivable, less allowance for doubtful
accounts of $940 as of March 28, 1999 and $746 as of March
29, 1998.................................................. 11,917 7,836
Inventories................................................. 10,623 3,835
Deferred income taxes....................................... 5,649 4,353
Prepaid expenses and other current assets................... 1,950 475
-------- --------
Total current assets.............................. 130,926 108,335
Long term investments....................................... 29,760 20,934
Property and equipment, net................................. 10,409 6,372
Other assets................................................ 1,828 601
-------- --------
$172,923 $136,242
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 6,432 $ 3,765
Accrued compensation........................................ 7,378 4,975
Income taxes payable........................................ 1,358 5,112
Deferred revenue............................................ 1,074 1,913
Other accrued liabilities................................... 3,997 1,821
-------- --------
Total current liabilities......................... 20,239 17,586
Other non-current liabilities............................... -- 607
-------- --------
Total liabilities................................. 20,239 18,193
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares
authorized, (200,000 shares designated as Series A
Junior Participating Preferred, $.001 par value); none
issued and outstanding................................. -- --
Common stock, $.05 par value; 50,000,000 shares
authorized, 17,961,058 and 17,301,652 shares issued and
outstanding at March 28, 1999 and March 29, 1998,
respectively........................................... 898 865
Additional paid-in capital................................ 107,911 99,008
Retained earnings......................................... 43,875 18,176
-------- --------
Total stockholders' equity........................ 152,684 118,049
-------- --------
$172,923 $136,242
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net revenues................................................ $117,182 $81,393 $68,927
Cost of revenues............................................ 42,603 34,049 38,151
-------- ------- -------
Gross profit.............................................. 74,579 47,344 30,776
-------- ------- -------
Operating expenses:
Engineering and development............................... 24,358 15,601 10,422
Selling and marketing..................................... 11,062 8,707 6,372
General and administrative................................ 5,794 4,550 4,628
-------- ------- -------
Total operating expenses.......................... 41,214 28,858 21,422
-------- ------- -------
Operating income............................................ 33,365 18,486 9,354
Interest expense............................................ 84 109 125
Interest and other income................................... 5,657 3,453 602
-------- ------- -------
Income before income taxes.................................. 38,938 21,830 9,831
Income tax provision........................................ 13,239 8,422 3,983
-------- ------- -------
Net income.................................................. $ 25,699 $13,408 $ 5,848
======== ======= =======
Net income per share:
Basic..................................................... $ 1.47 $ 0.88 $ 0.51
-------- ------- -------
Diluted................................................... $ 1.38 $ 0.83 $ 0.48
-------- ------- -------
Number of shares used in per share computations:
Basic..................................................... 17,512 15,183 11,443
-------- ------- -------
Diluted................................................... 18,690 16,198 12,230
-------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TOTAL
--------------- PAID-IN (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY
------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of March 31, 1996................ 11,117 $556 $ 16,801 $(1,080) $ 16,277
Net income................................ -- -- -- 5,848 5,848
Issuance of common stock under employee
stock plans............................ 565 28 2,200 -- 2,228
------ ---- -------- ------- --------
Balance as of March 30, 1997................ 11,682 584 19,001 4,768 24,353
Net income................................ -- -- -- 13,408 13,408
Stock offering............................ 5,290 265 77,271 -- 77,536
Issuance of common stock under employee
stock plans (including tax benefit of
$1,494)................................ 330 16 2,736 -- 2,752
------ ---- -------- ------- --------
Balance as of March 29, 1998................ 17,302 865 99,008 18,176 118,049
Net income................................ -- -- -- 25,699 25,699
Issuance of common stock under employee
stock plans (including tax benefit of
$5,753)................................ 659 33 8,903 -- 8,936
------ ---- -------- ------- --------
Balance as of March 28, 1999................ 17,961 $898 $107,911 $43,875 $152,684
====== ==== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
QLOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 25,699 $ 13,408 $ 5,848
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 3,366 2,434 3,023
Write-off of acquired in-process technology......... 1,220 -- --
Provision for doubtful accounts..................... 201 200 129
Loss on disposal of property and equipment.......... 89 161 1,338
Benefit from deferred income taxes.................. (1,354) (3,030) (1,273)
Changes in assets and liabilities:
Accounts and notes receivable.................... (4,282) (2,316) 1,184
Inventories...................................... (6,788) 959 1,876
Prepaid expenses and other current assets........ (1,475) (84) (152)
Other assets..................................... (1,158) -- (6)
Accounts payable................................. 2,667 (229) (2,183)
Accrued compensation............................. 2,403 1,750 1,375
Income taxes payable............................. 1,999 5,163 1,391
Other accrued liabilities........................ 2,244 162 885
Deferred revenue................................. (839) 914 246
Other non-current liabilities.................... (466) (458) (1,092)
--------- -------- -------
Net cash provided by operating activities........ 23,526 19,034 12,589
--------- -------- -------
Cash flows from investing activities:
Additions to property and equipment...................... (6,766) (3,924) (3,866)
Purchases of investments................................. (103,448) (53,059) --
Acquisition of business, net of cash acquired............ (1,957) -- --
Maturities of investments................................ 64,755 4,379 --
--------- -------- -------
Net cash used in investing activities............ (47,416) (52,604) (3,866)
--------- -------- -------
Cash flows from financing activities:
Principal payments under capital leases.................. (209) (225) (274)
Proceeds from issuance of stock under employee stock
plans................................................. 3,183 1,258 2,228
Proceeds from sale of common stock....................... -- 77,536 --
--------- -------- -------
Net cash provided by financing activities........ 2,974 78,569 1,954
--------- -------- -------
Net increase (decrease) in cash and cash equivalents....... (20,916) 44,999 10,677
Cash and cash equivalents at beginning of year............. 64,090 19,091 8,414
--------- -------- -------
Cash and cash equivalents at end of year................... $ 43,174 $ 64,090 $19,091
========= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................. $ 65 $ 90 $ 133
========= ======== =======
Income taxes............................................. $ 13,116 $ 6,275 $ 3,881
========= ======== =======
Non-cash investing and financing activities:
</TABLE>
During fiscal year 1999, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $5,753, related to the
tax benefit of exercises of stock options under the Company's stock option
plans. Additionally, during fiscal year 1999 the Company recorded an accrual of
$1,321, in accordance with the performance provisions of the Silicon Design
Resources Asset Acquisition Agreement. See Note 2 of Notes to Consolidated
Financial Statements.
During fiscal year 1998, the Company recorded a credit to additional
paid-in-capital and a debit to accrued taxes payable of $1,494 related to
exercises of stock options under the Company's stock option plans.
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Business Information
QLogic Corporation ("QLogic" or the "Company") designs and supplies
semiconductor and board level input/output (I/O) products. The Company's I/O
products provide a high performance interface between computer systems and their
attached data storage peripherals, such as hard disk drives, tape drives,
removable disk drives and Redundant Arrary of Independent Disks Subsystems, or
RAID subsystems. The Company also designs and supplies semiconductor enclosure
management products. QLogic markets and distributes its products through a
direct sales organization supported by field application engineers, as well as
through a network of independent manufacturers' representatives and regional and
international distributors. The Company's primary OEM customers are major
domestic and international suppliers and manufacturers of servers, workstations
and data storage peripherals.
Principles of Consolidation and Financial Reporting Period
The consolidated financial statements include the financial statements of
QLogic Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
QLogic's fiscal year ends on the Sunday nearest March 31. The fiscal years ended
March 28, 1999 ("fiscal 1999"), March 29, 1998 ("fiscal 1998") and March 30,
1997 ("fiscal 1997") each comprised 52 weeks.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the Company's consolidated financial statements and
accompanying notes. Actual results could differ from these estimates.
Revenue Recognition
Revenue is recognized upon product shipment. Royalty revenue is recognized
when earned and receipt is assured. The customer's obligation to pay the
Company, and the payment terms, are set at the time of shipment and are not
dependent on subsequent resale of the Company's product. However, certain of the
Company's sales are made to distributors under agreements allowing limited right
of return and/or price protection. The Company warrants its products, on a
limited basis, to be free from defects for periods of one to five years from
date of shipment. The Company estimates and establishes allowances and reserves,
by a current charge to income, for product returns, warranty obligations,
doubtful accounts, and price adjustments.
Capitalized Software Costs
Statement of Financial Accounting Standards No. ("SFAS") 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
provides for the capitalization of certain software development costs once
technological feasibility is established. The cost so capitalized is then
amortized on a straight-line basis over the estimated product life, or the ratio
of current revenues to total projected product revenues, whichever is greater.
No internal costs have been capitalized for all periods presented, as the impact
on the consolidated financial statements is immaterial.
32
<PAGE> 33
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Net Income per Share
During the third quarter of 1998, the Company adopted SFAS 128, "Earnings
per Share." All prior periods have been restated accordingly. Basic net income
per common share was computed based on the weighted average number of common
shares outstanding during the periods presented. Diluted net income per share
was computed based on the weighted average number of common and dilutive
potential common shares outstanding during the periods presented. The Company
has granted certain stock options which have been treated as dilutive potential
common shares in computing diluted net income per share. The adoption of SFAS
128 did not have a material impact on the Company's financial statements.
Segment Information
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
131 supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," replacing the "industry segment" approach with the "management"
approach. The managements approach is based on the way that management organizes
its operating segments within the enterprise. Operating segments, as defined by
SFAS 131, are components of an enterprise for which separate financial
information is available and is evaluated regularly by the Company in deciding
how to allocate resources and in assessing performance. SFAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The Company operates in one operating segment, for purposes of SFAS 131.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
accrued liabilities, the carrying amounts approximate fair value due to their
short maturities. Long-term investments are carried at cost which approximates
fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
marketable securities, and trade accounts receivable. The Company places its
marketable securities primarily in municipal bonds, corporate bonds and
government securities, all of which are of high investment grade. The Company,
by policy, limits the amount of credit exposure through diversification and
investment in highly rated securities. Sales to customers are denominated in
U.S. dollars. As a result, the Company believes its foreign currency risk is
minimal.
The Company sells its products to original equipment manufacturers and
distributors throughout the world, however, the Company expects to sell a
significant amount of product in the Pacific Rim. The
33
<PAGE> 34
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of all accounts receivable. The Company has not historically
experienced significant losses on accounts receivable.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with original maturities of
three months or less on their acquisition date to be cash equivalents.
Investments in Debt Securities
The Company determines the appropriate balance sheet classification of its
investments in debt securities based on maturity date at the time of purchase
and evaluates the classifications at each balance sheet date. Debt securities
are classified as held to maturity as the Company has the positive intent and
ability to hold the securities to maturity. Held to maturity securities are
stated at amortized cost.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income. Realized gains and losses are included in
interest and other income in the consolidated statements of income. The cost of
securities sold is based on the specific identification method.
The Company's investments in debt securities are diversified among high
credit quality securities in accordance with the Company's investment policy.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by the comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over estimated useful lives of two to seven years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the lease term or the estimated useful life of the related asset.
Stock Based Compensation
The Company accounts for its employee and director stock options and
employee stock purchase plan in accordance with provisions of Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." SFAS 123, "Accounting for Stock-Based Compensation," which was
effective
34
<PAGE> 35
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
for fiscal years beginning after December 31, 1995, provided an alternative to
APB 25, but allowed companies to account for employee and director stock-based
compensation under the current intrinsic value method as prescribed by APB 25.
The Company has continued to account for its employee and director stock plans
in accordance with APB 25. Additional pro forma disclosures as required under
SFAS 123 are presented in Note 8 of notes to consolidated financial statements.
Comprehensive Income
During fiscal 1999, the Company adopted SFAS 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
Comprehensive income equals net income as there are no non-owner sources of
equity.
Research and Development
Research and development costs, including costs related to the development
of new products and process technology, are expensed as incurred.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 consolidated
financial statements to conform to the 1999 presentation.
NOTE (2) BUSINESS COMBINATION
On August 20, 1998, the Company acquired the net assets of Silicon Design
Resources, Inc. ("SDR") for $2,000 in cash. In addition, the Company is
obligated to pay up to an additional $8,000 in cash provided that certain
performance targets are achieved through fiscal year 2002. These payments will
be accounted for as additional purchase price and allocated to the intangible
assets acquired, specifically the in-process technology and the completed
technology. The Company accounted for the transaction using the purchase method
of accounting, and excluding the initial write-off of the acquired in-process
technology in the quarter ended September 27, 1998, the impact to the Company's
financial position and results of operations from the acquisition date was not
material. Additionally, the Company incurred approximately $413 in professional
fees related to the acquisition.
The Company allocated the purchase price to the tangible and identifiable
intangible net assets as of August 20, 1998 based on the fair market values of
the assets; such fair values were derived from an independent third party
appraisal. The fair value of the net assets acquired exceeded the initial
payment, resulting in negative goodwill. This negative goodwill was allocated to
the intangible assets acquired, based on their relative fair values. The
allocation of the initial purchase price included $558 of net tangible assets,
$635 of completed technology and $1,220 of in-process technology.
At the time of the acquisition, SDR was a startup company which had two
products which were in full production, and three research and development
projects which were in the development stage. The primary purpose of the
acquisition was to acquire these in-process projects and complete the
development efforts. The Company believes the developmental projects had
economic value, but had not reached technological feasibility and had no
alternative future uses. In accordance with applicable accounting literature,
the acquired in-process technology was written-off to engineering and
development expense during the quarter ended September 27, 1998, and will
continue to be written-off to engineering and development when future
performance payments are earned. Acquired completed technology has been
capitalized and is included in
35
<PAGE> 36
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
other assets in the accompanying consolidated balance sheet. The acquired
completed technology is being amortized on a straight-line basis over a period
of three years from the acquisition date. At March 28,1999, a performance
payment to the former shareholders of SDR of $1,321 was included in other
accrued liabilities in the accompanying consolidated balance sheet. The payment
was allocated to the intangible assets acquired: $870 was written-off as
acquired in-process technology and $451 was capitalized as completed technology.
NOTE (3) NET INCOME PER SHARE
The Company computed basic net income per share based on the weighted
average number of common shares outstanding during the periods presented.
Diluted income per share was computed based on the weighted average number of
common and dilutive potential common shares outstanding during the periods
presented. The Company has granted certain stock options which have been treated
as dilutive potential common shares.
The following table sets forth the computations of basic and diluted net
income per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income.......................................... $25,699 $13,408 $ 5,848
======= ======= =======
Denominator:
Denominator for basic net income per
share -- weighted average shares................. 17,512 15,183 11,443
Dilutive potential common shares, using treasury
stock method..................................... 1,178 1,015 787
------- ------- -------
Denominator for diluted net income per share........ 18,690 16,198 12,230
======= ======= =======
Basic net income per share............................ $ 1.47 $ 0.88 $ 0.51
------- ------- -------
Diluted net income per share.......................... $ 1.38 $ 0.83 $ 0.48
------- ------- -------
</TABLE>
Options to purchase 38,348, 28,546 and 36,266 shares of common stock were
outstanding as of March 28, 1999, March 29, 1998, and March 30, 1997,
respectively, but were not included in the computation of diluted net income per
share, as the effect would be antidilutive.
NOTE (4) INVESTMENTS
The Company's portfolio of investments consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
U.S. Government securities.................................. $ 6,981 $ 10,474
Municipal securities........................................ 61,305 47,825
Corporate debt securities................................... 35,253 21,625
Other debt securities....................................... 26,673 32,064
-------- --------
$130,212 $111,988
======== ========
</TABLE>
36
<PAGE> 37
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At March 28, 1999 and March 29, 1998, the net unrealized holding gains and
losses on securities were immaterial. Investments at March 28, 1999 and March
29, 1998 were classified as shown below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash equivalents............................................ $ 42,839 $ 63,308
Short-term investments...................................... 57,613 27,746
Long-term investments (with maturities from 1 to 2 years)... 29,760 20,934
-------- --------
$130,212 $111,988
======== ========
</TABLE>
NOTE (5) INVENTORIES
Components of inventories, net of reserves, are as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Raw materials............................................... $ 7,716 $2,720
Work in progress............................................ 833 585
Finished goods.............................................. 2,074 530
------- ------
$10,623 $3,835
======= ======
</TABLE>
NOTE (6) PROPERTY AND EQUIPMENT
Components of property and equipment are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Product and test equipment.................................. $20,238 $13,855
Furniture and fixtures...................................... 1,907 1,543
Semiconductor tooling....................................... 2,119 1,957
Leasehold improvements...................................... 590 575
Land and buildings.......................................... 358 358
------- -------
25,212 18,288
Less accumulated depreciation and amortization.............. 14,803 11,916
------- -------
$10,409 $ 6,372
======= =======
</TABLE>
NOTE (7) CAPITAL ACCOUNTS
Common Stock
At March 28, 1999 and March 29, 1998, the Company's authorized common stock
was 50,000,000 and 25,000,000 shares, respectively, with 17,961,058 and
17,301,652 shares issued and outstanding, respectively. At March 28, 1999,
3,870,000 shares were reserved for the exercise of issued and unissued common
stock options, and 600,000 shares were reserved for issuance in connection with
the Company's Employee Stock Purchase Plan.
Preferred Stock
In fiscal 1994, the Company's stockholders approved an amendment and
restatement of the certificate of incorporation which authorized the future
issuance of 1,000,000 shares of preferred stock, $0.10 par value, with rights
and preferences to be determined by the Board of Directors.
37
<PAGE> 38
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Shareholder Rights Plan
On June 4, 1996, the Board of Directors of the Company unanimously adopted
a Shareholder Rights Plan (the "Rights Plan") pursuant to which it declared a
dividend distribution of preferred stock purchase rights (a "Right") upon all of
the outstanding shares of the common stock.
