-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OMIeQC5HGT8QkXZxIPTAfmJLUdKQlna8ZAyXHdFNywRcfEZumW7k5Eg19JIG8lfM IBI82ZETOCyK66atWNoKQQ== 0000892569-01-500545.txt : 20010703 0000892569-01-500545.hdr.sgml : 20010703 ACCESSION NUMBER: 0000892569-01-500545 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010401 FILED AS OF DATE: 20010702 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QLOGIC CORP CENTRAL INDEX KEY: 0000918386 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330537669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0328 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23298 FILM NUMBER: 1674091 BUSINESS ADDRESS: STREET 1: 26650 LAGUNA HILLS DR CITY: ALLISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 7144382200 MAIL ADDRESS: STREET 1: 26650 LAGUNA HILLS DR CITY: ALLISO VIEJO STATE: CA ZIP: 92656 FORMER COMPANY: FORMER CONFORMED NAME: Q LOGIC CORP DATE OF NAME CHANGE: 19940201 10-K405 1 a73890e10-k405.txt FORM 10-K405 PERIOD END APRIL 1, 2001 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 APRIL 1, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ . COMMISSION FILE NO. 0-23298 QLOGIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0537669 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 26600 LAGUNA HILLS DRIVE ALISO VIEJO, CALIFORNIA 92656 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 389-6000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.001 PER SHARE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, PAR 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. [X] As of June 15, 2001 the aggregate market value of the voting stock held by non-affiliates of the registrant was $3,488,394,936. As of June 15, 2001, the registrant had 92,457,289 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 2001 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2001 fiscal year. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS INTRODUCTION QLogic Corporation was organized as a Delaware corporation in 1992. Unless the context indicates otherwise, the "Company" and "QLogic" each refer to the Registrant and its subsidiaries. All references to years refer to the Company's fiscal years ended April 1, 2001, April 2, 2000 and March 28, 1999 as applicable, unless the calendar years are specified. OVERVIEW QLogic is a leading designer and supplier of Storage Area Networking (SAN) infrastructure building blocks. Our SAN infrastructure building blocks, comprised of semiconductor chips, host board adapters and switches, are integrated into storage networking solutions of the world's leading system and storage manufacturers. Companies such as Sun Microsystems, Inc., IBM, Dell Computer Corporation, Compaq Computer Corporation, Fujitsu Microelectronics, Inc. and Hitachi Ltd. all use some or all of our components in the storage and systems solutions they sell to the world's largest information technology environments. In addition to our original equipment manufacturer relationships with these and other companies, in January 2000 we started delivering selected Fibre Channel building blocks through leading distributors, systems integrators and resellers, thereby expanding our reach and visibility to the information technology community. STORAGE INDUSTRY The University of California at Berkeley report entitled "How Much Information?" published in late 2000, attempted to measure how much information is generated in the world each year. The report concluded we currently generate over 1.6 million terabytes (1 terabyte equals roughly 1 million books) of magnetically recorded information a year. Even more surprising is that this volume is doubling every year. The ability to access, share and, most importantly, manage this amount of information represents a large market opportunity. In the mid-1980s the need to distribute information quickly and efficiently drove client access from a "mainframe direct connect" environment to a Local Area Network (LAN) environment. More recently, the need to access growing volumes of information by large numbers of homogeneous and heterogeneous computing platforms has led to a rapid adoption of storage area networking environments. As indicated in the UC Berkeley study, the explosive expansion of the Internet and the growing use of digital information servers act as a catalyst for ever increasing storage requirements and drives the need to network storage for accessibility, maintainability and simplicity of management. Storage area networking was first introduced by IBM with the Enterprise System Connection (ESCON) in the early 1990s. While this was an effective solution for IBM mainframe environments, it did nothing for the rapidly expanding open systems environment. Fibre Channel, which was introduced in 1994, promised superior connectivity, distance and access benefits over ESCON in a standard protocol. Initially deployed in a loop environment and used primarily for its tremendous bandwidth advantages over existing Small Computer System Interface (SCSI) solutions, Fibre Channel gradually moved into networked environments. At first, deployments used hubs to connect networked servers and storage subsystems. Subsequently, switches replaced hubs and now represent the vast majority of deployments. As was the case in the adoption of LANs, software was a key ingredient to the successful adoption of storage area networking. The ability to consolidate multiple computing environments and share connectivity of previously dedicated storage offered significant cost advantages. The only remaining issue was managing such a sophisticated