The Rights dividend was paid on June 20, 1996 to the holders of record of
shares of common stock on that date, at the rate of one-half of one whole Right
per one share of common stock, as adjusted pursuant to the February 1999 stock
split. Each share of common stock presently outstanding that had been issued
since June 20, 1996 also includes one-half Right, and each share of common stock
that may be issued after the date hereof and prior to the Distribution Date (as
defined below) also will include one-half Right.
The Rights become exercisable (i) the 10th business day following the date
of a public announcement that a person or a group of affiliated or associated
persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more
of the outstanding shares of common stock, or (ii) the 10th business day
following the commencement of, or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the person or
group making the offer becoming an Acquiring Person (the earlier of the dates
described in clauses (i) and (ii) being called the "Distribution Date").
The Rights held by an Acquiring Person or its affiliates are not
exercisable. All shares of common stock that will be issued prior to the
Distribution Date will include such Rights. The Rights will expire at the close
of business on June 4, 2006 (the "Scheduled Expiration Date"), unless prior
thereto the Distribution Date occurs, or unless the Scheduled Expiration Date is
extended.
Pursuant to the Rights Plan, as so amended, each one-half Right initially
entitles the registered holder, on and after the Distribution Date and until
redemption of all Rights, to purchase from the Company 1/200th of one whole
share (a "Unit") of the Company's Series A Junior Participating Preferred Stock,
par value $.001 per share (the "Series A Preferred Stock"). The purchase price
is $112.50 per Unit. In the event of certain acquisitions involving the
Acquiring Person , directly or indirectly, the holder of one-half Right will be
entitled to purchase for $112.50 certain shares or assets of the Company or an
Acquiring person that have a market value of $225.00 at such time.
The Company has 200,000 whole shares of Series A Preferred Stock authorized
(40,000,000 Units authorized), of which no shares or Units are issued or
outstanding at March 31, 1999. Each Unit would entitle the holder to (A) one
vote, voting together with the shares of common stock; (B) in the event the
Company's assets are liquidated, a payment of one dollar ($1.00) or an amount
equal to the payment to be distributed per share of common stock, whichever is
greater; and (C) in the event of any merger, consolidation or other transaction
in which shares of common stock are exchanged, a payment in an amount equal to
the payment received per share of common stock. The number of Rights per share
of common stock, and the purchase price, is subject to adjustment in the event
of each and any stock split, stock dividend or similar event.
Holders of Rights will be entitled to purchase shares or assets of the
Company or an Acquiring Person with a value that is double the exercise price in
the event of certain acquisitions involving the Acquiring Person, directly or
indirectly.
Common Stock Split
On February 3, 1999, the stockholders of the Company approved an amendment
to the Certificate of Incorporation to increase the number of authorized shares
of common stock from 12.5 million to 50 million, and to effect a two-for-one
stock split. These actions were ratified by the Company's Board of Directors on
February 3, 1999, and became effective on February 15, 1999. In addition, the
amendments served to reduce
38
<PAGE> 39
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the par value of the common stock from $0.10 to $0.05 per share. Stockholders of
record at the close of business on February 15, 1999 received one additional
share for each share held. All share and per share data presented in the
consolidated financial statements and footnotes has been retroactively adjusted
to reflect the two-for-one stock split.
Stock Offering
In the second quarter of fiscal 1998, the Company completed a secondary
offering of 5,290,000 shares of the Company's common stock at a price of $15.63
per share. The Company received proceeds of $77.5 million net of underwriter's
discount and expenses.
NOTE (8) STOCK PLANS
Employee Stock Purchase Plan
In fiscal year 1999, the Company's Board of Directors adopted an Employee
Stock Purchase Plan (the "ESPP"). Under the ESPP, employees of the Company who
elect to participate are granted options to purchase common stock at a 15%
discount from the lower of the market value of the common stock at the beginning
or end of each three month offering period. The ESPP permits an enrolled
employee to make contributions to purchase shares of common stock by having
withheld from their salary an amount between 1% and 10% of compensation. The
ESPP is administered by the Compensation Committee of the Board of Directors.
The total number of shares of common stock that may be issued pursuant to
options granted under the ESPP is 600,000. As of March 28, 1999, a total of
5,934 shares of common stock have been issued under the ESPP.
Incentive Compensation Plans
On January 12, 1994, the Company's Board of Directors adopted the QLogic
Corporation Stock Awards Plan (the "Stock Awards Plan") and the QLogic
Corporation Non-Employee Director Stock Option Plan (the "Director Plan")
(collectively the "Stock Option Plans"). Additionally, the Company issues
options on an ad hoc basis from time to time.
The Stock Awards Plan provides for the issuance of incentive and
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. The Stock Awards Plan permits the
Compensation Committee of the Board of Directors to select eligible employees to
receive awards and to determine the terms and conditions of awards. As of March
28, 1999, a total of 3,450,000 shares were reserved for issuance under the Stock
Awards Plan, no shares of restricted stock were issued, options to purchase
1,334,434 shares of Common Stock were outstanding, and there were 676,520 shares
available for future grants.
Options granted under the Company's Stock Awards Plan provide that an
employee holding a stock option may exchange stock which the employee already
owns as payment against the exercise of an option. This provision applies to all
options outstanding as of March 28, 1999. All stock options granted under the
Company's Stock Awards Plan have ten-year terms and vest ratably over four years
from the date of grant.
Under the terms of the Director Plan, new directors receive an option
grant, at fair market value, to purchase 16,000 shares of common stock of the
Company upon election to the Board, and the plan provides for annual grants to
each non-employee director (other than the Chairman of the Board) of options to
purchase 6,000 shares of common stock. The plan also provides for annual grants
to the Chairman of the Board of options to purchase 10,000 shares of common
stock. A total of 400,000 shares have been reserved for
39
<PAGE> 40
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
issuance under the Director Plan. As of March 28, 1999, options for a total of
138,332 shares were outstanding, and 141,000 shares were available for grant.
All stock options granted under the Director Plan have ten-year terms and vest
ratably over three years from the date of grant.
As of March 28, 1999, ad hoc stock options have been issued representing
options to purchase 20,000 shares, with a total of 16,000 options outstanding.
Stock option activity in fiscal 1999, 1998 and 1999 under the Company's
Stock Option Plans was as follows:
<TABLE>
<CAPTION>
AVERAGE OPTION
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding as of March 31, 1996................... 1,708,996 $ 3.45
Granted.................................................... 618,820 6.86
Canceled................................................... (85,600) 4.00
Exercised.................................................. (564,706) 3.94
--------- ------
Options outstanding as of March 30, 1997................... 1,677,510 4.50
Granted.................................................... 305,500 14.74
Canceled................................................... (51,104) 6.34
Exercised.................................................. (330,250) 3.81
--------- ------
Options outstanding as of March 29, 1998................... 1,601,656 6.54
Granted.................................................... 565,200 33.04
Canceled................................................... (24,618) 16.16
Exercised.................................................. (653,472) 4.51
--------- ------
Options outstanding as of March 28, 1999................... 1,488,766 $17.33
========= ======
</TABLE>
As of March 28, 1999, March 29, 1998, and March 30, 1997, the number of
options exercisable was 445,226, 677,560 and 564,546, respectively, and the
weighted average exercise price of those options was $6.39, $3.96 and $3.32,
respectively.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------------
WEIGHTED REMAINING WEIGHTED
OUTSTANDING AVERAGE CONTRACTUAL EXERCISABLE AVERAGE
RANGE OF AS OF EXERCISE PRICE LIFE AS OF EXERCISE PRICE
EXERCISE PRICES MARCH 28,1999 PER OPTION (YEARS) MARCH 28,1999 PER OPTION
- ---------------- -------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.34 to
$ 5.25........ 374,900 $ 3.59 6.25 247,070 $ 3.49
$ 5.29 to
$12.75........ 466,392 $ 9.13 7.77 174,171 $ 8.70
$15.13 to
$26.56........ 379,474 $19.74 9.09 23,985 $19.53
$30.13 to
$65.50........ 268,000 $47.38 9.63 -- $ --
--------- -------
$ 2.34 to
$65.50........ 1,488,766 $17.33 8.06 445,226 $ 6.39
========= ====== ==== ======= ======
</TABLE>
40
<PAGE> 41
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Information
The Company applies APB 25 in accounting for its Stock Option Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Net income as reported................................. $25,699 $13,408 $5,848
Assumed stock compensation cost, net of tax............ $ 8,325 $ 2,576 $2,329
------- ------- ------
Pro forma net income................................... $17,374 $10,832 $3,519
------- ------- ------
Diluted net income per share as reported............... $ 1.38 $ 0.83 $ 0.48
Pro forma diluted net income per share................. $ 0.93 $ 0.67 $ 0.29
</TABLE>
Pro forma net income reflects only options granted in fiscal years 1996
through 1999. Therefore, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the options'
vesting period of four years and compensation cost for options granted prior to
April 3, 1995 is not considered.
The Company uses the Black-Scholes option-pricing model for estimating the
fair value of its equity instruments. The following represents the
weighted-average fair value of options granted and the assumptions used for the
calculations:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Estimated fair value per option granted................... $22.32 $ 8.43 $3.82
Average exercise price per option granted................. $33.04 $14.74 $6.86
Stock volatility.......................................... 79.5% 60.4% 56.4%
Risk-free interest rate................................... 5.6% 6.0% 6.7%
Annual rate of forfeiture................................. 14% 17% 20%
Expected life (years)..................................... 5.00 5.00 5.00
Stock dividend yield...................................... 0.0% 0.0% 0.0%
</TABLE>
The fair value of each option grant, as defined by SFAS 123, is estimated
on the date of grant using the Black-Scholes option-pricing model. The
Black-Scholes model, as well as other currently accepted option valuation
models, was developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly effect the calculated fair value on the grant
date.
NOTE (9) EMPLOYEE RETIREMENT SAVINGS PLAN
QLogic has established a pretax savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code for substantially all domestic
employees. Under the plan, eligible employees are able to contribute up to 15%
of their compensation. QLogic contributions match up to 3% of a participant's
compensation. QLogic's direct contributions on behalf of its employees were
$458, $349, and $218, in fiscal 1999, 1998, and 1997, respectively.
41
<PAGE> 42
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (10) COMMITMENTS AND CONTINGENCIES
Line of Credit
On July 6, 1998, the Company renewed its unsecured line of credit from a
bank. Maximum borrowings under the line of credit are $7.5 million, subject to a
borrowing base based on accounts receivable, with a $3.0 million sub-limit for
letters of credit. Interest on outstanding advances is payable monthly at the
bank's prime rate. The line of credit expires on July 5, 1999. The line of
credit contains certain restrictive covenants that, among other things, require
the maintenance of certain financial ratios and restrict the Company's ability
to incur additional indebtedness. The Company was in compliance with all such
covenants as of March 28, 1999. There were no borrowings under the line of
credit as of March 28, 1999. The Company expects to extend the line of credit
through the end of fiscal year 2000.
Leases
The Company leases certain equipment and facilities under non-cancelable
operating lease agreements, which expire at various dates through fiscal year
2010. Future minimum non-cancelable lease commitments are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Fiscal year:
2000...................................................... $ 1,451
2001...................................................... 2,732
2002...................................................... 2,732
2003...................................................... 2,910
2004...................................................... 2,914
All other................................................. 15,520
-------
Total minimum lease payments...................... $28,259
=======
</TABLE>
Rent expense for fiscal 1999, 1998, and 1997 was $1,430, $820 and $712,
respectively.
Aliso Viejo
The Company has entered into a ten-year lease agreement to relocate and
expand its corporate headquarters to a 165,000 square foot facility located in
Aliso Viejo, California. The lease commences upon completion of the construction
of the first of three buildings, currently estimated in November 1999.
Construction of the second and third buildings is estimated to be completed in
February 2000. For purposes of the operating lease disclosure above, lease
payments are assumed to commence in November 1999, however, actual lease
commencement is contingent on construction completion. The lease contains two
five-year extension options (these extensions have not been included in the
operating lease disclosure above), as well as an option to purchase the land and
buildings along with an adjacent undeveloped piece of land, and will be
accounted for as an operating lease.
As part of the lease for the Aliso Viejo facility, the Company has
committed to provide short-term advances to the lesser of a maximum of $1,544
which will bear interest at 4.5% per year. At March 28, 1999, the Company had
advanced $553 under this agreement, which is recorded in other current assets in
the accompanying consolidated balance sheet.
42
<PAGE> 43
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Litigation
QLogic is involved in various legal proceedings, which have arisen in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
NOTE (11) INCOME TAXES
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal:
Current............................................. $12,892 $ 9,888 $ 4,479
Deferred............................................ (1,398) (2,264) (1,059)
State:
Current............................................. 1,701 1,564 777
Deferred............................................ 44 (766) (214)
------- ------- -------
$13,239 $ 8,422 $ 3,983
======= ======= =======
</TABLE>
A reconciliation of the income tax provision with the amount computed by
applying the federal statutory tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Expected income tax provision at the statutory rate.... $13,628 $ 7,641 $3,343
State income tax, net of Federal tax benefit........... 1,910 1,991 370
Tax benefit of net operating loss...................... (13) (13) (13)
Tax benefit of research and development and other
credits.............................................. (1,240) -- --
Foreign Sales Corporation tax benefit.................. (431) -- --
Increase (decrease) in valuation allowance............. -- (1,904) (14)
Tax exempt income...................................... (882) (315) --
Nondeductible permanent differences.................... 37 26 20
Other, net............................................. 230 996 277
------- ------- ------
$13,239 $ 8,422 $3,983
======= ======= ======
</TABLE>
43
<PAGE> 44
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit............................ $ -- $ 19
Reserves not currently deductible......................... 5,572 4,569
Property and equipment.................................... 789 836
Acquired technology....................................... 897 --
Research and development credit........................... -- 238
State tax expense......................................... 122 --
Other..................................................... 12 87
------ ------
Total gross deferred tax assets................... 7,392 5,749
------ ------
Deferred tax liabilities:
Research and development expenditures..................... 882 404
State tax expense......................................... -- 394
Other..................................................... 205 --
------ ------
Total gross deferred tax liabilities.............. 1,087 798
------ ------
Net deferred tax assets................................... $6,305 $4,951
------ ------
</TABLE>
Based upon the Company's current and historical pre-tax earnings,
management believes it is more likely than not that the Company will realize the
benefit of the existing net deferred tax assets as of March 28, 1999. Management
believes the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income or that there would be
sufficient tax carrybacks available; however, there can be no assurance that the
Company will generate any earnings or any specific level of continuing earnings
in future years.
The tax benefit associated with dispositions from employee stock purchase
plans reduced taxes currently payable by $5,753 and $1,494 for the years ended
March 28, 1999 and March 29, 1998, respectively. These benefits were recorded
directly to additional paid-in capital.
During fiscal 1999, the Company's U.S. income tax returns for fiscal 1995
through 1997 were under examination by the Internal Revenue Service (IRS). The
Company settled all tax and related interest for fiscal years 1995 through 1997
with the IRS. The settlement did not have a material impact on the Company's
consolidated financial statements.
NOTE (12) EXPORT REVENUES AND SIGNIFICANT CUSTOMERS
Export Revenues
QLogic's export revenues (primarily to Pacific Rim countries) were
approximately $62,076 for 1999, $34,558 for 1998 and $31,301 for 1997. This
represented 53%, 42% and 45% of net revenues for fiscal 1999, 1998 and 1997,
respectively.
44
<PAGE> 45
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Product Revenues
The Company designs and supplies semiconductor and board I/O and enclosure
management products. These products utilize one of three technology standards:
Fibre Channel, SCSI and IDE. Net revenues for the Company's products are grouped
by technology standard as they function using similar technologies.
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Fibre Channel................................ $ 19,288 $ 1,398 $ 14
SCSI......................................... 97,269 79,745 68,538
IDE.......................................... 625 250 375
-------- ------- -------
$117,182 $81,393 $68,927
======== ======= =======
</TABLE>
Significant Customers
The following table represents sales to customers accounting for greater
than 10% of Company net revenue, or customer accounts receivable accounting for
greater than 10% of Company accounts receivable.
<TABLE>
<CAPTION>
ACCOUNTS
NET REVENUES RECEIVABLE
-------------------- ------------
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Customer 1........................... 24% 23% 16% 31% 40%
Customer 2........................... 19% 20% 20% 10% 22%
Customer 3........................... N/A N/A N/A 12% 11%
Customer 4........................... N/A N/A 10% N/A N/A
Customer 5........................... N/A N/A 19% N/A N/A
</TABLE>
With the exception of these customers, management believes that the loss of
any one customer would not have a material adverse effect on its business.
45
<PAGE> 46
QLOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 28, 1999, MARCH 29, 1998, AND MARCH 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE (13) CONDENSED QUARTERLY RESULTS (UNAUDITED)
The following summarizes certain unaudited quarterly financial information
for fiscal 1999, 1998, and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
------- --------- -------- -------
<S> <C> <C> <C> <C>
FISCAL 1999:
Net revenues..................................... $24,115 $27,692 $30,299 $35,076
Operating income................................. 5,888 6,535 9,368 11,574
Net income....................................... 4,775 5,238 7,148 8,538
Net income per diluted share..................... 0.26 0.28 0.38 0.45
======= ======= ======= =======
FISCAL 1998:
Net revenues..................................... $18,172 $19,625 $20,856 $22,740
Operating income................................. 3,367 4,225 5,184 5,710
Net income....................................... 2,244 3,041 3,946 4,177
Net income per diluted share..................... 0.18 0.20 0.22 0.23
======= ======= ======= =======
FISCAL 1997:
Net revenues..................................... $15,740 $16,725 $17,431 $19,031
Operating income................................. 1,592 1,872 2,656 3,234
Net income....................................... 967 1,178 1,677 2,026
Net income per diluted share..................... 0.08 0.10 0.14 0.16
======= ======= ======= =======
</TABLE>
46
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Company's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to the Company's Directors under the heading "Nomination and Election
of Directors." Such information is incorporated herein by reference.
See the information presented in Part I of this report under the heading
"Executive Officers of the Registrant" for information relating to the Company's
executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the Company's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to executive compensation under the heading "Executive Compensation and
Other Information" excluding the "Report of Executive Compensation Committee"
and the "Stockholder Return Performance Presentation." Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the Company's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to security ownership of certain beneficial owners and management under
the heading "Principal Stockholders and Stock Ownership of Management." Such
information is incorporated herein by reference.
There are no arrangements, known to the Company, which might at a
subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Company's Definitive Proxy Statement for its 1999
Annual Meeting of Stockholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1999, for information
relating to certain relationships and related transactions, if any, under the
headings "Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions." Such information is incorporated herein by reference.
47
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
(1) Consolidated Financial Statements
The following consolidated financial statements of the Company for the
years ended March 28, 1999, March 29, 1998, and March 30, 1997 are filed as part
of this report:
FINANCIAL STATEMENT INDEX
<TABLE>
<CAPTION>
PAGE
STATEMENT NUMBER
--------- ------
<S> <C>
QLogic Corporation:
Independent Auditors' Report.............................. 27
Consolidated Balance Sheets as of March 28, 1999 and March
29, 1998............................................... 28
Consolidated Statements of Income for the years ended
March 28, 1999, March 29, 1998 and March 30, 1997...... 29
Consolidated Statements of Stockholders' Equity for the
years ended March 28, 1999, March 29, 1998 and March
30, 1997............................................... 30
Consolidated Statements of Cash Flows for the years ended
March 28, 1999, March 29, 1998 and March 30, 1997...... 31
Notes to Consolidated Financial Statements................ 32
</TABLE>
(2) Financial Statement Schedule
The following consolidated financial statement schedule of the Company for
the years ended March 28, 1999, March 29, 1998, and March 30, 1997 is filed as
part of this report:
<TABLE>
<CAPTION>
PAGE NUMBER OF THIS REPORT
--------------------------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ 52
</TABLE>
All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and, therefore,
have been omitted.
48
<PAGE> 49
(3) Exhibits Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM CAPTION
------- ------------
<S> <C>
2.1 Distribution Agreement dated as of January 24, 1994 among
Emulex Corporation, A Delaware Corporation, Emulex
Corporation, a California Corporation and QLogic
Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21,
1993, among Emulex Corporation, a California corporation,
Emulex Corporation, a Delaware corporation and QLogic
Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January
24, 1994, among Emulex Corporation, a Delaware corporation,
Emulex Corporation, a California corporation, and QLogic
Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among
Emulex Corporation, a California corporation, QLogic
Corporation and C.J. Segerstrom & Sons, a general
partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
21.1 Subsidiaries of the registrant.(9)
23.1 Consent of Independent Auditors.(9)
27 Financial Data Schedule.(9)
</TABLE>
49
<PAGE> 50
- ---------------
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 3, 1994 and is incorporated herein by reference.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 2, 1995.
(4) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended March 31, 1996 and is incorporated herein by reference.
(5) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A filed June 19, 1996, and is incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A/A filed November 25, 1997, and is incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 28, 1998.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended December 27,1998.
(9) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QLOGIC CORPORATION
By: /s/ H.K. DESAI
------------------------------------
H.K. Desai
Chairman of the Board , Chief
Executive Officer, President and
Director
Date: June 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
PRINCIPAL EXECUTIVE OFFICER:
/s/ H.K. DESAI Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer, President and Director
H.K. Desai
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ THOMAS R. ANDERSON Vice President and Chief Financial Officer
- -----------------------------------------------------
Thomas R. Anderson
/s/ JAMES A. BIXBY Director
- -----------------------------------------------------
James A. Bixby
/s/ CAROL L. MILTNER Director
- -----------------------------------------------------
Carol L. Miltner
/s/ GEORGE D. WELLS Director
- -----------------------------------------------------
George D. Wells
</TABLE>
51
<PAGE> 52
QLOGIC CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 28, 1999, MARCH 29, 1998 AND MARCH 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS --
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
BEGINNING OF COSTS AND WRITTEN OFF/ END OF
PERIOD EXPENSES RECOVERED PERIOD
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
CLASSIFICATION:
Year ended March 28, 1999
Allowance for doubtful accounts........... $ 746 $ 201 $ (7) $ 940
Inventory reserves........................ $2,574 $ 688 $ (642) $2,620
Year ended March 29, 1998
Allowance for doubtful accounts........... $ 636 $ 200 $ (90) $ 746
Inventory reserves........................ $2,322 $ 628 $ (376) $2,574
Year ended March 30, 1997
Allowance for doubtful accounts........... $ 506 $ 129 $ (1) $ 636
Inventory reserves........................ $1,841 $2,964 $(2,483) $2,322
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM CAPTION
- ------- ------------
<S> <C>
2.1 Distribution Agreement dated as of January 24, 1994 among
Emulex Corporation, A Delaware Corporation, Emulex
Corporation, a California Corporation and QLogic
Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21,
1993, among Emulex Corporation, a California corporation,
Emulex Corporation, a Delaware corporation and QLogic
Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January
24, 1994, among Emulex Corporation, a Delaware corporation,
Emulex Corporation, a California corporation, and QLogic
Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among
Emulex Corporation, a California corporation, QLogic
Corporation and C.J. Segerstrom & Sons, a general
partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
21.1 Subsidiaries of the registrant.(9)
23.1 Consent of Independent Auditors.(9)
27 Financial Data Schedule.(9)
</TABLE>
- ---------------
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 filed January 28, 1994 and incorporated herein by reference.
<PAGE> 54
(2) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 3, 1994 and is incorporated herein by reference.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended April 2, 1995.
(4) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the year ended March 31, 1996 and is incorporated herein by reference.
(5) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A filed June 19, 1996, and is incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A/A filed November 25, 1997, and is incorporated herein by reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 28, 1998.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended December 27,1998.
(9) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
<PAGE> 1
EXHIBIT 3.6
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
QLOGIC CORPORATION
A DELAWARE CORPORATION
(Pursuant to Section 242 of the Delaware General Corporation Law)
QLOGIC CORPORATION, a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of QLogic Corporation,
resolutions were duly adopted setting forth proposed amendments of the
Certificate of Incorporation of said corporation, declaring said amendments to
be advisable and directing that said amendments be submitted to the stockholders
of said corporation for consideration thereof. The resolutions setting forth the
proposed amendments are as follows:
RESOLVED, that, effective as of February 15, 1999, the second and third
sentences of the first paragraph of ARTICLE IV: "Authorized Capital
Stock," of the corporation's Certificate of Incorporation be amended
and restated in their entirety as follows:
"The amount of total authorized capital stock of the
corporation is 51,000,000 shares, divided into 50,000,000
shares of Common Stock, par value $0.05 per share, and
1,000,000 shares of Preferred Stock, par value $0.10 per
share. Upon the effectiveness of this Certificate of Amendment
of Certificate of Incorporation, each issued and outstanding
share of the
<PAGE> 2
corporation's Common Stock, par value $0.10 per share, shall
automatically and without any action on the part of the holder
thereof be reclassified as and changed into two shares of the
corporation's Common Stock, par value $0.05 per share."
RESOLVED FURTHER, that the foregoing amendment of the Certificate of
Incorporation shall in no way modify, amend or supersede the
corporation's Certificate of Designation filed in the office of the
Secretary of State of Delaware on June 14, 1996, which is hereby
affirmed.
SECOND: That thereafter, the holders of the necessary number of shares of
capital stock of the Corporation, as required by statute and by the Certificate
of Incorporation, gave their written consent in favor of the foregoing amendment
in accordance with the provisions of Section 228 of the Delaware General
Corporation Law, and written notice thereof was provided to stockholders who did
not so consent.
THIRD: That said amendments were duly adopted in accordance with the provisions
of Section 242 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, QLogic Corporation has caused this Certificate of Amendment
to be signed by its duly authorized Chief Executive Officer, H.K. Desai, and
attested by its duly authorized Secretary, Michael R.
Manning, this 5 day of February, 1999.
QLOGIC CORPORATION,
a Delaware corporation
By: /s/ H.K. Desai
-----------------------------
H.K. Desai,
Chief Executive Officer
ATTEST:
/s/ Michael R. Manning
- --------------------------------
Michael R. Manning,
Secretary
2
<PAGE> 1
EXHIBIT 10.1.1
QLOGIC CORPORATION
NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purpose ............................................................. 1
2. Nonqualified Stock Options .......................................... 1
3. Administration ...................................................... 1
3.1 Administration by Board ................................... 1
3.2 Administration by Committee ............................... 1
4. Eligibility ......................................................... 2
5. Shares Subject to Options ........................................... 2
6. Terms and Conditions of Options ..................................... 2
6.1 Grant of Options .......................................... 2
6.2 Option Price .............................................. 3
6.3 Notice and Payment ........................................ 3
6.4 Term of Option ............................................ 4
6.5 Exercise of Option ........................................ 5
6.6 No Transfer of Option ..................................... 5
6.7 Rights as a Stockholder or Director ....................... 5
6.8 No Fractional Shares ...................................... 5
6.9 Exercisability in the Event of Death ...................... 5
6.10 Recapitalization, Reorganization or Change in Control of
Company ................................................... 5
6.11 Modification, Extension, and Renewal of Options ........... 6
6.12 1994 Distribution ......................................... 7
(a) Adjustment of Options for Reverse Stock Split ....... 7
(b) Conversion of Options Upon the Distribution ......... 7
(c) Option Terms and Conditions ......................... 7
(d) Option Price ........................................ 8
(e) Fair Market Value ................................... 8
6.13 Other Provisions .......................................... 8
7. Termination or Amendment of Plan .................................... 8
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
8. Indemnification ..................................................... 9
9. Stockholder Approval and Term of Plan ............................... 9
</TABLE>
-ii-
<PAGE> 4
QLOGIC CORPORATION
NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
1. PURPOSE. The purpose of this QLogic Corporation Non-Employee
Director Stock Option Plan ("Plan") is to increase the proprietary and vested
interest of the non-employee directors of QLogic Corporation ("Company") in the
growth and performance of the Company by granting such directors options to
purchase shares of common stock of the Company, to encourage them to continue
their services to the Company, and to attract individuals of outstanding ability
to serve on the Board of Directors of the Company.
2. NONQUALIFIED STOCK OPTIONS. The options granted under the Plan
(each an "option") will be options not specifically authorized or qualified for
favorable tax treatment under Section 422 of the Internal Revenue Code of 1986
as amended, and any successor statutes ("Code") ("nonqualified stock
options").
3. ADMINISTRATION.
3.1 ADMINISTRATION BY BOARD. The Plan shall be administered by
the Board of Directors of the Company ("Board"). Subject to the provisions of
the Plan, the Board shall have authority to construe and interpret the Plan, to
promulgate, amend, and rescind rules and regulations relating to its
administration, and to make all of the determinations necessary or advisable for
administration of the Plan; provided, however, that the Board shall have no
discretion with respect to the selection of directors to receive options under
the Plan, the number of shares of stock subject to any such options, or the
purchase price thereof. The interpretation and construction by the Board of any
provision of the Plan, or of any agreement executed pursuant to the Plan, shall
be final and binding upon all parties. No member of the Board shall be liable
for any action or determination undertaken or made in good faith with respect to
the Plan or any agreement executed pursuant to the Plan.
3.2 ADMINISTRATION BY COMMITTEE. The Board may, in its sole
discretion, delegate any or all of its administrative duties to a committee (the
"Committee") of not fewer than two (2) members of the Board, all of the members
of which Committee shall be persons who, in the opinion of counsel to the
Company, are "disinterested persons" within the meaning of Rule 16b-3(c)(2)(i)
promulgated by the Securities and Exchange Commission. Effective on and after
August 15, 1996, the requirement that Committee members be disinterested persons
shall not apply and all of the members of the Committee shall be persons who, in
the opinion of counsel to the Company, are "non-employee directors" within the
meaning of Rule l6b-3(b)(3)(i) promulgated by the Securities and Exchange
Commission. If administration is delegated to a Committee, the Committee shall
have, in connection with administration of the Plan, the powers otherwise
possessed by the Board, subject, however, to such resolutions, not inconsistent
with the provisions of the Plan, as may be adopted from time to time by the
Board. The Board may abolish the Committee at any time and revest in the Board
the administration of the Plan. From time to time, the Board may increase or
decrease (to not less than two members) the size of the Committee, and add
additional members to, or
<PAGE> 5
remove members from, the Committee. The Committee shall act pursuant to a
majority vote, or the written consent of a majority of its members, and minutes
shall be kept of all of its meetings and copies thereof shall be provided to the
Board. Subject to the provisions of the Plan and the directions of the Board,
the Committee may establish and follow such rules and regulations for the
conduct of its business as it may deem advisable. No member of the Committee
shall be liable for any action or determination undertaken or made in good faith
with respect to the Plan or any agreement executed pursuant to the Plan.
4. ELIGIBILITY. Each director of the Company who satisfies the
eligibility criteria of this Section 4 (an "Eligible Director") shall receive an
option under the Plan pursuant to Section 6.1 hereof. A director is an Eligible
Director only if such director (i) is not then an employee of the Company or any
of its subsidiaries and (ii) has not, within three (3) years immediately
preceding such time, received any stock option, stock bonus, stock appreciation
right, or other similar stock award from the Company or any of its subsidiaries,
except as provided by this Plan. Only Eligible Directors may receive options
under the Plan. A director of the Company shall not be deemed to be an employee
of the Company or any of its subsidiaries solely by reason of the existence of
an agreement between such director and the Company or any subsidiary thereof
pursuant to which the director provides services as a consultant to the Company
or its subsidiaries on a regular or occasional basis for compensation.
5. SHARES SUBJECT TO OPTIONS. The stock available for grant of
options under the Plan shall be shares of the Company's authorized but unissued,
or reacquired, common stock. The aggregate number of shares which may be issued
pursuant to exercise of options granted under the Plan shall not exceed 200,000
shares of common stock. In the event that any outstanding option under the Plan
for any reason expires or is terminated, the shares of common stock allocable to
the unexercised portion of the option shall again be available for options under
the Plan as if no option had been granted with respect to such shares.
6. TERMS AND CONDITIONS OF OPTIONS. Options granted under the Plan
shall be evidenced by agreements in such form and containing such provisions
which are consistent with the Plan as the Board or Committee shall from time to
time approve. All grants of options to Eligible Directors shall be automatic and
non-discretionary and shall be made strictly in accordance with the following
provisions.
6.1 GRANT OF OPTIONS.
(a) Prior to July 1, 1996, an option to purchase 12,500
shares of common stock of the Company shall be granted automatically to each
Eligible Director upon the later to occur of:
(1) the date of adoption of the Plan by the
Board,
(2) the date of stockholder approval of the
Plan,
-2-
<PAGE> 6
(3) the Distribution Date (as defined in Section
6.12), or
(4) the date on which such director first
becomes an Eligible Director (the "Initial Grant Date").
(b) Effective as of July 1, 1996, an option to purchase
8,000 shares of common stock of the Company shall be granted automatically to
each Eligible Director upon the Initial Grant Date. This provision shall not
apply to any Eligible Director who, pursuant to the terms of this Plan, received
an option to purchase common stock of the Company prior to July 1, 1996.
(c) Subsequent annual grants shall be made at the close
of business on the date of each annual meeting of stockholders at which the
members of the Board are elected or reelected subsequent to the Initial Grant
Date (the "Annual Grant Date"). Each Eligible Director shall automatically
receive an option to purchase 3,000 shares of common stock of the Company on the
Annual Grant Date. If the Eligible Director is serving as the Chairman of the
Board on the Annual Grant Date, an option to purchase 5,000 shares of common
stock of the Company shall be granted. If a period of less than twelve (12)
months elapses between the Initial Grant Date and the first Annual Grant Date,
the number of shares of common stock that can be purchased under the option
granted on the Annual Grant Date shall be prorated by multiplying the number of
shares designated above by a fraction, the numerator of which shall be the
number of days that have elapsed since the Initial Grant Date and the
denominator of which shall be the number of days since the last annual meeting
of stockholders at which the members of the Board were elected or reelected.
6.2 OPTION PRICE. Except as provided by Section 6.12, the
purchase price for the shares subject to any option shall be 100% of the fair
market value of the shares of common stock of the Company on the date the option
is granted. For purposes of the Plan, the "fair market value" of any share of
common stock of the Company at any date shall be (a) if the common stock is
listed on an established stock exchange or exchanges, the last reported sale
price per share on the last trading day immediately preceding such date on the
principal exchange on which it is traded, or if no sale was made on such day on
such principal exchange, at the closing reported bid price on such day on such
exchange, (b) if the common stock is not then listed on an exchange, the last
reported sale price per share on the last trading day immediately preceding such
date reported by NASDAQ, or if sales are not reported by NASDAQ or no sale was
made on such day, the average of the closing bid and asked prices per share for
the common stock in the over-the-counter market as quoted on NASDAQ on such day,
or (c) if the common stock is not then listed on an exchange or quoted on
NASDAQ, an amount determined in good faith by the Board or the Committee.