environment. SANs followed much the same adoption path as LANs, with storage manufacturers, original equipment manufacturers and third parties all developing and delivering SAN management solutions. Today there are many SAN management solutions available, from relatively basic 1 3 solutions for small environments to extensive software packages capable of managing thousands of SAN nodes. Storage Area Networks are still in the early adoption phase with Fibre Channel the primary enabling technology for their implementation. According to International Data Corporation (IDC) and Dataquest market reports, SANs will dominate the storage market by 2004 and Fibre Channel will be the overwhelmingly dominant technology used to deploy SANs through 2004 and beyond. THE QLOGIC SOLUTION We have been designing and marketing storage connectivity and management controller products for over 14 years. Initially we produced high-performance controller chips for leading hard disk drive manufacturers. Then expanded into high-performance host bus adapters in the early 1990s and in 2001 we added Fibre Channel switches through our merger with Ancor Communications, Inc. to expand our storage networking solution set. To ensure that our storage network products, and the products of our largest customers, remain competitive in the industry, we continued to expand our core competence in semiconductor design. In 1996 we introduced the industry's first fully integrated single chip Peripheral Computing Interface, or PCI, to Fibre Channel controller. This chip and the board products we designed around it, quickly became a standard for performance, reliability and interoperability in the storage industry. In addition, leading Redundant Array of Independent Disks (RAID) storage and system manufacturers selected this chip for their internal Fibre Channel SAN initiatives. One of our key strategies has been to provide our customers with solutions that simplify their product design requirements. Complete storage networking solutions that are pre-tested and easy to install significantly reduce the implementation efforts in both manufacturing and enterprise information technology environments. This strategy also led us to acquire Ancor Communications, Inc., a leading SAN switching technology company, enabling us to deliver our customers a complete end-to-end SAN infrastructure. Today our SAN infrastructure components can be found in all aspects of the SAN infrastructure, including SAN-connected disk drives, RAID controllers, SAN switches, system host bus adapters and even systems motherboards. QLOGIC PRODUCT OVERVIEW QLogic designs and supplies storage network infrastructure components and software for the world's largest server and storage subsystem manufacturers and ultimately for the medium to large information technology environment. Our products are based on small computer systems interface (SCSI) and Fibre Channel standards. We have the unique position as the only end-to-end supplier of Fibre Channel network infrastructure components that aid in the transfer and acquisition of data within the Storage Area Network. Our products include our SANblade adapters and SANbox Fibre Channel Switches. In addition, we design and supply controller chips used in hard drives and tape drives as well as enclosure management and baseboard management chip solutions that monitor the health of the physical environment within a server or storage enclosure. Storage Network Infrastructure Products SANblade(TM) Host Bus Adapters Currently, QLogic's SANblade family consists of board-level solutions based on Fibre Channel. QLogic SANblade products are engineered around a standard, common driver interface (CDI), so developers can migrate between topologies with minimal investment and bring new technology products to market quickly. QLogic produces a broad-line of host bus adapters and management software for both direct connect and SAN connected environments. SANblade 2300, 2200 and 2100 Series. Host bus adapters support a wide range of operating system environments and provide reliable, high-performance connectivity for the world's leading server and storage subsystem platforms. 2 4 PCI-SCSI Host Bus Adapters Designed for maximum performance in real world applications, QLogic's PCI-SCSI host bus adapter family enables a powerful combination of speed and host-CPU independence, making QLogic SCSI products among the most scalable solutions on the market. SANbox(TM) Fibre Channel Switches We develop and market innovative Fibre Channel switches and switch management software. Deployed in single or multi-stage "fabrics" of almost any size, these products are essential to the creation of resilient, intelligent SANs. Linking multiple host and storage resources, SANbox products create the connectivity framework that allows users to share and efficiently access stored data. The SANbox product line features 8-, 16-, 64-, and 128-port switches along with a variety of software tools. By incorporating these reliable, highly-scalable products in their own solutions, QLogic's original equipment manufacturer and systems integrator partners along with enterprise network storage customers maximize the benefits of today's state-of-the-art SAN technologies. SANbox 8. The SANbox-8's small size makes it the ideal 8-port switch for either "edge switch" or "core switch" use, supporting applications ranging from server clustering to storage consolidation and enterprise backup. SANbox 16/16HA. The SANbox-16 is the ideal storage consolidation, server clustering, enterprise backup for any application requiring