6.3 NOTICE AND PAYMENT. Any exercisable portion of an option
may be exercised only by:
-3-
<PAGE> 7
(a) delivery of a written notice to the Company, prior
to the time when such option becomes unexercisable under Section 6.4, stating
the number of shares being purchased and complying with all applicable rules
established by the Board or the Committee;
(b) payment in full of the exercise price of such option
by, as applicable, (1) cash or check for an amount equal to the aggregate option
exercise price for the number of shares being purchased, (2) in the discretion
of the Board or Committee, upon such terms as the Board or Committee shall
approve, a copy of instructions to a broker directing such broker to sell the
common stock for which such option is exercised, and to remit to the Company the
aggregate exercise price of such options (a "cashless exercise"), or (3) in the
discretion of the Board or Committee, upon such terms as the Board or Committee
shall approve, the optionee may pay all or a portion of the purchase price for
the number of shares being purchased by tendering shares of the Company's common
stock owned by the optionee, duly endorsed for transfer to the Company, with a
fair market value (as determined pursuant to Section 6.2) on the date of
delivery equal to the aggregate purchase price of the shares with respect to
which such option or portion is thereby exercised (a "stock-for-stock
exercise");
(c) payment of the amount of tax required to be withheld
(if any) by the Company or any parent or subsidiary corporation as a result of
the exercise of an option. The Optionee may pay all or a portion of the tax
withholding by (1) cash or check payable to the Company, (2) in the discretion
of the Board or Committee, upon such terms as the Board or Committee shall
approve, cashless exercise, (3) in the discretion of the Board or Committee,
upon such terms as the Board or Committee shall approve, stock-for-stock
exercise, or (4) a combination of (1), (2) and (3); and
(d) delivery of a written notice to the Company
requesting that the Company direct the transfer agent to issue to the Optionee
(or to his designee) a certificate for the number of shares of common stock for
which the Option was exercised or, in the case of a cashless exercise, for any
shares that were not sold in the cashless exercise.
Any certificate(s) for shares of outstanding common stock of the Company used to
pay the exercise price shall be accompanied by stock power(s) duly endorsed in
blank by the registered holder of the certificate(s) (with the signature thereon
guaranteed). In the event the certificate(s) tendered by the optionee in such
payment cover more shares than are required for such payment, the certificate(s)
shall also be accompanied by instructions from the optionee to the Company's
transfer agent with respect to disposition of the balance of the shares covered
thereby.
6.4 TERM OF OPTION. No option granted under the Plan shall be
exercisable after the expiration of the earlier of:
(a) ten years following the date the option is
granted; or
-4-
<PAGE> 8
(b) one year following the date the optionee ceases to
be a director of the Company for any reason.
6.5 EXERCISE OF OPTION. No option shall be exercisable during
the lifetime of an optionee by any person other than the optionee. An option
shall become exercisable as to one-third of the shares subject to the option on
each anniversary of the date the option is granted if the director to whom the
option is granted is still a director of the Company on such anniversary.
6.6 NO TRANSFER OF OPTION. No option shall be transferable by
an optionee otherwise than by will or the laws of descent and distribution.
6.7 RIGHTS AS A STOCKHOLDER OR DIRECTOR. An optionee or
transferee of an option shall have no rights as a stockholder of the Company
with respect to any shares covered by any option until the date of issuance of a
share certificate for such shares. No adjustment shall be made for dividends
(ordinary or extraordinary, whether cash, securities, or other property) or
distribution or other rights for which the record date is prior to the date such
share certificate is issued, except as provided in Section 6.10. Nothing in the
Plan or in any option agreement shall confer upon any director any right to
continue as a director of the Company or any of its subsidiaries, to be
nominated to serve as a director, or to receive any particular rate of
compensation.
6.8 NO FRACTIONAL SHARES. In no event shall the Company be
required to issue fractional shares upon the exercise of an option.
6.9 EXERCISABILITY IN THE EVENT OF DEATH. In the event of the
death of an optionee, any option (or unexercised portion thereof) held by the
optionee, to the extent exercisable by him or her on the date of death, may be
exercised by the optionee's personal representatives, heirs, or legatees subject
to the provisions of Sections 6.4 and 6.5 hereof.
6.10 RECAPITALIZATION, REORGANIZATION OR CHANGE IN CONTROL OF
COMPANY. Except as otherwise provided herein, appropriate and proportionate
adjustments shall be made in the number and class of shares subject to the Plan
and to the option rights granted under the Plan, and the exercise price of such
option rights, in the event of a stock dividend (but only on common stock),
stock split, reverse stock split, recapitalization, reorganization, merger,
consolidation, separation, or like change in the capital structure of the
Company. In the event of a liquidation of the Company, or a merger,
reorganization, or consolidation of the Company with any other corporation in
which the Company is not the surviving corporation or the Company becomes a
subsidiary of another corporation, any unexercised options theretofore granted
under the Plan shall be deemed cancelled unless the surviving corporation in
any such merger, reorganization, or consolidation elects to assume the options
under the Plan or to use substitute options in place thereof; provided, however,
that, notwithstanding the foregoing, if such options would otherwise be
cancelled in accordance with the foregoing, the optionee shall have the right,
exercisable during a ten-day period
-5-
<PAGE> 9
ending on the fifth day prior to such liquidation, merger, or consolidation, to
fully exercise the optionee's option in whole or in part without regard to any
installment exercise provisions otherwise provided by Section 6.5. In the event
of a Change in Control of the Company, as defined below, any unexercised option
theretofore granted under the Plan which is not then already exercisable as to
all of the shares subject to the option shall become exercisable upon such
Change in Control as to one-half of the shares as to which the option is not
already exercisable in addition to the shares, if any, as to which the option is
already exercisable. To the extent that the foregoing adjustments relate to
stock or securities of the Company, such adjustments shall be made by the Board
or the Committee, the determination of which in that respect shall be final,
binding, and conclusive. A "Change in Control" shall be deemed to have occurred
if:
(a) any person, or any two or more persons acting as a
group, and all affiliates of such person or persons, shall own beneficially
33-1/3% or more of the common stock of the Company outstanding, or
(b) if following:
(1) a tender or exchange offer for voting
securities of the Company (other than any such offer made by the Company), or
(2) a proxy, contest for election of directors of
the Company,
the persons who were directors of the Company immediately before the initiation
of such event (or directors who were appointed by such directors) cease to
constitute a majority of the Board of the Company upon the completion of such
tender or exchange offer or proxy contest or within one year after such
completion.
6.11 MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. Subject
to the terms and conditions and within the limitations of the Plan, the Board or
Committee may modify, extend, or renew outstanding options granted under the
Plan, accept the surrender of outstanding options (to the extent not theretofore
exercised), and authorize the granting of new options in substitution therefor
(to the extent not theretofore exercised). Notwithstanding the foregoing, no
modification of an option shall:
(a) without the consent of the optionee, alter or impair
any rights of the optionee under the option, or
(b) adversely affect the qualification of the Plan or
any other stock-related plan of the Company under Rule 16b-3 tinder the
Securities Exchange Act of 1934 or any successor provision.
-6-
<PAGE> 10
6.12 1994 DISTRIBUTION. The following provisions shall apply to
the options issued under this Plan in connection with the conversion and
adjustment of options which are outstanding under the Emulex Corporation
Non-Employee Director Stock Option Plan (the "Emulex Plan") on the "Distribution
Date" specified in the Distribution Agreement (the "Distribution Agreement")
providing for the distribution of all of the outstanding common stock of the
Company (the "Distribution") to the stockholders of Emulex Corporation, a
Delaware corporation ("Emulex"), on the Distribution Date and a reverse stock
split of the Outstanding shares of common stock of the Company in connection
with the Distribution pursuant to which each two outstanding shares of common
stock of the Company on the Distribution Date will be combined to become one
share of common stock of the Company (the "Reverse Stock Split"), with all
fractional shares being acquired by the Company for cash:
(a) ADJUSTMENT OF OPTIONS FOR REVERSE STOCK SPLIT. Upon
the effectiveness of the Reverse Stock Split, each option then outstanding under
the Emulex Plan shall be automatically adjusted pursuant to the terms of the
Emulex Plan so that the total number of shares of common stock of Emulex
purchasable under such option and the number of shares of such common stock
purchasable as of any given point in time shall be halved and the purchase price
per share of such common stock shall be doubled.
(b) CONVERSION OF OPTIONS UPON THE DISTRIBUTION. Upon
the Distribution, each option then outstanding under the Emulex Plan (an
"Outstanding Option") shall be automatically converted into two separately
exercisable options (collectively, the "New Options"), one to purchase common
stock of Emulex (a "New Emulex Option") and the other to purchase common stock
of the Company (a "Company Option"). Each New Emulex Option will be deemed
granted under the Emulex Plan and each Company Option will be deemed granted
under this Plan. Each New Option shall be exercisable for a number of shares
equal to the number of shares subject to purchase under the unexercised portion
of the related Outstanding Option (as adjusted as a result of the Reverse Stock
Split as provided herein).
(c) OPTION TERMS AND CONDITIONS. Except as otherwise
provided in this Section 6.12, each New Option shall contain and continue to be
subject to the same terms and conditions of the related Outstanding Option,
including, without limitation, provisions relating to the term and expiration of
the option; exercisability of the option; payment for shares purchased upon
exercise of the option; adjustments in the shares and exercise price under the
option, cancellation of the option, and/or acceleration of exercisability of the
option in the event of any stock dividend, stock split, reverse stock split,
merger, consolidation, liquidation, recapitalization or reorganization of the
Company or Emulex, as the case may be; or acceleration of exercisability of the
option as a result of a change in control of the Company or Emulex, as the case
may be. For purposes of determining expiration of the term and vesting of the
right to exercise a Company Option received in connection with the conversion of
an Outstanding Option held by a person who is a director of Emulex immediately
after the Distribution, such person's service as a director of Emulex following
the
-7-
<PAGE> 11
Distribution shall be credited as if it were service as a director of the
Company. For purposes of determining expiration of the term and vesting of the
right to exercise a New Emulex Option received in connection with the conversion
of an Outstanding Option held by a person who is a director of the Company
immediately after the Distribution, such person's service as a director of the
Company following the Distribution shall be credited as if it were service as a
director of Emulex.
(d) OPTION PRICE. Upon the Distribution, the purchase
price per share of stock purchasable under each New Option shall be adjusted to
give effect to the Distribution by allocating the purchase price per share of
the stock purchasable under the related Outstanding Option between the Company
Option and the New Emulex Option proportionately such that the purchase price
per share under the Company Option shall be equal to the product of the purchase
price per share under the related Outstanding Option (adjusted as a result of
the Reverse Stock Split as provided herein) multiplied by a fraction, the
numerator of which is the fair market value of a share of common stock of the
Company and the denominator of which is the sum of the fair market value of a
share of common stock of the Company plus the fair market value of a share of
common stock of Emulex; and the purchase price per share under the New Emulex
Option shall be equal to the product of the purchase price per share under the
related Outstanding Option (adjusted as a result of the Reverse Stock Split as
provided herein) multiplied by a fraction, the numerator of which is the fair
market value of a share of common stock of Emulex and the denominator of which
is the sum of the fair market value of a share of common stock of Emulex plus
the fair market value of a share of common stock of the Company.
(e) FAIR MARKET VALUE. For purposes of this Section
6.12, the fair market value of a share of common stock of the Company and a
share of common stock of Emulex shall be the average of the closing sales prices
per share of common stock of the Company and common stock of Emulex,
respectively, as quoted on the NASDAQ National Market System as reported in the
Wall Street Journal for each of the 20 trading days beginning on the day
following the Distribution Date, and if there is no closing sale price reported
on the NASDAQ National Market System for either common stock of the Company or
common stock of Emulex for one or more days during such period, the
determination shall be made utilizing the earliest 20 days following the day
following the Distribution Date on which closing sales prices are reported for
such stock.
6.13 OTHER PROVISIONS. Each option may contain such other
terms, provisions, and conditions not inconsistent with the Plan as may be
determined by the Board or Committee.
7. TERMINATION OR AMENDMENT OF PLAN. The Board may at any time
terminate or amend the Plan; provided that, without approval of the stockholders
of the Company, there shall be, except by operation of the provisions of Section
6.10, no increase in the total number of shares covered by the Plan, no change
in the class of directors eligible to
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<PAGE> 12
receive options granted tinder the Plan, no material increase in the benefits
accruing to participants under the Plan, no reduction in the exercise price of
options granted under the Plan, and no extension of the latest date upon which
options may be exercised; and provided further that, without the consent of tile
optionee, no amendment may adversely affect any then outstanding option or any
unexercised portion thereof held by the optionee. Prior to August 15, 1996, the
Plan may not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder.
8. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or the Committee, the
members of the Board or the Committee administering the Plan shall be
indemnified by the Company against reasonable expenses, including attorney's
fees, actually and necessarily incurred in connection with the defense of any
action, suit, or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with the Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company) or paid by
them in satisfaction of a judgment in any action, suit, or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit, or
proceeding that such member is liable for negligence or misconduct in the
performance of his duties, provided that within 60 days after institution of any
such action, suit, or proceeding, the member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same.
9. STOCKHOLDER APPROVAL AND TERM OF PLAN. This is an amendment and
restatement of the Plan, which originally was adopted and effective January 25,
1994. This amendment and restatement of the Plan shall be Subject to approval by
the stockholders of the Company within 12 months after adoption of this amended
and restated Plan by the Board. In the event stockholder approval of the Plan is
not obtained within such time period, the Plan shall be terminated and all
options granted pursuant to the amendment and restatement of the Plan shall be
void and of no effect. The amended and restated Plan shall become effective upon
its adoption by the Board and approval by stockholders (the "Effective Date")
and shall apply to options granted on or after the Effective Date. The terms of
options granted under the Plan prior to the Effective Date shall be governed by
the Plan terms in effect prior to the Effective Date. Unless sooner terminated
by the Board in its sole discretion, the Plan will expire on December 31, 2001.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed
by its duly authorized officer and to be effective on this 19th day of July,
1996.
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<PAGE> 13
QLOGIC CORPORATION
BY: /s/ H. K. DESAI
-------------------------------------
H. K. Desai, President and CEO
ATTEST:
By: /s/ MICHAEL R. MANNING
------------------------------
Michael R. Manning, Secretary
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<PAGE> 1
EXHIBIT 10.2.1
QLOGIC CORPORATION
STOCK AWARDS PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
1. Purpose..............................................................................1
2. Definitions..........................................................................1
2.1 Award........................................................................1
2.2 Board........................................................................1
2.3 Code.........................................................................1
2.4 Company......................................................................1
2.5 Common Stock.................................................................1
2.6 Deferred Stock Award.........................................................1
2.7 Disabled or Disability.......................................................1
2.8 Fair Market Value............................................................1
2.9 Incentive Stock Option.......................................................2
2.10 Nonqualified Stock option....................................................2
2.11 Optionee.....................................................................2
2.12 Other Stock-Based Award......................................................2
2.13 Performance Unit Award.......................................................2
2.14 Plan.........................................................................2
2.15 Plan Administrator...........................................................2
2.16 Restricted Stock Award.......................................................2
2.17 Stock Appreciation Right.....................................................2
2.18 Stock Option.................................................................2
2.19 Unrestricted Stock Award.....................................................2
3. Awards Under the Plan................................................................3
4. Administration.......................................................................3
4.1 Administration by Board......................................................3
4.2 Administration by Compensation Committee.....................................3
5. Eligibility..........................................................................4
6. Shares Subject to the Plan...........................................................4
6.1 Available Shares.............................................................4
6.2 Capital Structure Adjustments................................................4
7. Terms and Conditions of Stock Options................................................5
7.1 Number of Shares Subject to Stock Option.....................................5
7.2 Stock Option Price...........................................................5
7.3 Notice and Payment...........................................................5
7.4 Term of Stock Option.........................................................7
7.5 Exercise of Stock Option.....................................................7
7.6 No Transfer of Stock Option..................................................7
7.7 Limit on Incentive Stock Options.............................................7
7.8 No Fractional Shares.........................................................8
7.9 Exercisability in the Event of Death.........................................8
7.10 Modification, Extension, and Renewal of Stock
Options......................................................................8
7.11 1994 Distribution............................................................8
7.12 Other Provisions............................................................10
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
8. Stock Appreciation Rights...........................................................11
8.1 General ....................................................................11
8.2 Grant and Exercise..........................................................11
8.3 Terms and Conditions of Stock Appreciation Rights...........................11
8.4 Rules Relating to Exercise .................................................12
9. Restricted Stock ...................................................................12
9.1 General ....................................................................12
9.2 Award Agreement and Certificates............................................13
9.3 Rights as a Stockholder.....................................................13
9.4 Restrictions................................................................13
9.5 Section 83(b) Election......................................................14
10. Unrestricted Stock..................................................................14
11. Deferred Stock Awards...............................................................15
11.1 General.....................................................................15
11.2 Award Agreement.............................................................15
11.3 Elective Deferral...........................................................15
11.4 Termination.................................................................15
11.5 Payments in Respect of Deferred Stock.......................................15
12. Performance Unit Awards.............................................................16
12.1 General.....................................................................16
12.2 Award Agreement.............................................................16
12.3 Termination.................................................................16
12.4 Acceleration; waiver........................................................16
12.5 Exercise....................................................................17
13. Other Stock-Based Awards............................................................17
13.1 General.....................................................................17
13.2 Purchase Price; Form of Payment.............................................17
13.3 Forfeiture of Awards; Repurchase of Stock;
Acceleration of Waiver of Restrictions .....................................18
13.4 Award Agreements............................................................18
13.5 Deemed Dividend Payments; Deferrals.........................................18
14. Supplemental Grants 18
14.1 Loans ......................................................................18
14.2 Cash Payments...............................................................19
15. Termination or Amendment of the Plan................................................19
16. Indemnification.....................................................................19
17. Withholding.........................................................................20
17.1 Irrevocable Election........................................................20
17.2 Approval by Plan Administrator..............................................20
17.3 Timing of Election..........................................................20
17.4 Window Period...............................................................20
17.5 Timing of Delivery..........................................................21
</TABLE>
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<PAGE> 4
QLOGIC CORPORATION
STOCK AWARDS PLAN
1. PURPOSE. The purpose of this QLogic Corporation Stock Awards
Plan is to further the growth and development of QLogic Corporation by providing
an incentive to officers and other key employees who are in a position to
contribute materially to the prosperity of the Company to participate in the
long-term growth of the company by receiving the opportunity to acquire shares
of the Company's common stock and to provide for additional compensation based
on appreciation in the Company's shares. The Plan provides a means to increase
such persons' interests in the Company's welfare, to encourage them to continue
their services to the Company or its subsidiaries, and to attract individuals of
outstanding ability to enter the employment of the Company or its subsidiaries.
2. DEFINITIONS. The following definitions are applicable to the
Plan:
2.1 AWARD. Except where referring to a particular category
of grant under the Plan, "Award" or "Awards" shall include Incentive Stock
options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock
Awards, Unrestricted Stock Awards, Deferred Stock Awards, Performance Unit
Awards and Other Stock-Based Awards.
2.2 BOARD. The Board of Directors of the Company.
2.3 CODE. The Internal Revenue Code of 1986, as amended
from time to time.
2.4 COMPANY. QLogic corporation, a Delaware corporation.
2.5 COMMON STOCK. The shares of the common stock of the
Company.
2.6 DEFERRED STOCK AWARD. An Award made pursuant to
Section 11 below of the right to receive Common Stock at the end of a specified
deferral period.
2.7 DISABLED OR DISABILITY. For the purposes of Section
7.4, a disability of the type defined in Section 22(e)(3) of the Code. The
determination of whether an individual is Disabled or has a Disability shall be
determined under procedures established by the Plan Administrator.
2.8 FAIR MARKET VALUE. For purposes of the Plan, the "fair
market value" of any share of Common Stock of the Company at any date shall be
(a) if the Common Stock is listed on
<PAGE> 5
an established stock exchange or exchanges, the last reported sale price per
share on the last trading day immediately preceding such date on the principal
exchange on which it is traded, or if no sale was made on such day on such
principal exchange, at the closing reported bid price on such day on such
exchange, or (b) if the Common Stock is not then listed on an exchange, the last
reported sale price per share on the last trading day immediately preceding such
date reported by NASDAQ, or if sales are not reported by NASDAQ or no sale was
made on such date, the average of the closing bid and asked prices per share for
the Common Stock in the over-the-counter market as quoted on NASDAQ on the day
prior to such date, or (c) if the Common Stock is not then listed on an exchange
or quoted on NASDAQ, an amount determined in good faith by the Plan
Administrator.
2.9 INCENTIVE STOCK OPTION. Any Stock Option intended to
be and designated as an "incentive stock option" within the meaning of Section
422 of the Code.
2.10 NONQUALIFIED STOCK OPTION. Any Stock Option that is
not an Incentive Stock Option.
2.11 OPTIONEE. The recipient of a Stock Option Award.
2.12 OTHER STOCK-BASED AWARD. An Award made pursuant to
Section 13 below of the right to receive debt or other securities convertible
into or exchangeable for Common Stock.
2.13 PERFORMANCE UNIT AWARD. An Award made pursuant to
Section 12 below of the right to receive cash or Common Stock upon the
attainment of specified performance goals.
2.14 PLAN. The QLogic Corporation Stock Awards Plan, as
amended from time to time.
2.15 PLAN ADMINISTRATOR. The Board or the Compensation
Committee designated pursuant to Section 4 to administer, construe and interpret
the terms of the Plan.
2.16 RESTRICTED STOCK AWARD. An Award of shares of Common
Stock that are subject to restrictions pursuant to Section 9.
2.17 STOCK APPRECIATION RIGHT. An Award made pursuant to
Section 8 below.
2.18 STOCK OPTION. Any option to purchase shares of Common
Stock granted pursuant to Section 7.
2.19 UNRESTRICTED STOCK AWARD. An Award made pursuant to
Section 10 below.
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<PAGE> 6
3. AWARDS UNDER THE PLAN. Two types of Stock Options (referred to
herein as "Stock options" without distinction between such two types) may be
granted under the Plan: Stock options intended to qualify as Incentive Stock
Options and Nonqualified Stock Options. The Plan also permits the Award of Stock
Appreciation Rights that provide additional compensation based on appreciation
in the Company's Common Stock, Restricted Stock Awards, Unrestricted Stock
Awards, Deferred Stock Awards, Performance Unit Awards and other Stock-Based
Awards.
4. ADMINISTRATION.
4.1 ADMINISTRATION BY BOARD. Subject to Section 4.2, the
Plan Administrator shall be the Board of Directors of the Company (the "Board")
during such periods of time as all members of the Board are "disinterested
persons" as defined in Rule l6b-3(c)(2)(i) promulgated by the Securities and
Exchange Commission (a "disinterested person"). Subject to the provisions of the
Plan, the Plan Administrator shall have authority to construe and interpret the
Plan, to promulgate, amend, and rescind rules and regulations relating to its
administration, from time to time to select from among the eligible employees
(as determined pursuant to Section 5) of the Company and its subsidiaries those
employees to whom Awards will be granted, to determine the timing and manner of
the grant of the Awards, to determine the exercise price, the number of shares
covered by and all of the terms of the Awards, to determine the duration and
purpose of leaves of absence which may be granted to Award holders without
constituting termination of their employment for purposes of the Plan, and to
make all of the determinations necessary or advisable for administration of the
Plan. The interpretation and construction by the Plan Administrator of any
provision of the Plan, or of any agreement issued and executed under the Plan,
shall be final and binding upon all parties. No member of the Board shall be
liable for any action or determination undertaken or made in good faith with
respect to the Plan or any agreement executed pursuant to the Plan.
4.2 ADMINISTRATION BY COMPENSATION COMMITTEE. The Board
may, in its sole discretion, delegate any or all of its duties as Plan
Administrator, and at any time the Board includes any person who is not a
disinterested person, the Board shall delegate all of its duties as Plan
Administrator during such period of time, to a committee (the "Compensation
Committee") of not fewer than two (2) members of the Board, all of the members
of which Compensation Committee shall be persons who, in the opinion of counsel
to the Company, are disinterested persons, to be appointed by and serve at the
pleasure of the Board. From time to time, the Board may increase or decrease (to
not less than two members) the size of the Compensation Committee, and add
additional members to, or remove members from, the Compensation Committee. The
Compensation Committee shall act pursuant to a majority vote, or the written
consent of a majority of its
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<PAGE> 7
members, and minutes shall be kept of all of its meetings and copies thereof
shall be provided to the Board. Subject to the provisions of the Plan and the
directions of the Board, the Compensation Committee may establish and follow
such rules and regulations for the conduct of its business as it may deem
advisable. No member of the Compensation Committee shall be liable for any
action or determination undertaken or made in good faith with respect to the
Plan or any agreement executed pursuant to the Plan.
5. ELIGIBILITY. Any employee (including any officer who is an
employee) of the Company or any of its subsidiaries shall be eligible to receive
an Award under the Plan; provided, however, that no person who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any of its parent or subsidiary corporations shall be
eligible to receive an Incentive Stock Option under the Plan unless at the time
such Stock Option is granted the Stock Option price (determined in the manner
provided in Section 7.2) is at least 110% of the Fair Market Value of the shares
subject to the Stock Option and such Stock Option by its terms is not
exercisable after the expiration of five years from the date such Stock Option
is granted. An employee may receive more than one Award under the Plan.
6. SHARES SUBJECT TO THE PLAN.
6.1 AVAILABLE SHARES. The shares available for grant of
Awards under the Plan shall be shares of the Company's authorized but unissued,
or reacquired, Common Stock. The aggregate number of shares which may be issued
pursuant to exercise of Awards granted under the Plan shall not exceed 1,100,000
shares of Common Stock (after giving effect to a one-for-two reverse stock split
and as subject to further adjustment as provided in Section 6.2). In the event
that the grant of any Award under the Plan for any reason expires, is terminated
or surrendered without being exercised in full or is exercised or surrendered
without the distribution of shares, the shares of Common Stock allocable to the
unexercised portion of the Award shall again be available for grant and
distribution under the Plan as if no Award had been granted with respect to such
shares.
6.2 CAPITAL STRUCTURE ADJUSTMENTS. Except as otherwise
provided herein, appropriate and proportionate capital structure adjustments
shall be made in the number and class of shares subject to the Plan, to the
Award rights granted under the Plan, and the exercise price of such Award
rights, in the event of a stock dividend (but only on Common Stock), stock
split, reverse stock split, recapitalization, reorganization, merger,
consolidation, separation, or like change in the corporate or capital structure
of the Company. In the event of a liquidation of the Company, or a merger,
reorganization, or consolidation of the Company with any other corporation in
which the Company is not the surviving corporation or the Company becomes a
wholly
-4-
<PAGE> 8
owned subsidiary of another corporation, any unexercised Award rights
theretofore granted under the Plan shall be deemed cancelled unless the
surviving corporation in any such merger, reorganization, or consolidation
elects to assume the Award rights under the Plan or to use substitute Award
rights in place thereof; provided, however, that, notwithstanding the foregoing,
if such Award rights would otherwise be cancelled in accordance with the
foregoing, the Award recipient shall have the right, exercisable during a
ten-day period ending on the fifth day prior to such liquidation, merger, or
consolidation, to exercise the Award rights without regard to any restrictions
on exercisability. To the extent that the foregoing adjustments relate to stock
or securities of the Company, such adjustments shall be made by the Plan
Administrator, the determination of which in that respect shall be final,
binding, and conclusive, provided that each Incentive Stock option granted
pursuant to the Plan shall not be adjusted in a manner that causes it to fail to
continue to qualify as an incentive stock option within the meaning of Section
422 of the Code.
7. TERMS AND CONDITIONS OF STOCK OPTIONS. Stock options granted
under the Plan shall be evidenced by agreements (which need not be identical) in
such form and containing such provisions which are consistent with the Plan as
the Plan Administrator shall from time to time approve. Such agreements may
incorporate all or any of the terms hereof by reference and shall comply with
and be subject to the following terms and conditions:
7.1 NUMBER OF SHARES SUBJECT TO STOCK OPTION. Each Stock
option agreement shall specify the number of shares subject to the Stock Option.
7.2 STOCK OPTION PRICE. The purchase price for the shares
subject to any Stock option shall be such amount as is determined by the Plan
Administrator, but not less than par value per share. Anything to the contrary
notwithstanding, the purchase price for the shares subject to any Incentive
Stock Option shall not be less than 100% of the Fair Market Value of the shares
of Common Stock of the Company on the date the Stock Option is granted. In the
case of an Incentive Stock Option granted to an employee who owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any of its parent or subsidiary corporations, the Stock
Option price shall not be less than 110% of the Fair Market Value of the shares
of Common Stock of the Company on the date the Stock Option is granted.
7.3 NOTICE AND PAYMENT. Any exercisable portion of a Stock
Option may be exercised only by:
(a) delivery of a written notice to the
Company, prior to the time when such Stock Option becomes unexercisable under
Section 7.4, stating the number of shares
-5-
<PAGE> 9
being purchased and complying with all applicable rules established by the Plan
Administrator;
(b) payment in full of the exercise price of such
Option by, as applicable, (i) cash or check for an amount equal to the aggregate
Stock Option exercise price for the number of shares being purchased, (ii) in
the discretion of the Plan Administrator, upon such terms as the Plan
Administrator shall approve, a copy of instructions to a broker directing such
broker to sell the Common Stock for which such Option is exercised, and to remit
to the Company the aggregate exercise price of such options (a "cashless
exercise"), or (iii) in the discretion of the Plan Administrator, upon such
terms as the Plan Administrator shall approve, the Optionee may pay all or a
portion of the purchase price for the number of shares being purchased by
tendering shares of the Company's Common Stock owned by the Optionee, duly
endorsed for transfer to the Company, with a Fair Market Value on the date of
delivery equal to the aggregate purchase price of the shares with respect to
which such Stock option or portion is thereby exercised (a "stock-for-stock
exercise");
(c) payment of the amount of tax required to be
withheld (if any) by the Company or any parent or subsidiary corporation as a
result of the exercise of a Stock Option. At the discretion of the Plan
Administrator, upon such terms as the Plan Administrator shall approve, the
Optionee may pay all or a portion of the tax withholding by (i) cash or check
payable to the Company, (ii) cashless exercise, (iii) stock-for-stock exercise,
or (iv) a combination of (1), (2) and (3); and
(d) delivery of a written notice to the Company
requesting that the Company direct the transfer agent to issue to the optionee
(or to his designee) a certificate for the number of shares of Common Stock for
which the Option was exercised or, in the case of a cashless exercise, for any
shares that were not sold in the cashless exercise.
Notwithstanding the foregoing, the Company may extend and maintain, or arrange
for the extension and maintenance of, credit to any optionee to finance the
Optionee's purchase of shares pursuant to exercise of any Stock option, on such
terms as may be approved by the Plan Administrator, subject to applicable
regulations of the Federal Reserve Board and any other laws or regulations in
effect at the time such credit is extended. The Plan Administrator may, at any
time and in its discretion, authorize a cash payment, determined in accordance
with Section 8.3(f), which shall not exceed the amount required to pay in full
the federal, state and local tax consequences of an exercise of any Stock Option
granted under the Plan.
-6-
<PAGE> 10
7.4 TERM OF STOCK OPTION. No Stock Option shall be
exercisable after the expiration of the earliest of (a) ten years after the date
the Stock option is granted, (b) three months after the date the Optionee's
employment with the Company and its subsidiaries terminates if such termination
is for any reason other than Disability or death, or (c) one year after the date
the Optionee's employment with the Company and its subsidiaries terminates if
such termination is a result of death or Disability; provided, however, that the
Stock Option agreement for any Stock Option may provide for shorter periods in
each of the foregoing instances. In the case of an Incentive Stock option
granted to an employee who owns stock possessing more than lot of the total
combined voting power of all classes of stock of the Company or any of its
parent or subsidiary corporations, the term set forth in (a), above, shall not
be more than five years after the date the Stock Option is granted.
7.5 EXERCISE OF STOCK OPTION. No Stock Option shall be
exercisable during the lifetime of an Optionee by any person other than the
Optionee. Subject to the foregoing, the Plan Administrator shall have the power
to set the time or times within which each Stock Option shall be exercisable and
to accelerate the time or times of exercise. Unless otherwise provided by the
Plan Administrator, each Stock Option granted under the Plan shall become
exercisable an a cumulative basis as to 25% of the total number of shares
covered thereby at any time after one year from the date the Stock Option is
granted and an additional 6-1/4% of such total number of shares at any time
after the end of each consecutive calendar quarter thereafter until the Stock
Option has become exercisable as to all of such total number of shares. To the
extent that an Optionee has the right to exercise a Stock Option and purchase
shares pursuant thereto, the Stock Option may be exercised from time to time as
provided in Section 7.3.
7.6 NO TRANSFER OF STOCK OPTION. No Stock Option shall be
transferable by an Optionee otherwise than by will or the laws of descent and
distribution.
7.7 LIMIT ON INCENTIVE STOCK OPTIONS. The aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which Incentive Stock Options granted under this Plan are exercisable
for the first time by an Optionee during any calendar year shall not exceed
$100,000. To the extent that the aggregate Fair Market Value (determined at the
time the Stock option is granted) of the stock with respect to which Incentive
Stock Options are exercisable for the first time by an Optionee during any
calendar year (under all Incentive Stock Option plans of the Company and any
parent or subsidiary corporations) exceeds $100,000, such Stock Options shall be
treated as Nonqualified Stock options. The determination of which Stock Options
shall be treated as Nonqualified Stock Options shall be made by taking Stock
Options into account in the order in which they were granted.
-7-
<PAGE> 11
7.8 NO FRACTIONAL SHARES. In no event shall the Company be
required to issue fractional shares upon the exercise of a Stock option.
7.9 EXERCISABILITY IN THE EVENT OF DEATH. In the event of
the death of the Optionee, any Stock Option or unexercised portion thereof
granted to the Optionee, to the extent exercisable by him or her on the date of
death, may be exercised by the Optionee's personal representatives, heirs, or
legatees subject to the provisions of Section 7.4 hereof.
7.10 MODIFICATION, EXTENSION, AND RENEWAL OF STOCK
OPTIONS. Subject to the terms and conditions and within the limitations of the
Plan, the Plan Administrator may modify, extend, or renew outstanding Stock
Options granted under the Plan, accept the surrender of outstanding Stock
Options (to the extent not theretofore exercised) and authorize the granting of
new Stock Options in substitution therefor (to the extent not theretofore
exercised). The Plan Administrator may modify any outstanding Stock Options so
as to specify a lower exercise price or accept the surrender of outstanding
Stock Options and authorize the grant of new Stock Options in substitution
therefor specifying a lower price. The Plan Administrator shall not, however,
without the consent of the Optionee, modify any outstanding Incentive Stock
Option in any manner which would cause the Stock Option not to qualify as an
Incentive Stock Option within the meaning of Section 422 of the Code.
Notwithstanding the foregoing, no modification of a Stock Option shall, without
the consent of the Optionee, alter or impair any rights of the Optionee under
the Stock Option.
7.11 1994 DISTRIBUTION. The following provisions shall
apply to the options issued under this Plan in connection with the conversion
and adjustment of options which are outstanding under the Emulex Corporation
Employee Stock Option Plan (the "Emulex Plan") on the "Distribution Date"
specified in the Distribution Agreement (the "Distribution Agreement") providing
for the distribution of all of the outstanding common stock of the Company (the
"Distribution") to the stockholders of Emulex Corporation, a Delaware
corporation ("Emulex"), on the Distribution Date and a reverse stock split of
the outstanding shares of common stock of the Company in connection with the
Distribution pursuant to which each two outstanding shares of common stock of
the Company on the Distribution Date will be combined to become one share of
common stock of the Company (the "Reverse Stock Split"), with all fractional
shares being acquired by the Company for cash:
(a) Adjustment of options for Reverse Stock Split.