maximum reliability, availability and performance. The SANbox-16HA includes all the features of our standard 16-port switch, plus optional dual redundant power supplies. SANbox 64/128. The SANbox-64/128 Director, which is sold exclusively to our OEM customers, is a highly scalable Fibre Channel switch offering Reliability, Availability and Serviceability (RAS) features required in today's 24X7 data center environment. Providing robust, mainframe-class connectivity for mission-critical open systems storage applications, the SANbox Director creates an intelligent backbone infrastructure. SAN Management Software With the SAN as the prime focus for IT managers, and the ability to easily configure and manage critical data resources as a primary requirement, we offer two software tools that help manage network connectivity through host bus adapters and network switches -- QLogic Management Suite (QMS) and SANSurfer(TM). ISP Controller Chips QLogic's PCI-Fibre Channel and PCI-SCSI controllers are highly integrated, cost effective solutions. Interoperability is a key feature of our single-chip design and ultra-scalable chip architecture, making our Fibre Channel products easy to implement and migrate to new technology. Peripheral Controllers QLogic's Peripheral Controllers are the industry standard for stand-alone SCSI and Fibre Channel solutions, providing the flexibility and performance required for applications in hard drives, tape drives, scanners, and other peripheral products. Management Controllers QLogic's Management Controller products monitor and control the physical environment within server or storage enclosure environment. These products detect the presence or absence of functional disk drives, power supplies and fans, as well as monitor the temperature within the enclosure, and pass the information back to a system for display and/or programmed action. 3 5 SALES AND MARKETING We market and distribute our products through original equipment manufacturer partners, system integrators, resellers and our direct sales organization supported by sales and field engineering personnel. We also utilize a network of independent manufacturers' representatives and regional and international distributors. In North America, we maintain a direct sales force to serve our large original equipment manufacturer customers and multiple outside representatives that are focused on medium and emerging accounts. National distributors carrying our products serve the Value Added Reseller (VAR) market. We also utilize a focused sales organization to assist, train, equip and augment the sales organizations of our major original equipment manufacturer customers and their respective reseller organizations and partners. We market and sell our products throughout the world. Internationally, we utilize an extensive network of distributors and master distributors to focus on the original equipment manufacturer and VAR markets. We maintain direct sales and technical relationships with our major original equipment manufacturer customers. We believe that it is important to work closely with our large peripheral and computer system manufacturers during their design cycles. We support these customers with extensive applications and system design support, as well as training classes and seminars, conducted both in the field and from our offices in Eden Prairie, Minnesota and Aliso Viejo, California. We also maintain a high level of customer support through technical hotlines and Internet communications. For our original equipment manufacturer customers, our sales efforts are focused on establishing and developing long-term relationships. The sales cycle typically begins with one of our product designs being selected as a component into a potential customer's computer system or data storage peripheral. Once we secure this design win with a given customer, the time to product shipment can range between six and 18 months. After winning a design with a potential customer, we work closely with the customer to integrate our product with the customer's current and next generation products. We actively participate within industry organizations relating to the development and acceptance of industry standards. We also collaborate with peer companies in respective markets through co-marketing activities, joint training, road tours and cooperative testing. To ensure multi-vendor inter-operation, we maintain extensive interoperability and testing laboratories. ENGINEERING AND DEVELOPMENT Our industry is subject to rapid and regular technological change. Our ability to compete depends upon our ability to continually design, develop and introduce new products that take advantage of market opportunities and address emerging standards. Our strategy is to leverage our substantial base of architectural and systems expertise to address a broad range of Input/Output, or I/O, and SAN solutions. We are engaged in the design and development of integrated circuits for Fibre Channel switches, switch components, SCSI I/O controllers and Fibre Channel host bus adapters. We also design and develop SCSI and Fibre Channel hard disk controllers and management controller semiconductors used in storage peripherals and server enclosures and circuit boards. We continue to invest heavily in research and development and have expanded our capabilities with the merger with Ancor Communications, Inc. and the acquisition of Little Mountain Group, Inc. Recognizing the rapid technological evolution in the industry, we maintain research and development activities in the areas of emerging technologies including Infiniband and iSCSI. On April 1, 2001, we employed approximately 330 engineers, including technicians and support personnel engaged in the development of new products and the improvement of existing products. There can be no assurance that we will continue to be successful in attracting and retaining key personnel with the skills and expertise necessary to develop new products in the future. 