Upon the effectiveness of the Reverse Stock Split, each option then outstanding
under the Emulex Plan shall be automatically adjusted pursuant to the terms of
the Emulex Plan so that the total number of shares of common stock of Emulex
purchasable under such option and the number of shares of such
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<PAGE> 12
common stock purchasable as of any given point in time shall be halved and the
purchase price per share of such common stock shall be doubled.
(b) Conversion of Options Upon the Distribution.
Upon the Distribution, except as otherwise provided in a written instrument with
respect to a specified option outstanding under the Plan on the date of the
Distribution, each option then outstanding under the Emulex Plan (an
"Outstanding Option") shall be automatically converted into two separately
exercisable options (collectively, the "New Options"), one to purchase common
stock of the Company (a "Company Option") and the other to purchase common stock
of Emulex (a "New Emulex Option"). Each Company Option will be deemed granted
under the Plan and each New Emulex Option will be deemed granted under the
Emulex Plan. Each New Option shall be exercisable for a number of shares equal
to the number of shares subject to purchase under the unexercised portion of the
related outstanding Option (as adjusted as a result of the Reverse Stock Split
as provided herein).
(c) Option Terms and Conditions. Except as
otherwise provided in this Section 7.11, each New Option shall contain and
continue to be subject to the same terms and conditions of the related
Outstanding Option, including, without limitation, provisions relating to the
term and expiration of the option; exercisability of the option; payment for
shares purchased upon exercise of the option; adjustments in the shares and
exercise price under the option, cancellation of the option, and/or acceleration
of exercisability of the option in the event of any stock dividend, stock split,
reverse stock split, merger, consolidation, liquidation, recapitalization or
reorganization of the Company or Emulex, as the case may be; or acceleration of
exercisability of the option as a result of a change in control of the Company
or Emulex, as the case may be. For purposes of determining expiration of the
term and vesting of the right to exercise a Company Option received in
connection with the conversion of an outstanding Option held by a person who is
employed by Emulex immediately after the Distribution (an "Emulex Employee"),
such Emulex Employee's employment with Emulex following the Distribution shall
be treated the same as if such Emulex Employee had continued to be employed by
the Company or one of its subsidiaries; and termination of such Emulex
Employee's employment with Emulex and its subsidiaries after the Distribution
shall be treated as termination of such Emulex Employee's employment with the
Company and its subsidiaries, irrespective of whether such Emulex Employee may
become employed by the Company or one of its subsidiaries following termination
of his or her employment with Emulex and its subsidiaries. For purposes of
determining expiration of the term and vesting of the right to exercise a New
Emulex Option received in connection with the conversion of an Outstanding
Option held by a person who is employed by the Company or one of its
subsidiaries immediately after the Distribution (a "Company Employee"), such
Company
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Employee's employment with the Company (or any of its subsidiaries) following
the Distribution shall be treated the same as if such Company Employee were
employed by Emulex or one of its subsidiaries; and termination of such Company
Employee's employment with the Company and its subsidiaries after the
Distribution shall be treated as termination of his or her employment with
Emulex and its subsidiaries, irrespective of whether such Company Employee may
become employed by Emulex or one of its subsidiaries following termination of
his or her employment with the Company and its subsidiaries.
(d) Option Price. Upon the Distribution, the
purchase price per share of stock purchasable under each New Option shall be
adjusted to give effect to the Distribution by allocating the purchase price per
share of the stock purchasable under the related Outstanding Option between the
Company Option and the New Emulex Option proportionately such that the purchase
price per share under the Company Option shall be equal to the product of the
purchase price per share under the related Outstanding Option (adjusted as a
result of the Reverse Stock Split as provided herein) multiplied by a fraction,
the numerator of which is the fair market value of a share of common stock of
the Company and the denominator of which is the sum of the fair market value of
a share of common stock of the Company plus the fair market value of a share of
common stock of Emulex; and the purchase price per share under the Emulex Option
shall be equal to the product of the purchase price per share under the related
Outstanding Option (adjusted as a result of the Reverse Stock Split as provided
herein) multiplied by a fraction, the numerator of which is the fair market
value of a share of common stock of Emulex and the denominator of which is the
sum of the fair market value of a share of common stock of Emulex plus the fair
market value of a share of common stock of the Company.
(e) Fair Market Value. For purposes of this Section
7.11, the fair market value of a share of common stock of the Company and a
share of common stock of Emulex shall be the average of the closing sales prices
per share of common stock of the Company and common stock of Emulex,
respectively, as quoted on the NASDAQ National Market System as reported in the
Wall Street Journal for each of the 20 trading days beginning on the day
following the Distribution Date, and if there is no closing sale price reported
on the NASDAQ National Market System for either common stock of the Company or
common stock of Emulex for one or more days during such period, the
determination shall be made utilizing the earliest 20 days following the day
following the Distribution Date on which closing sales prices are reported for
such stock.
7.12 Other Provisions. Each Stock Option may contain such
other terms, provisions, and conditions not inconsistent with the Plan as may be
determined by the Plan Administrator.
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8. STOCK APPRECIATION RIGHTS.
8.1 GENERAL. A stock Appreciation Right is a grant
entitling the recipient to receive an amount in cash or shares of the Common
Stock of the Company or a combination thereof having a value equal to (or if the
Plan Administrator shall so determine at time of grant, less than) the excess of
the Fair Market Value of a share on the date of exercise over the Fair Market
Value of a share on the date of grant (or over the Stock Option exercise price,
if the Stock Appreciation Rights are granted in tandem with a Stock Option)
multiplied by the number of shares with respect to which the Stock Appreciation
Rights shall have been exercised, with the Plan Administrator having the sole
discretion to determine the form of payment. In any event, cash shall be paid in
lieu of fractional shares.
8.2 GRANT AND EXERCISE. Stock Appreciation Rights may be
granted in tandem with the grant of any Stock Option or independent of any Stock
Option granted under the Plan. In the case of a tandem grant with a Nonqualified
Stock Option, such Stock Appreciation Rights may be granted either at or after
the grant of such Nonqualified Stock Option. In the case of a tandem grant with
an Incentive Stock Option, Stock Appreciation Rights may be granted only at the
time of the grant of such Incentive Stock Option. Stock Appreciation Rights or
any applicable portion thereof granted in tandem with a given Stock Option shall
terminate and no longer be exercisable upon the termination or exercise of the
related Stock Option, except that, unless otherwise provided by the Plan
Administrator at the time of grant, a right granted with respect to less than
the full number of shares covered by a related tandem Stock Option shall be
reduced only if and to the extent that the number of shares covered by the
exercise or termination of the related tandem Stock Option exceeds the number of
shares not covered by the Stock Appreciation Rights.
8.3 TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS.
Stock Appreciation Rights shall be subject to the following terms and conditions
and to such other terms and conditions not inconsistent with the Plan as the
Plan Administrator may from time to time determine:
(a) No Stock Appreciation Rights shall be
exercisable in whole or in part during the first six months of the grant term.
(b) Stock Appreciation Rights granted in tandem
with a Stock Option shall be exercisable by the Optionee (or such other person
entitled under the Plan to exercise the Stock Option contained in the tandem
grant) only at such time or times, and to the extent, that the related tandem
Stock Option is exercisable and only when the Fair Market Value of the stock
subject to the tandem Stock Option exceeds the exercise price of such Stock
Option. Upon the exercise of Stock Appreciation
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Rights, the applicable portion of any related tandem Stock Option shall be
surrendered. Stock Appreciation Rights granted independent of any Stock Option
shall be exercisable by the holder in such manner and within such period or
periods as shall be determined by the Plan Administrator pursuant to the terms
of the Stock Appreciation Rights agreement evidencing the grant.
(c) Stock Appreciation Rights granted in tandem
with a Stock Option shall be transferable only with such Stock Option. Stock
Appreciation Rights shall not be transferable otherwise than by will or the laws
of descent and distribution. All Stock Appreciation Rights shall be exercisable
during the holder's lifetime only by the holder or the holder's legal
representative or guardian.
(d) The Plan Administrator may, at any time and in
its discretion, authorize a cash payment in respect of a grant or exercise under
the Plan which shall not exceed the amount required to pay in full the federal,
state and local tax consequences of an exercise of any Award granted under this
Plan. The Plan Administrator shall have sole and complete authority to decide
whether to make such cash payments in any case, to make provision for such
payments either simultaneously with or after any grant, and to determine the
amount of any such payment.
8.4 RULES RELATING TO EXERCISE. In the case of a holder
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended from
time to time, no Stock Appreciation Rights shall be exercised except in
compliance with any applicable requirements of Rule 16b-3(e) promulgated by the
Securities and Exchange Commission or any successor rule. The Plan Administrator
may impose such conditions on the exercise of Stock Appreciation Rights
(including, without limitation, to limit the time of exercise to specified
window periods following the release of quarterly and annual statements of sales
and earnings or to fixed dates that are outside the control of the Stock
Appreciation Rights holder) as may be required to satisfy the requirements of
Rule 16b-3 or any successor rule.
9. RESTRICTED STOCK.
9.1 GENERAL. A Restricted Stock Award is an Award
entitling the recipient to acquire shares of Common Stock, subject to such
conditions, including the right of the Company during a specified period or
periods to repurchase such shares at their original price or to require
forfeiture of such shares (if no cash consideration was paid) upon the
participant's termination of employment, as the Plan Administrator may determine
at the time of grant. The Plan Administrator may award shares of Restricted
Stock (i) at no cost to the recipient (or for a purchase price not in excess of
the par value of the shares) or (ii) for a purchase price determined by the Plan
Administrator on the date of grant. Shares of Restricted Stock
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may be granted or sold in respect of past services or other valid consideration.
9.2 AWARD AGREEMENT AND CERTIFICATES. A participant who is
granted a Restricted Stock Award shall have no rights with respect to such Award
unless the participant shall have accepted the Award within sixty days (or such
shorter period as the Plan Administrator may specify) following the Award date
by executing and delivering to the Company a Restricted Stock Award agreement in
such form as the Plan Administrator shall determine and by making payment to the
Company by certified or bank check or instrument acceptable to the Plan
Administrator any cash consideration required to be paid in connection with such
Restricted Stock Award. Each participant receiving a Restricted Stock Award
shall be issued a certificate in respect of such shares of Restricted Stock.
Such certificate shall be registered in the name of the participant and
deposited with the Company or its designee, and shall bear an appropriate legend
referring to the terms, conditions and restrictions applicable to such Award,
substantially in the following form:
"This certificate and the shares of stock represented hereby are
subject to the terms and conditions (including forfeiture and
restrictions against transfer) contained in the QLogic
Corporation Stock Awards Plan and an agreement entered into
between the registered owner and QLogic Corporation. Release from
such terms and conditions shall be obtained only in accordance
with the provisions of the Plan and the agreement, copies of
which are on file in the office of the Secretary of QLogic
Corporation."
The Plan Administrator may require that, as a condition of any Restricted Stock
Award, the participant shall have delivered to the Company a stock power,
endorsed in blank, relating to the Stock covered by such Award.
9.3 RIGHTS AS A STOCKHOLDER. Upon complying with Section
9.2 above, a participant shall have all the rights of a stockholder with respect
to the Restricted Stock including voting and dividend rights, subject to
nontransferability restrictions, Company repurchase or forfeiture rights and any
other condition described in this Section 9 or contained in the Restricted Stock
Award agreement. The Restricted Stock Award agreement may require or permit the
immediate payment, waiver, deferral, or investment of dividends paid on the
Restricted Stock.
9.4 RESTRICTIONS. Shares of Restricted Stock may not be
sold, assigned, transferred, pledged, or otherwise encumbered or disposed of
except as specifically provided herein and in the Restricted Stock Award
agreement. Unless the Plan
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Administrator in its discretion provides otherwise, all shares of Restricted
Stock shall be subject to the restrictions against transfer and to the Company's
right to repurchase or require forfeiture set forth in this Section 9.4 for a
period of six months from the date of grant.
The Plan Administrator shall specify the date or dates
(which may depend upon or be related to the attainment of performance goals or
such other factors or criteria as the Plan Administrator shall determine) on
which the nontransferability of the Restricted Stock and the obligation to
forfeit or resell such shares to the Company shall lapse. The Plan Administrator
may provide for the lapse of such restrictions in installments and at any time
may accelerate such date or dates and otherwise waive or, subject to Section 15
below, amend any terms and conditions of the Award.
Except as otherwise may be provided in the Award agreement
or determined by the Plan Administrator at any time after the date of grant, in
the event of termination of employment of a participant with the Company and its
subsidiaries for any reason (including death), the participant or the
participant's legal representative shall resell to the Company, at the cash
consideration paid therefor, all Restricted Stock, and the Company shall
purchase such shares at that price, or if no cash consideration was paid, all
shares of Restricted Stock awarded to the participant shall automatically be
forfeited to the Company.
Any shares of Stock or other securities of the Company or
any other entity which are issued as a distribution on, or in exchange for,
Restricted Stock or into which Restricted Stock is converted as a result of a
recapitalization, stock dividend, distribution of securities, stock split or
combination of shares or a merger, consolidation or sale of substantially all of
the assets of the Company shall be subject to the restrictions set forth in the
Restricted Stock Award agreement, which shall inure to the benefit of any
surviving or successor corporation which is the issuer of such securities. Upon
the lapse of the restrictions applicable to a participant's Restricted Stock,
certificates for shares of Stock free of any restrictive legend shall be
delivered to the participant or his legal representative or guardian.
9.5 SECTION 83(b) ELECTION. Any Restricted Stock Award
agreement may provide that the participant may not elect to be taxed with
respect to such Award in accordance with Section 83(b) of the Code.
10. UNRESTRICTED STOCK. The Plan Administrator may, in its sole
discretion, grant (or sell at a purchase price determined by the Plan
Administrator at the time of sale) to any participant shares of Common Stock
free of restrictions under the Plan ("Unrestricted Stock"). Shares of
Unrestricted Stock may be
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<PAGE> 18
granted or sold as described in the preceding sentence in respect of past
services or other valid consideration. Any purchase of Unrestricted Stock by a
recipient must take place within sixty days after the time of grant of the right
to purchase such shares. Notwithstanding the foregoing, any shares of
Unrestricted Stock granted to a participant subject to Section 16(b) of the Act
may not be sold or otherwise disposed of for value for a period of six months
from the date of grant.
11. DEFERRED STOCK AWARDS.
11.1 GENERAL. A Deferred Stock Award is an Award entitling
the recipient to acquire shares of Common Stock without payment in one or more
installments at a future date or dates, all as determined by the Plan
Administrator. The Plan Administrator may also condition such acquisition on the
attainment of specified performance goals or such other factors or criteria as
the Plan Administrator shall determine. Unless the Plan Administrator in its
discretion provides otherwise, the deferral with respect to any Deferred Stock
Award shall be no less than six months from the date of grant.
11.2 AWARD AGREEMENT. A participant who is granted a
Deferred Stock Award shall have no rights with respect to such Award unless
within sixty days of the grant of such Award (or such shorter period as the Plan
Administrator may specify) the participant shall have accepted the Award by
executing and delivering to the Company a Deferred Stock Award agreement.
11.3 ELECTIVE DEFERRAL. A participant may elect to further
defer receipt of the Common Stock payable under a Deferred Stock Award (or an
installment of the Award) for a specified period or until a specified event,
subject in each case to the Plan Administrator's approval and under such terms
as determined by the Plan Administrator. Subject to any exceptions adopted by
the Plan Administrator, such election must generally be made at least 12 months
prior to completion of the deferral period for the Award (or for such
installment of the Award).
11.4 TERMINATION. Except as may otherwise be provided in
the Deferred Stock Award agreement, a participant's rights in all Deferred Stock
Awards shall automatically terminate upon the participant's termination of
employment with the Company and its Subsidiaries for any reason (including
death). At any time prior to the participant's termination of employment, the
Plan Administrator may in its discretion accelerate, waive, or, subject to
Section 15 below, amend any or all of the restrictions or conditions imposed
under any Deferred Stock Award.
11.5 PAYMENTS IN RESPECT OF DEFERRED STOCK. Without
limiting the right of the Plan Administrator to specify different terms, the
Deferred Stock Award agreement may either make no provisions for, or may require
or permit the immediate payment, deferral, or investment of amounts equal to, or
less
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than, any cash dividends which would have been payable on the Deferred Stock had
such Stock been outstanding, all as determined by the Plan Administrator in its
sole discretion.
12. PERFORMANCE UNIT AWARDS.
12.1 GENERAL. A Performance Unit Award is an Award
entitling the recipient to acquire cash or shares of Common Stock, or a
combination of cash and Common Stock, upon the attainment of specified
performance goals. The Plan Administrator in its sole discretion shall determine
whether and to whom Performance Unit Awards shall be made, the performance goals
applicable under each such Award, the periods during which performance is to be
measured, and all other limitations and conditions applicable to the Performance
Unit Award. Notwithstanding the foregoing, no Performance Unit Award shall be
exercisable in whole or in part during the first six months following the date
of grant. Performance goals may vary from participant to participant and between
groups of participants and shall be based upon such Company, business unit or
individual performance factors or criteria as the Plan Administrator may deed
appropriate. Performance periods may overlap and participants may participate
simultaneously with respect to Performance Unit Awards that are subject to
different performance periods and different performance goals. The Plan
Administrator may adjust the performance goals and periods applicable to a
Performance Unit Award to take into account changes in law and accounting and
tax rules, and to make such adjustments as the Plan Administrator deems
necessary or appropriate to reflect the inclusion or exclusion of the impact of
extraordinary or unusual items, events or circumstances in order to avoid
windfalls or hardships. Performance Units may be awarded independent of or in
connection with the grant of any other Award under the Plan.
12.2 AWARD AGREEMENT. A participant shall have no rights
with respect to a Performance Unit Award unless within sixty days of the grant
of such Award (or such shorter period as the Plan Administrator may specify) the
participant shall have accepted the Award by executing and delivering to the
Company a Performance Unit Award agreement.
12.3 TERMINATION. Except as may otherwise be provided by
the Plan Administrator at any time prior to the termination of employment, a
participant's rights and all Performance Unit Awards shall automatically
terminate upon the participant's termination of employment by the Company and
its Subsidiaries for any reason (including death).
12.4 ACCELERATION; WAIVER. At any time prior to the
participant's termination of employment with the Company and its Subsidiaries,
the Plan Administrator may in its sole discretion accelerate, waive, or, subject
to Section 15 below, amend any or all of the goals, restrictions or conditions
imposed under any Performance Unit Award.
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12.5 EXERCISE. The Plan Administrator in its sole
discretion shall establish procedures to be followed in exercising any
Performance Unit Award, which procedure shall be set forth in the Performance
Unit Award agreement. The Plan Administrator may at any time provide that
payment under a Performance Unit Award shall be made, upon satisfaction of the
applicable performance goals, without any exercise by the participant. Except as
otherwise specified by the Plan Administrator, (i) a Performance Unit granted in
tandem with a Stock Option is exercisable, and (ii) the exercise of a
Performance Unit granted in tandem with any Award shall reduce the number of
shares of Common Stock subject to the related Award on such basis as is
specified in the Performance Unit Award agreement.
13. OTHER STOCK-BASED AWARDS.
13.1 GENERAL. The Plan Administrator may grant other
Awards under which Common Stock is or may in the future be acquired ("Other
Stock-Based Awards"). Such Awards may include, without limitation, debt
securities convertible into or exchangeable for shares of Common Stock upon such
conditions, including attainment of performance goals, as the Plan Administrator
shall determine. No Other Stock-Based Award shall be exercisable in whole or in
part during the first six months following the date of grant or, if shares of
Common Stock are awarded to a participant on the date of grant, such Stock shall
be subject to restrictions against transfer for a period of no less than six
months from the date of grant. Subject to the purchase price limitations in
section 13.2 below, such convertible or exchangeable securities may have such
terms and conditions as the Plan Administrator may determine at the time of
grant. However, no convertible or exchangeable debt shall be issued unless the
Plan Administrator shall have provided (by the Company's right of repurchase,
right to require conversion or exchange, or other means deemed appropriate by
the Plan Administrator) a means of avoiding any right of the holders of such
debt to prevent a Company transaction by reason of covenants in such debt.
13.2 PURCHASE PRICE; FORM OF PAYMENT. The Plan
Administrator may determine the consideration, if any, payable upon the issuance
or exercise of an Other Stock-Based Award. However, no shares of Common Stock
(whether acquired by purchase, conversion, or exchange or otherwise) shall be
issued unless (i) issued at no cost to the recipient (or for a purchase price
not in excess of the par value of the shares), or (ii) sold, exchanged, or
converted by the Company, and the Company shall have received payment for such
Stock or securities so sold, exchanged, or converted equal to at least 50% of
Fair Market Value of the Stock on the grant or effective date, or the exchange
or conversion date, under the Award, as specified by the Plan Administrator. The
Plan Administrator may permit payment by certified check or bank check or other
instrument acceptable to
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the Plan Administrator or by surrender of other shares of Common Stock
(excluding shares then subject to restrictions under the Plan).
13.3 FORFEITURE OF AWARDS; REPURCHASE OF STOCK;
ACCELERATION OF WAIVER OF RESTRICTIONS. The Plan Administrator may determine the
conditions under which an Other Stock-Based Award shall be forfeited or, in the
case of an Award involving a payment by the recipient, the conditions under
which the Company may or must repurchase such Award or related Stock. At any
time the Plan Administrator may in its sole discretion accelerate, waive, or,
subject to Section 15 below, amend any or all of the limitations or conditions
imposed under any Other Stock-Based Award.
13.4 AWARD AGREEMENTS. A participant shall have no rights
with respect to any Other Stock-Based Award unless within sixty days after the
grant of such Award (or such shorter period as the Plan Administrator may
specify) the participant shall have accepted the Award by executing and
delivering to the Company an Other Stock-Based Award agreement.
13.5 DEEMED DIVIDEND PAYMENTS; DEFERRALS. Without limiting
the right of the Plan Administrator to specify different terms, an Other Stock-
Based Award agreement may require or permit the immediate payment, waiver,
deferral, or investment of dividends or deemed dividends payable or deemed
payable on Stock subject to the Award.
14. SUPPLEMENTAL GRANTS.
14.1 LOANS. The Company may extend and maintain, or
arrange for the extension and maintenance of, credit to any Award recipient to
finance the participant's purchase of shares pursuant to the exercise of any
Award, on such terms as may be approved by the Plan Administrator, subject to
applicable regulations of the Federal Reserve Board and any other laws or
regulations in effect at the time such credit is extended, either on or after
the date of grant of such Award. Such loans may be either in connection with the
grant or exercise of any Award, or in connection with the payment of any
federal, state and local income taxes in respect of income recognized under an
Award. The Plan Administrator shall have full authority to decide whether to
make a loan hereunder and to determine the amount, term, and provisions of any
such loan, including the interest rate (which may be zero) charged in respect of
any such loan, whether the loan is to be secured or unsecured, the terms on
which the loan is to be repaid and the conditions, if any, under which it may be
forgiven. However, no loan hereunder shall provide or reimburse to the borrower
the amount used by him for the payment of the par value of any shares of Stock
issued, have a term (including extensions) exceeding ten years in duration, or
be an amount exceeding the total exercise or purchase price paid by the borrower
under an Award or for related Stock under the Plan plus
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an amount equal to the cash payment permitted in Section 14.2 below.
14.2 CASH PAYMENTS. The Plan Administrator may, at any
time and in its discretion, authorize a cash payment, in respect of the grant or
exercise of an Award under the Plan or the lapse or waiver of restrictions under
an Award, which shall not exceed the amount which would be required in order to
pay in full the federal, state and local income taxes due as a result of income
recognized by the recipient as a consequence of (i) the receipt of an Award or
the exercise of rights thereunder and (ii) the receipt of such cash payment. The
Plan Administrator shall have complete authority to decide whether to make such
cash payments in any case, to make provisions for such payments either
simultaneously with or after the grant of the associated Award, and to determine
the amount of any such payment.
15. TERMINATION OR AMENDMENT OF THE PLAN. The Board may at any
time terminate or amend the Plan; provided that, without approval of the
stockholders of the Company, there shall be, except by operation of the
provisions of Section 6.2, no increase in the total number of shares covered by
the Plan, no change in the class of persons eligible to receive Awards granted
under the Plan or other material modification of the requirements as to
eligibility for participation in the Plan, no material increase in the benefits
accruing to participants under the Plan, no reduction in the exercise price of
Awards granted under the Plan, and no extension of the latest date upon which
Awards may be exercised; and provided further that, without the consent of the
Award recipient, no amendment may adversely affect any then outstanding Awards
or any unexercised portion thereof.
16. INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or the Compensation
Committee, the members of the Plan Administrator shall be indemnified by the
Company against reasonable expense, including attorney's fees, actually and
necessarily incurred in connection with the defense of any action, suit, or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any grant thereunder, and against all amounts paid
by them in settlement thereof (provided such settlement is approved by
independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any action, suit, or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit, or
proceeding that such member is liable for negligence or misconduct in the
performance of his duties, provided that within 60 days after institution of any
such action, suit, or proceeding, the member shall in writing offer the Company
the opportunity, at its own expense, to handle and defend the same.
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17. WITHHOLDING. Whenever the Company proposes or is required to
issue or transfer shares under the Plan, the Company shall have the right to
require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state and local withholding tax requirements prior to the delivery
of any certificate or certificates for such shares of Common Stock. If a
participant surrenders shares acquired pursuant to the exercise of an Incentive
Stock Option in payment of the exercise price of an Award and such surrender
constitutes a disqualifying disposition for purposes of obtaining Incentive
Stock Option treatment under the Code, the Company shall have the right to
require the Optionee to remit to the Company an amount sufficient to satisfy any
federal, state and local withholding tax requirements prior to the delivery of
any certificate or certificates for such shares. Whenever under the Plan
payments are to be made in cash, such payments shall be net of an amount
sufficient to satisfy any federal, state and local withholding tax requirements.
A recipient may elect with respect to any Award which is paid in whole or in
part in shares of Common Stock, to surrender previously acquired shares of
Common Stock or authorize the Company to withhold shares (valued at Fair Market
Value on the date of surrender or withholding of the shares) in satisfaction of
all such withholding requirements (the "Share Surrender Withholding Election")
in accordance with the following:
17.1 IRREVOCABLE ELECTION. Any Share surrender Withholding
Election shall be made by written notice to the Company and thereafter shall be
irrevocable by the recipient.
17.2 APPROVAL BY PLAN ADMINISTRATOR. If a recipient is
subject to Section 16 of the Securities Exchange Act of 1934, as amended, or any
successor law, any Share Surrender Withholding Election shall be subject to the
consent or disapproval of the Plan Administrator in accordance with rules
established from time to time by the Plan Administrator.
17.3 TIMING OF ELECTION. Any Share Surrender Withholding
Election must be made prior to the date on which the recipient recognizes
taxable income with respect to the receipt of such shares (the "Tax Date").
17.4 WINDOW PERIOD. If a recipient is subject to Section
16 of the Securities Exchange Act of 1934, as amended, or any successor law,
such person must make any Share Surrender Withholding Election:
(a) more than six months after the date of grant
with respect to which such election is made (except whenever such election is
made by a Disabled recipient or the estate or personal representative of a
deceased recipient); and
(b) either at least six months prior to the Tax
Date or during the period of ten business days beginning
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on the third business day following the release for publication of the Company's
summary statement of sales and earnings for a quarter or fiscal year.
17.5 TIMING OF DELIVERY. When the Tax Date falls after the
exercise of an Award and the recipient makes a Share Surrender Withholding
Election, the full number of shares subject to the Award being exercised will be
issued, but the recipient will be unconditionally obligated to deliver to the
Company on the Tax Date the number of shares having a value on the Tax Date
equal to the recipient's federal, state and local withholding tax requirements.
17.6 TERMS IN AGREEMENT. For purposes of this Section 15,
the Plan Administrator shall have the discretion to provide (by general rule or
a provision in the specific Award agreement) that, at the election of the
recipient, "federal, state and local withholding tax requirements" shall be
deemed to be any amount designated by the recipient which does not exceed his
estimated federal, state and local tax obligations associated with the
transaction, including FICA taxes to the extent applicable.
18. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute
an "unfunded" plan for incentive and deferred compensation. With respect to any
payments not yet made to a participant by the Company, nothing set forth herein
shall give any such participant any rights that are greater than those of a
general unsecured creditor of the Company. In its sole discretion, the Plan
Administrator may authorize the creation of trusts or other arrangements to meet
the obligations created under the Plan to deliver shares or cash with respect to
the exercise of Awards hereunder, provided, however, that the existence of such
trusts or other arrangements is consistent with the unfunded status of the Plan.
19. GENERAL PROVISIONS.
19.1 RESTRICTIONS ON ISSUANCE OF SHARES. The issuance of
Awards and shares of Common Stock shall be subject to compliance with all of the
applicable requirements of law with respect to the issuance and sale of
securities, including, without limitation, any required qualification under the
California Corporate Securities Law of 1968, as amended. If a participant
acquires shares of Common Stock pursuant to the exercise of an Award, the Plan
Administrator, in its sole discretion, may require as a condition of issuance of
shares covered by his or her Award, to represent that the shares to be acquired
pursuant to exercise of the Award will be acquired for investment and without a
view to distribution thereof; and in such case, the Company may place a legend
on the certificate evidencing the shares reflecting the fact that they were
acquired for investment and cannot be sold or transferred unless registered
under the Securities Act of 1933, as amended, or
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unless counsel for the Company is satisfied that the circumstances of the
proposed transfer do not require such registration. The Company may place a
legend on the certificates evidencing the shares reflecting the fact that they
are subject to restrictions on transfer under the terms of this Section 20.1. In
addition, any participant may be required to execute a buy-sell or right of
first refusal agreement in favor of the Company or its designee with respect to
all or any of the shares so acquired. In such event, the terms of such agreement
shall apply to such shares.
19.2 RIGHTS AS A STOCKHOLDER OR EMPLOYEE. A participant or
transferee of an Award shall have no right as a stockholder of the Company with
respect to any shares covered by any grant under this Plan until the date of the
issuance of a share certificate for such shares. No adjustment shall be made for
dividends (ordinary or extraordinary, whether cash, securities, or other
property) or distributions or other rights for which the record date is prior to
the date such share certificate is issued, except as provided in Section 6.2.
Nothing in the Plan or in any Award agreement shall confer upon any participant
any right to continue in the employ of the Company or any of its subsidiaries or
interfere in any way with any right of the Company or any subsidiary to
terminate the participant's employment at any time.
19.3 GOVERNING LAW. This Plan shall be governed by, and
construed in accordance with, the laws of the state of California.
20. EFFECTIVE DATE OF PLAN. The Plan shall be adopted and become
effective on the date of execution specified below subject, however, to the
approval of the Plan by the stockholders of the Company within twelve months of
the Effective Date. Unless stockholder approval is obtained within twelve months
of the Effective Date, this Plan and any Awards hereunder shall become void.
21. TERM OF PLAN. Unless sooner terminated by the Board in its
sole discretion, the Plan will expire and no Awards may be made hereunder on and
after December 1, 2003.
-22-
<PAGE> 1
EXHIBIT 10.15
P R O S P E C T U S
QLOGIC CORPORATION
1998 EMPLOYEE STOCK PURCHASE PLAN
This Prospectus covers 300,000 shares of the Common Stock, $0.10 par value,
of QLogic Corporation, a Delaware corporation (the "Company"), to be issued by
the Company or purchased in open market broker's transactions under the
Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan").
Persons not deemed to be "affiliates" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), from time to time
may resell shares of Common Stock in the over-the-counter market. However, this
Prospectus may not be used in connection with reoffers or resales of shares of
Common Stock. See "Resales of Common Stock."
This document constitutes part of a prospectus covering securities that
have been registered under the Securities Act.
--------------------------------------------
The date of this Prospectus is October 30, 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
I. INTRODUCTION........................................................... 1
II. THE PURCHASE PLAN...................................................... 1
A. General Nature and Purpose......................................... 1
B. Administration..................................................... 1
C. Eligibility........................................................ 1
D. Participation...................................................... 2
E. Purchase Price..................................................... 3
F. Payment of Purchase Price; Payroll Deductions...................... 3
G. Purchase of Stock.................................................. 3
H. Withdrawal......................................................... 3
I. Termination of Employment.......................................... 4
J. Adjustment Upon Changes in Capitalization; Merger,
Consolidation or Reorganization.................................... 4
K. Nonassignability................................................... 4
L. Amendment and Termination of the Purchase Plan..................... 4
III. RESALES OF COMMON STOCK................................................ 4
IV. U.S. FEDERAL INCOME TAX CONSEQUENCES................................... 5
V. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................ 6
</TABLE>
-i-
<PAGE> 3
I. INTRODUCTION
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan")
authorizes the issuance or purchase of up to a total of 300,000 shares of its
Common Stock for the benefit of participating employees (each, a "Participant,"
and collectively, the "Participants"), who shall be entitled to subscribe for
purchase directly from the Company such Common Stock at a discount from the
market price, and to pay the purchase price in installments by payroll
deductions. This Prospectus describes the principal features of the Purchase
Plan and includes certain other information about the Purchase Plan. The
following description is qualified, however, by reference to the complete text
of the Purchase Plan. Any Participant in the Purchase Plan may obtain a copy of
the Purchase Plan by making a written or oral request to the Secretary of the
Company. The Company's executive offices are located at 3545 Harbor Boulevard,
Costa Mesa, California, 92626, and its telephone number is (714) 438-2200.
II. THE PURCHASE PLAN
A. GENERAL NATURE AND PURPOSE
The Purchase Plan was adopted by the Board of Directors of the Company (the
"Board") on April 9, 1998 and by the stockholders of the Company on August 27,
1998, and will be effective on November 2, 1998 (the "Effective Date"). The
Purchase Plan authorizes the issuance or purchase of up to an aggregate of
300,000 shares of Common Stock by direct issuance by the Company or by purchase
in open market transactions for the benefit of Participants in the Purchase
Plan, who shall be entitled to subscribe for and purchase shares of such Common
Stock directly from the Company at a discount from the market price, and to pay
the purchase price in installments by payroll deductions. The primary purpose of
the Purchase Plan is to provide employees of the Company and its designated
subsidiaries with an opportunity to purchase Common Stock conveniently and at a
discount from the market price, in order that Participants may increase their
proprietary interest in the Company.
The Purchase Plan is not a qualified plan under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"). The Purchase Plan is
designed to be an employee stock purchase plan under Section 423 of the Code,
providing the Participants the benefits afforded under Section 421 of the Code.
See "U.S. Federal Income Tax Consequences." The Purchase Plan has been designed
in a manner so that the Purchase Plan is exempt from the provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA").