4 6 BACKLOG Our backlog of orders was approximately $86.2 million on April 1, 2001, compared to approximately $83.9 million on April 2, 2000. These backlog figures include only orders scheduled for shipment within six months. Most orders are subject to rescheduling and/or cancellation with little or no penalty. Purchase order release lead times depend upon the scheduling practices of the individual customer, and the rate of booking new orders fluctuates from month to month. Our customers have in the past encountered uncertain and changing demand for their products. Orders are typically placed based on customer forecasts. If demand falls below customers' forecasts, or if customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from us. In the past, we have experienced and we 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 storage area network infrastructure components are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Due to the broad array of components required in the storage area network infrastructure, we compete with several companies. In the host bus adapter (HBA) market our primary competitors are Emulex Corporation, Adaptec Inc. and JNI Corporation. Our switch products compete with Brocade Communications Systems, Inc., however, there are also many other smaller companies in these markets. There are two markets in the Fibre Channel semiconductor controller business. The first market is associated with host applications and controller interfaces. In this market our primary competitors are Agilent Technologies and LSI Logic Corporation. The other market is the hard drive controller business. Although there are no direct competitors currently, potential competitors are LSI Logic Corporation and vertically integrated hard disk drive manufacturers. Finally, our enclosure and baseboard management semiconductor controllers compete primarily with Vitesse Semiconductor Corporation. MANUFACTURING We subcontract the manufacturing of our semiconductor chips and host bus adapter boards and switches to independent foundries and subcontractors, which allows us to avoid the high costs of owning, operating and constantly upgrading a wafer fabrication facility and assembly factory. As a result, we focus our resources on product design and development, quality assurance, sales and marketing and customer support. We design our semiconductor switches, and host adapter board products, and perform final tests on products, including tests required under our ISO9001/TickIT Certification. We also provide fabrication process reliability tests, conduct failure analysis and audit the finished goods inventory to confirm the integrity of our quality assurance procedures. Our semiconductors are currently manufactured by a number of domestic and offshore foundries. Our major semiconductor suppliers are Toshiba, NEC Electronics, LSI Logic Corporation and Samsung Semiconductor, Inc. Most of our products are manufactured using 0.35 or 0.25 micron process technology. We depend on our foundries to allocate a portion of their foundry capacity sufficient to meet our needs and to produce products of acceptable quality and with satisfactory manufacturing yields in a timely manner. These foundries fabricate products for other companies and manufacture products of their own design. We do not have long-term agreements with any of our foundries; we purchase both wafers and finished chips on a purchase order basis. Therefore, the foundries generally are not obligated to supply products to us for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. We work with our existing foundries, and intend to qualify new foundries, as needed, to obtain additional manufacturing capacity. However, there can be no assurance that we will be able to maintain our current foundry relationships or obtain additional capacity. 5 7 We currently purchase our semiconductor products from our foundries either in finished form or wafer form. We use subcontractors to die assemble our semiconductor products purchased in wafer form, and to assemble our switches and host adapter board products. In the assembly process for our semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packages and tested. Following assembly, we further test and inspect the packaged devices prior to shipment to our customers. For our host adapter board products, we purchase components in kit form. We provide these items to contract manufacturing companies that work together with our component suppliers to assemble the boards to our specifications. For our switch products, we subcontract the material, management, test and assembly to a subcontractor. Most component parts used in our host bus adapter boards are standard off-the-shelf items, which are, or can be, dual-sourced. We select suppliers on the basis of technology, manufacturing capacity, quality and cost. Whenever possible and practicable, we strive to have at least two manufacturing locations for each host adapter board and chip product. Nevertheless, our reliance on third-party manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, unavailability of, or delays in obtaining access to certain product technologies and the absence of complete control over delivery schedules, manufacturing yields, and total production costs. The inability of our suppliers to deliver products of acceptable quality and in a timely manner or the inability by us to procure adequate supplies of our products could have a material adverse effect on our business, financial condition and results of operations. INTELLECTUAL PROPERTY Although we have thirteen patents issued and fifteen additional patent applications pending in the United States, we rely primarily on our trade secrets, trademarks and copyrights to protect our intellectual property. We attempt to protect our proprietary information through confidentiality agreements and contractual provisions with our customers, suppliers, employees and consultants, and through other security measures. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States. While our ability to compete may be affected by our ability to protect our intellectual property, we believe our technical expertise and ability to introduce new products on a timely basis will be more important in maintaining our competitive position than protection of our intellectual property. We have received notices of claimed infringement of trademark rights in the past. There can be no assurance that third parties will not assert claims of infringement of trademarks or any other intellectual property rights against us with respect to existing and future products. In the event of a patent or other intellectual property dispute, we may be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the claim. There can be no assurance that we would be successful in such development or that any such license would be available on commercially reasonable terms, if at all. In the event of litigation to determine the validity of any third party's claims, such litigation could result in significant expense to us, and divert the efforts of our technical and management personnel, whether or not such litigation is determined our favor. EMPLOYEES We had 624 employees as of April 1, 2001, including 330 engineers. We believe our future prospects will depend, in part, on our ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. None of our employees are represented by a labor union. We believe that our relations with our employees are good. ITEM 2. PROPERTIES Our principal product development, operations, sales and corporate offices are currently located in three buildings comprising approximately 165,000 square feet in Aliso Viejo, California. We purchased the Aliso 6 8 Viejo facility on March 23, 2000 and the facility is held without encumbrance. Additionally, we have leased design centers in Austin, Texas, Roseville, California and Eden Prairie, Minnesota comprising 5,973 square feet, 15,000 square feet and 50,182 square feet, respectively. ITEM 3. LEGAL PROCEEDINGS Periodically, we are a party to ordinary disputes arising in the normal course of business. We do not believe that the outcome of any current legal proceedings will have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of fiscal 2001 to a vote of security holders. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRINCIPAL MARKET AND PRICES Shares of our common stock are traded and quoted in The NASDAQ National Market under the symbol QLGC. The following table sets forth the range of high and low sales prices per share of our common stock for each quarterly period of the two most recent years as reported on The NASDAQ National Market. The share prices have been retroactively restated to reflect the two-for-one stock split of our common stock which was effected in February 2000.
SALES PRICES ----------------- HIGH LOW FISCAL 2001 ------- ------ First Quarter............................................. $131.75 $39.69 Second Quarter............................................ 119.25 60.25 Third Quarter............................................. 130.25 60.44 Fourth Quarter............................................ 99.13 21.75
HIGH LOW FISCAL 2000 ------- ------ First Quarter............................................. $ 34.22 $14.38 Second Quarter............................................ 49.75 31.25 Third Quarter............................................. 83.75 22.50 Fourth Quarter............................................ 203.25 68.06
NUMBER OF COMMON STOCKHOLDERS The approximate number of record holders of our common stock was 650 as of April 1, 2001. DIVIDENDS We have never paid cash dividends on our common stock and currently have no intention to do so. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon our operating results, financial condition and other factors as the board of directors, in its discretion, deems relevant. 8 10 ITEM 6. SELECTED FINANCIAL DATA(1) The following table of certain selected data regarding QLogic should be read in conjunction with the consolidated financial statements and notes thereto.
FISCAL YEAR ENDED ------------------------------------------------------------ APRIL 1, APRIL 2, MARCH 28, MARCH 29, MARCH 30, 2001 2000 1999 1998 1997 -------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (RESTATED) (RESTATED) (RESTATED) (RESTATED) SELECTED STATEMENTS OF OPERATIONS DATA Net revenues............................. $357,542 $216,093 $121,575 $ 89,317 $75,185 Cost of revenues......................... 128,739 70,982 49,034 40,040 41,717 -------- -------- -------- -------- ------- Gross profit........................ 228,803 145,111 72,541 49,277 33,468 -------- -------- -------- -------- ------- Operating expenses: Engineering and development............ 56,315 47,451 29,809 19,872 13,620 Selling and marketing.................. 36,482 22,623 15,248 12,540 9,047 General and administrative............. 14,828 11,202 8,803 8,402 6,897 Merger and related expenses............ 22,947 -- -- -- -- -------- -------- -------- -------- ------- Total operating expenses....... 130,572 81,276 53,860 40,814 29,564 -------- -------- -------- -------- ------- Operating income............... 98,231 63,835 18,681 8,463 3,904 Interest and other income................ 18,706 9,181 5,759 3,543 637 -------- -------- -------- -------- ------- Income before income taxes............. 116,937 73,016 24,440 12,006 4,541 Income tax provision..................... 48,168 24,701 8,310 4,983 2,132 -------- -------- -------- -------- ------- Net income............................... 68,769 48,315 16,130 7,023 2,409 Accretion on convertible preferred stock.................................. -- 12 762 345 331 Net income attributable to common stockholders........................... $ 68,769 $ 48,303 $ 15,368 $ 6,678 $ 2,078 ======== ======== ======== ======== ======= Basic net income per share(2)............ $ 0.76 $ 0.56 $ 0.20 $ 0.10 $ 0.04 -------- -------- -------- -------- ------- Diluted net income per share(2).......... $ 0.72 $ 0.52 $ 0.18 $ 0.09 $ 0.04 -------- -------- -------- -------- ------- SELECTED BALANCE SHEET DATA Working capital.......................... $442,702 $257,127 $118,790 $ 96,066 $26,312 Total assets............................. $571,497 $394,969 $203,479 $159,295 $58,676 Long-term capitalized lease obligations, excluding current installments......... $ -- $ -- $ -- $ 141 $ 352 Other non-current liabilities............ $ -- $ -- $ -- $ -- $ 924 Total stockholders' equity............... $523,702 $359,325 $175,710 $139,255 $43,711
- --------------- (1) The condensed consolidated selected financial data as of April 2, 2000, and all financial data prior to that, have been restated to give effect to the August 1, 2000 merger accounted for using the pooling-of-interest method. (2) All per share data has been retroactively restated to reflect the stock splits in February 1999, August 1999 and February 2000. 9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Discussion and Analysis of Financial Condition and Results of Operations contains descriptions of our expectations regarding future trends affecting our business. These forward-looking statements and other forward-looking statements made elsewhere in this document are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, including, but not limited to those factors set forth under "Factors That May Affect Future Results" and elsewhere in this document, which include without limitation the fact that our operating results fluctuate significantly, that our business is dependent on the storage area network market that is new and unpredictable, and that our financial condition will be materially harmed if we do not maintain and gain market or industry acceptance of our products. Readers of this Annual Report on Form 10-K are urged to read those sections in their entirety. In light of the significant uncertainties inherent in the forward-looking information included in this document, the inclusion of information should not be regarded as a representation by us or any other person that our objectives or plans will be achieved. QLogic undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise. RESULTS OF OPERATIONS The following table sets forth the results of operations and percentage of total revenues in our consolidated statements of income:
FISCAL YEAR ENDED ----------------------------------------------------------- APRIL 1, 2001 APRIL 2, 2000 MARCH 28, 1999 ----------------- ----------------- ----------------- (IN THOUSANDS) Net revenues...................... $357,542 100.0% $216,093 100.0% $121,575 100.0% Cost of revenues.................. 128,739 36.0 70,982 32.8 49,034 40.3 -------- ----- -------- ----- -------- ----- Gross profit................. 228,803 64.0 145,111 67.2 72,541 59.7 -------- ----- -------- ----- -------- ----- Operating expenses: Engineering and development..... 56,315 15.8 47,451 22.0 29,809 24.5 Selling and marketing........... 36,482 10.2 22,623 10.5 15,248 12.6 General and administrative...... 14,828 4.1 11,202 5.2 8,803 7.2 Merger and related expenses..... 22,947 6.4 -- -- -- -- -------- ----- -------- ----- -------- ----- Total operating expenses.............. 130,572 36.5 81,276 37.7 53,860 44.3 -------- ----- -------- ----- -------- ----- Operating income........ $ 98,231 27.5% $ 63,835 29.5% $ 18,681 15.4% ======== ===== ======== ===== ======== =====
NET REVENUES Our net revenues are derived primarily from the sale of SCSI and Fibre Channel based I/O products and enclosure management products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues in fiscal 2001 increased $141.4 million or 65% from fiscal 2000 to $357.5 million. The increase was the result of a $35.8 million increase in sales of SCSI products, and a $112.1 million increase in sales of Fibre Channel products, partially offset by a $6.4 million decrease in IDE-based royalties. Net revenues in fiscal 2000 increased $94.5 million or 78% from fiscal 1999 to $216.1 million. The increase was the result of a $34.9 million increase in sales of SCSI products, a $48.8 million increase in sales of Fibre Channel products, and a $10.8 million increase in IDE-based royalties. Export revenues (primarily to Pacific Rim Countries) in fiscal year 2001 increased $84.0 million or 73% from fiscal 2000 to approximately $198.9 million. Export revenues in fiscal 2000 