B. ADMINISTRATION
The Purchase Plan will be administered by the Board or a committee
thereof (herein referred to collectively as the "Administrator"). The initial
Administrator of the Purchase Plan shall be the Compensation Committee of the
Company's Board of Directors. All questions of interpretation of the Purchase
Plan will be determined by the Administrator, and its decisions will be final
and binding on all Participants. The Administrator has the authority to
designate agents to carry out its responsibilities relating to the Purchase
Plan. The address of the Administrator is the address of the Company set forth
under the caption "Introduction" above.
C. ELIGIBILITY
Each employee of the Company or a designated subsidiary thereof who
has attained age eighteen (18) on the Entry Date (defined below) and who
regularly works at least thirty (30) hours per week for more than five (5)
months per year in the rendition of personal services to the Company may become
a Participant in the Plan on the Entry Date coincident with or next following
his or her satisfaction of such requirements of employment with the Company.
"Entry Date" means the first day of the second month of each calendar quarter
(February 1, May 1, August 1 and November 1); provided, however, that the
initial Entry Date shall be the Effective Date, which is November 2, 1998.
<PAGE> 4
No Participant shall be granted a right to purchase (i) more than
5,000 shares of Common Stock (subject to adjustments for any increase or
decrease in the number of issued shares of the Company's Common Stock as
discussed in "Adjustments Upon Changes in Capitalization; Merger, Consolidation
or Reorganization") in any calendar year, (ii) any stock under the Purchase
Plan, if immediately after the purchase the employee would own stock or hold
outstanding options to purchase stock possessing in the aggregate 5% or more of
the total combined voting power of all classes of capital stock of the Company,
or (iii) any stock in excess of that amount of stock if which, when aggregated
with purchases under all other employee stock purchase plans of the Company,
would exceed $25,000 worth of Common Stock of the Company (determined using the
fair market value of such Common Stock at the time such right is granted) during
any calendar year.
D. PARTICIPATION
An employee who has satisfied the eligibility requirements of the
Purchase Plan may become a Participant upon his or her completion and delivery
to the Company of a Stock Purchase Agreement authorizing payroll deductions.
Subject to the other limitations contained in the Purchase Plan, a participant
may elect to defer only whole percentages of his or her Compensation (defined
below) up to an aggregate maximum of 10% of his or her total Compensation in any
calendar year. Such percentage may be increased or decreased form time to time
in the discretion of the Administrator, but in no event shall the maximum amount
be increased to an amount in excess of 15% of a Participant's Compensation.
Under the Purchase Plan, "Compensation" includes salary, annual bonus/incentive,
annual profit sharing, overtime, lead premium, commissions and shift
differential, but expressly excludes other forms of compensation such as
relocation, housing, car allowances, phone allowances, sign-on bonuses and
referral bonuses.
A Participant may change any election (increase or decrease the rate
of payroll deductions) one time during any Offering Period (defined below) by
completing and delivering to the Administrator a new Stock Purchase Agreement
setting forth the desired change at least 15 days prior to the close of the
Offering Period. A Participant may terminate participation in the Purchase Plan
at any time prior to the close of an Offering Period (see "Withdrawal" below). A
Participant may also terminate payroll deductions and have accumulated
deductions for the Offering Period applied to the purchase of Company Common
Stock as of the next Purchase Date (defined below) by completing and delivering
to the Administrator a new Stock Purchase Agreement setting forth the desired
change. Any such change shall become effective on the next payroll period (to
the extent practical under the Company's payroll practices) following the
delivery of the new Stock Purchase Agreement. Under the Purchase Plan, "Offering
Period" means the three-month periods from February 1 through April 30, May 1
through July 31, August 1 through October 31 and November 1 through January 31
of each calendar year. "Grant Date" means the first day of each Offering Period
under the Purchase Plan (February 1, May 1, August 1 and November 1) and
"Purchase Date" means the last day of each Offering Period (April 30, July 31,
October 31 and January 31).
Each Participant's payroll deductions shall be credited to an account
established for him or her by the Company. Amounts in a Participant's account
shall not bear interest, and shall be general corporate assets of the Company to
be used by the Company for any corporate purpose. The Company is not obligated
to segregate such payroll deductions.
On each Grant Date, each Participant shall be granted an option to
purchase at the Purchase Price (determined in the manner set forth under the
caption "Purchase Price" below) that number of shares and partial shares of the
Company's Common Stock that can be purchased or issued by the Company based upon
such Purchase Price with the amounts held in such Participant's account, subject
to the limits described under the caption "Eligibility" above. See "Adjustments
Upon Changes in Capitalization; Merger, Consolidation or Reorganization" below.
The Company Stock will be purchased on the next Purchase Date. The initial
Offering Period under the Purchase Plan shall commence on the Effective Date,
and terminate on January 31, 1999. Thereafter, the Purchase Plan provides for
consecutive three-month offering periods commencing on each Grant Date and
ending on the next following Purchase Date.
2
<PAGE> 5
E. PURCHASE PRICE
The purchase price per share (the "Purchase Price") for which shares
of Common Stock will be sold in an Offering Period under the Purchase Plan is
the lower of 85% of the fair market value of a share of Common Stock on the
Grant Date or 85% of the fair market value of a share of Common Stock on the
Purchase Date.
The fair market value of the Common Stock shall be the closing sale
price on the date of valuation if the Company's stock is traded on the Nasdaq
National Market System or an exchange that reports closing sale prices, or, if
no closing sale price is quoted or no sale takes place on such day, then the
fair market value shall be the closing sale price of the Common Stock on the
Nasdaq National Market system or such exchange on the next preceding day on
which a sale occurred. If the Common Stock is not then listed for trading on an
exchange which reports closing sale prices, the fair market value shall be the
average of the closing bid and asked price for the Common Stock on such exchange
or in the over-the-counter market, as the case may be, on that date, or, if such
securities markets were closed on that date, on the next preceding date on which
such securities markets were open for trading. If neither of these two methods
of determining fair market value are applicable as of the date of valuation,
then the fair market value shall be finally determined by the Administrator of
the Purchase Plan in good faith using any reasonable method of valuation.
F. PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS
The Purchase Price of shares is paid by means of accumulated payroll
deductions on behalf of a Participant during the Offering Period. During an
Offering Period, a Participant has the opportunity to: (1) terminate
participation in the Purchase Plan and have all payroll deductions returned to
the Participant; (2) discontinue deductions and have accumulated deductions
applied to the purchase of shares at the end of the Offering Period; or (3)
increase or decrease the rate of payroll deductions once during the Offering
Period. If a Participant terminates participation in the Purchase Plan, however,
the Participant will be precluded from participating in the Purchase Plan for
the remainder of the Offering Period in which the withdrawal occurred and the
next succeeding Offering Period, but may then be reinstated as a Participant
thereafter by executing and delivering a new Stock Purchase Agreement to the
Administrator.
Payroll deductions for a Participant commence on the Grant Date
coincident with or next following the date on which a Participant's payroll
deduction authorization is properly filed, and continue thereafter unless such
rate is changed or the Participant's participation is terminated.
G. PURCHASE OF STOCK
By executing a Stock Purchase Agreement to participate in the Purchase
Plan, a Participant is entitled to have shares purchased under the Purchase Plan
and issued to him or her. Unless the Participant's participation is terminated
or the Participant directs the Company otherwise, shares will be issued by the
Company or purchased in open market transactions on his or her behalf
automatically with all amounts held in his or her account on each Purchase Date.
The shares issued or purchased for a Participant will either be delivered to him
or her as promptly as practicable after each Purchase Date or issued to a
contract administrator for the benefit of the Participant. Any cash remaining in
the Participant's account shall remain in the account and be applied to the
issuance or purchase of shares at the next Purchase Date.
H. WITHDRAWAL
A Participant may terminate his or her participation in the Purchase
Plan by signing and delivering to the Company a notice of withdrawal. Such
withdrawal may be elected at any time before the end of the applicable Offering
Period. As soon as practicable after such withdrawal, the payroll deductions
credited to the Participant's account will be returned to the Participant,
without interest. A Participant who has withdrawn from the Purchase Plan will be
excluded from participation for the remainder of the Offering Period in which
the withdrawal
3
<PAGE> 6
occurred and the next succeeding Offering Period, but may be reinstated as a
Participant thereafter by executing and delivering a new Stock Purchase
Agreement to the Administrator.
I. TERMINATION OF EMPLOYMENT
Termination of a Participant's employment for any reason, including
resignation, retirement, death or discharge, immediately cancels his or her
participation in the Purchase Plan. In such event, the payroll deductions
credited to the Participant's account will be returned to such Participant or,
in the case of death, to the Participant's beneficiary, without interest.
J. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; MERGER, CONSOLIDATION OR
REORGANIZATION
In the event of any changes in the capitalization of the Company, such
as a stock split or stock dividend, or in the event of any spin-off, merger,
sale or other reorganization or recapitalization, appropriate adjustments will
be made by the Company in the shares subject to purchase under the Purchase Plan
and in the Purchase Price per share.
In the event that the Company at any time proposes to merge into,
consolidate with or to enter into any other reorganization (including the sale
of substantially all of its assets or a "reverse" merger in which the Company is
the surviving entity), the Purchase Plan shall terminate, unless provision is
made in writing in connection with such transaction for the continuance of the
Purchase Plan, with appropriate adjustments as to number and kind of shares and
prices. If provision is not made for the continuance of the Purchase Plan, the
Administrator shall cause written notice of the proposed transaction to be given
to all Participants not less than ten (10) days before the anticipated effective
date of the proposed transaction, and all Participant accounts shall purchase
Company Stock as if the day before the effective date of the proposed
transaction were a Purchase Date.
K. NONASSIGNABILITY
No rights or accumulated payroll deductions of a Participant under the
Purchase Plan may be pledged, assigned or transferred for any reason (other than
upon the death of a Participant), and any such attempt may be treated by the
Company as an election to withdraw from the Purchase Plan.
L. AMENDMENT AND TERMINATION OF THE PURCHASE PLAN
The Purchase Plan shall terminate on December 31, 2008. The Company at
any time may amend or terminate the Purchase Plan, and upon such termination,
all benefits under the Purchase Plan shall become payable immediately.
Termination of the Purchase Plan shall not, however, make any change in a right
previously granted to a Participant that adversely affects such right. No
amendment may be made to the Purchase Plan without prior approval of the
stockholders of the Company if such amendment would increase the number of
shares reserved under the Purchase Plan, materially modify the eligibility
requirements of the Purchase Plan or materially increase the benefits that may
accrue to Participants under the Purchase Plan.
III. RESALES OF COMMON STOCK
Subject to certain limitations set forth below that pertain to "affiliates"
of the Company, as defined in Rule 405 promulgated under the Securities Act,
shares of Common Stock purchased under the Purchase Plan generally may be resold
from time to time in the over-the-counter market or otherwise. Persons who are
affiliates of the Company may resell shares purchased under the Purchase Plan
only (i) in accordance with the provisions of Rule 144 of the Securities Act
(exclusive of the two-year holding period) or some other exemption from
registration under the Securities Act or (ii) pursuant to an effective
Registration Statement on such form as may be applicable. This Prospectus does
not cover any of such resales of shares. An affiliate usually includes officers,
directors and principal stockholders of the Company.
4
<PAGE> 7
Section 16(b) of the Securities Exchange Act of 1933, as amended (the
"Exchange Act") provides, among other things, that any person who is a
beneficial owner of more than 10% of an equity security of the Company
registered under the Exchange Act (such as Common Stock), or an officer or
director, will be liable to the Company for all profit realized from any
purchase and sale (or any sale and purchase) of any equity security of the
Company within a period of less than six months, irrespective of the intention
on the part of such person in entering into the transaction. In determining
ownership of Common Stock, such person may be required to include shares
issuable upon exercise of options or warrants or upon conversion of convertible
securities. The term "equity security" may include rights to acquire Common
Stock upon the exercise of warrants or options or upon the conversion of
convertible securities, or otherwise. Prior to the acquisition or disposition of
any equity security of the Company (including the acceptance of any stock
options or rights to purchase restricted shares), officers, directors and 10%
stockholders of the Company should consult with counsel.
IV. U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain United States federal income tax
consequences of participation in the Purchase Plan. The summary should not be
relied upon as being a complete statement. Federal tax laws are complex and
subject to change. Moreover, participation in the Purchase Plan also may have
consequences under state and local tax laws that may vary from the federal tax
consequences described below. For such reasons, the Company recommends that each
Participant consult his or her personal tax advisor in order to determine the
specific tax consequences applicable to him or her.
The Purchase Plan and the right of Participants to make purchases
thereunder are intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions, no income will be taxable to a Participant
at the time of grant or purchase of shares. However, a Participant may become
liable for tax upon disposition of shares acquired under the Purchase Plan, and
the tax consequences will depend upon how long a Participant has held the shares
before disposition.
If the shares are disposed of at least two years after the Grant Date and
at least one year after the Purchase Date, or in the event of a Participant's
death (whenever occurring) while owning such shares, then the lesser of (i) the
excess of the fair market value of the shares at the time of such disposition
over the Purchase Price of the shares or (ii) fifteen percent of the fair market
value of the shares on the Grant Date, will be treated as ordinary income to the
Participant. Any further gain upon such disposition will be taxed as long-term
capital gain. Any long-term capital gain will be taxed as capital gain at the
rates then in effect. If the shares are sold and the sale price is less than the
Purchase Price, there is no ordinary income and the Participant will have a
capital loss equal to the difference between the sale price and the Purchase
Price. The ability of a Participant to utilize such a capital loss will depend
upon the Participant's other tax attributes and the statutory limitation on
capital loss deductions not discussed herein.
If the shares are sold or disposed of (including any disposition by way of
gift) before the expiration of the two-year holding period described above or
within one year after the shares are transferred to the Participant, then the
excess of the fair market value of the shares on the Purchase Date over the
Purchase Price will be treated as ordinary income to the Participant. This
excess will constitute ordinary income for the year of sale or other disposition
even if no gain is realized on the sale or a gratuitous transfer of shares is
made. The balance of the gain will be taxed as capital gain at the rates then in
effect. If the shares are sold for less than their fair market value on the
Purchase Date, the same amount of ordinary income will be attributed to the
Participant and a capital loss recognized equal to the difference between the
sale price and the value of the shares on such Purchase Date. As indicated
above, the ability of the Participant to utilize such a capital loss will depend
upon the Participant's other tax attributes and the statutory limitation on
capital losses not discussed herein.
The ordinary income reported under the rules described above, added to the
actual Purchase Price of the shares, determines the tax basis of the shares for
the purpose of determining gain or loss on the sale or exchange of the shares.
5
<PAGE> 8
The Company is entitled to a deduction for amounts taxed as ordinary income
to a Participant only to the extent that ordinary income must be reported upon
disposition of shares by the Participant before the expiration of the holding
periods described above.
V. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
March 29, 1998, filed with the Commission on June 17, 1998.
(b) All other reports filed by the Company pursuant to Section 13(a) or
15(d) of the Exchange Act, since the end of the fiscal year covered by the
Annual Report referred to in (a) above.
(c) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 10 (Commission file number 0-23298),
filed on February 15, 1994, including any amendment or report filed for the
purpose of updating such description.
(d) The description of the Rights contained in the Company's Registration
Statement on Form 8-A, filed on June 19, 1996 pursuant to Section 12 of the
Exchange Act, including any amendment or report filed for the purpose of
updating such description.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment which indicates that all of the securities offered hereby have been
sold or which deregisters all securities remaining unsold shall be deemed to be
incorporated herein by reference and to be a part hereof from the date of filing
of such documents, except as to any portion of any future annual or quarterly
report to stockholders or document that is not deemed filed under such
provisions. For the purposes of this Prospectus, any statement in a document
incorporated by reference shall be deemed to be modified or superseded to the
extent that a statement contained in this Prospectus modifies or supersedes a
statement in such document. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, copies of all reports, proxy statements and other communications
distributed by the Company to its stockholders generally, and a copy of any or
all of the documents referred to above that have been or may be incorporated in
this Prospectus by reference (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference into the documents
incorporated into this Prospectus by reference). Requests should be directed to:
QLogic Corporation, 3545 Harbor Boulevard, Costa Mesa, California, 92626, to the
attention of the Secretary of the Company, or by telephone at (714) 438-2200.
6
<PAGE> 1
EXHIBIT 21.1
QLOGIC CORPORATION
Subsidiaries of Registrant
QLogic Foreign Sales Corporation,
A U.S. Virgin Islands Corporation
QLogic Enclosure
Management Products, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
QLogic Corporation:
We consent to incorporation by reference in the registration statements on Form
S-8 (Nos. 33-75814 and 333-13137) of QLogic Corporation of our report dated May
6, 1999, relating to the consolidated balance sheets of QLogic Corporation as of
March 28, 1999 and March 29, 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in the
three-year period ended March 28, 1999 and the related financial statement
schedule, which report appears in the March 28, 1999, annual report on Form 10-K
of QLogic Corporation.
KPMG LLP
Orange County, California
June 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-28-1999
<PERIOD-START> MAR-30-1998
<PERIOD-END> MAR-28-1999
<CASH> 43,174
<SECURITIES> 87,373
<RECEIVABLES> 12,857
<ALLOWANCES> 940
<INVENTORY> 10,623
<CURRENT-ASSETS> 130,926
<PP&E> 25,212
<DEPRECIATION> 14,803
<TOTAL-ASSETS> 172,923
<CURRENT-LIABILITIES> 20,239
<BONDS> 0
0
0
<COMMON> 898
<OTHER-SE> 151,786
<TOTAL-LIABILITY-AND-EQUITY> 172,923
<SALES> 117,182
<TOTAL-REVENUES> 117,182
<CGS> 42,603
<TOTAL-COSTS> 42,603
<OTHER-EXPENSES> 41,214
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,573)
<INCOME-PRETAX> 38,938
<INCOME-TAX> 13,239
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<NET-INCOME> 25,699
<EPS-BASIC> 1.47
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