increased $51.6 million or 82% from fiscal 1999, to approximately $114.9 million. As a percentage of net revenues, export revenues accounted for 56% in fiscal year 2001, 53% in fiscal year 2000, and 52% in fiscal year 1999. The increase in export net revenues as a percentage of total revenues is due to an increase in net revenues in Pacific Rim 10 12 countries. The increases in export revenue dollars are primarily due to increased sales to customers in Japan and to a lesser extent, Europe. Export revenues are denominated in U.S. Dollars. We do not expect the uncertainty in selected Pacific Rim foreign currency markets to have a material adverse effect on the results of our operations. A small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. Our four largest customers accounted for approximately 64% of net revenues in fiscal year 2001, 55% in fiscal year 2000, and 55% in fiscal year 1999. In fiscal 2001, Fujitsu Limited accounted for 29% of net revenues, and Sun Microsystems accounted for 18% of the Company's net revenues. In fiscal 2000, Fujitsu Limited accounted for 27% of net revenues, and Sun Microsystems accounted for 13% of the Company's net revenues. In fiscal 1999, Fujitsu Limited accounted for 24% of net revenues and Sun Microsystems accounted for 18% of net revenues. We believe that our major customers continually evaluate whether or not to purchase products from alternate or additional sources. Additionally, customers' economic and market conditions frequently change. Accordingly, there can also be no assurance that a major customer will not reduce, delay or eliminate its purchases from us. Any such reduction, delay or loss of purchases could have a material adverse effect on the Company's business, financial condition and results of operations. GROSS PROFIT Cost of revenues consist primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The gross profit percentage in fiscal 2001 was 64%, a decrease from 67% in fiscal 2000. The percentage decline was due to a reduction in the contribution of license fees combined with an increase in sales of switch products with lower margins. The gross profit percentage in fiscal 2000 was 67%, an increase from 60% in fiscal 1999. The percentage increase was due to the increasing contribution of license fees combined with the continuing introduction of new, higher margin products and volume related cost reductions on mature products. Our ability to maintain our current gross profit percentage can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the worldwide semiconductor foundry capacity, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and our ability to achieve manufacturing cost reductions. We anticipate that it will be increasingly more difficult to reduce manufacturing costs. As a result, we do not anticipate gross profit percentages to remain consistent with historic trends. OPERATING EXPENSES Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development related material, occupancy costs, and computer support. We believe continued investments in engineering and development activities are critical to achieving our strategic objectives. As a result, we expect that engineering and development expenses will increase in absolute dollars in fiscal 2002. Engineering and development expenses were $56.3 million in fiscal year 2001, $47.5 million in fiscal year 2000, and $29.8 million in fiscal year 1999. As a percentage of net revenues this amounted to 16% in fiscal 2001, 22% in fiscal 2000, and 25% in fiscal 1999. The increase in spending each fiscal year was largely due to increased levels of spending for Fibre Channel, IDE, and SCSI design and engineering support. The decline as a percentage of net revenues is attributed to economies of scale benefits realized from an increase in net revenues. In fiscal year 2000 we incurred a $7.5 million charge for acquired in-process technology relating to the acquisition of AdaptiveRAID(R) technology from Borg Adaptive Technologies, Inc., a wholly-owned subsidiary of nStor Corporation. The Company recorded the purchase price as a one-time charge for in-process research 11 13 and development of $7.5 million to engineering and development expense in the fourth fiscal quarter ended April 2, 2000. In fiscal year 1999 we incurred a $2.1 million charge for acquired in-process technology relating to the acquisition of Silicon Design Resources, Inc. Selling and Marketing. Selling and marketing expenses consist primarily of sales and marketing salaries, sales commissions and related expenses, promotional activities and travel for sales and marketing personnel. We believe continued investments of these types of expenses are critical to the success of our strategy of expanding relationships with our customers. As a result, we expect sales and marketing expenditures will continue to increase in the future. Sales and marketing expenses were $36.5 million in fiscal 2001, $22.6 million in fiscal 2000, and $15.2 million in fiscal 1999. As a percentage of net revenues this amounted to 10% in fiscal 2001, 11% in fiscal 2000, and 13% in fiscal 1999. 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 1999 to fiscal 2000 and from fiscal 2000 to fiscal 2001 relates to economies of scale benefits realized from the growth in net revenues. General and Administrative. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, human resources and information technology personnel. Non-personnel related expenses consist of recruiting fees, professional services, and corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs relating to the growth of the business and our operation as a public company. General and administrative expenses were $14.8 million in fiscal 2001, $11.2 million in fiscal 2000, and $8.8 million in fiscal 1999. As a percentage of net revenues this amounted to 4% in fiscal 2001, 5% in fiscal 2000, and 7% in fiscal 1999. In fiscal 2001 salaries and fringe benefits increased by $3.6 million due to an increase in personnel, combined with increases in bad debt reserve related to accounts receivable growth. The decrease in general and administrative expenses as a percentage of net revenues is due to our benefits realized from economies of scale related to the increases in net revenue. General and administrative expenses increased in fiscal year 2000 from fiscal year 1999 due to an increase in outside services related to the acquisition of Silicon Design Resources, Inc. and an increase in general and administrative personnel. Merger and Related Expenses. Merger and related expenses consist primarily of direct and incremental transaction costs, such as fees for investment bankers, attorneys, accountants, and other related fees and expenses. Merger and related costs of approximately $22.9 million were incurred in fiscal year 2001 in connection with the merger with Ancor accounted for as a pooling-of-interests. NON-OPERATING INCOME Interest and other income, was $18.7 million in fiscal 2001, $9.2 million in 2000, and $5.9 million in fiscal 1999. The increases in interest and other income in fiscal 2001, 2000 and 1999 are largely due to increases in cash equivalents and investment balances due to $64.9 million in net proceeds received from a secondary stock offering in the second quarter of 2000, $14.8 million in net proceeds received from Intel pursuant to a stock purchase agreement in the third quarter of fiscal 2000, and $77.5 million in net proceeds received from a secondary stock offering in the second quarter of fiscal 1998. Additionally, cash equivalent and investment balances have increased due to cash flow from operations in each of the last three fiscal years. INCOME TAX PROVISION Our effective tax rates were approximately 41% in fiscal 2001, 34% in fiscal 2000, and 34% in fiscal 1999. The increase in tax rates in fiscal 2001 is due to nondeductible costs incurred in conjunction with the merger 12 14 with Ancor Communications, Inc. For more information on the merger, please see Note (2) in Notes to Consolidated Financial Statements. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to all fiscal quarters for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of FASB Statement No. 133 ("SFAS 138"). Although we continue to review the effect of the implementation of SFAS 133 and SFAS 138, we do not currently believe their adoption will have a material impact on our financial position or overall trends in results of operations and do not believe adoption will result in significant changes to our financial risk management practices. LIQUIDITY AND CAPITAL RESOURCES Our combined balances of cash and cash equivalents, short-term and long-term investments have increased to $355.5 million at April 1, 2001 compared to $244.4 million at April 2, 2000. The increase was attributable to positive cash flow from operations, primarily net income growth, during the twelve months ended April 1, 2001. Our primary source of liquidity is derived from working capital and cash from operations. We also have an unused $5.0 million unsecured line of credit with Silicon Valley Bank. Working capital increased $185.6 million to $442.7 million from April 2, 2000 to April 1, 2001. The increase in working capital in the fiscal year ended April 1, 2001 was largely attributable to positive cash flow from operations. The $5.0 million line of credit facility with Silicon Valley Bank allows us to borrow at the bank's prime rate. The credit facility expires on July 6, 2001, and, although there can be no assurance, we currently expect to renew this line of credit. There were no borrowings under this credit facility on April 1, 2001. Our cash flow provided by operations was $98.1 million in fiscal 2001, and $66.5 million in fiscal 2000. The growth in cash provided by operations compared to the prior year was primarily due to increases in profitability. Additionally, in fiscal 2001, cash flow from operations was improved by increases in income taxes payable, accounts payable, and accrued compensation balances, and was offset by increases in accounts and notes receivable and inventories. Our inventory turns decreased to 3.2 in fiscal 2001 from 3.5 in the comparable prior year period largely due to the increase in inventory at fiscal year end to assure product availability for HBA customers. Our cash flow used in investing activities was $86.7 million in fiscal 2001 compared to $110.9 million in fiscal 2000. The decrease in net cash used in investing activities in fiscal 2001 was primarily due to decreases in additions to property and equipment partially offset by increases in purchases of investments, net of maturities. Additions to property and equipment were $16.7 million in fiscal 2001, compared to $42.4 in fiscal 2000. The fiscal year 2000 additions to property and equipment included $32.2 million for the new corporate headquarters in Aliso Viejo, California. Our cash flow provided by financing activities was $30.0 million in fiscal 2001 compared to $96.0 million in the prior year. The fiscal year 2001 decrease in cash provided by financing activities was primarily due to a reduction in proceeds from sale of common and preferred stock offset by increases in proceeds from issuance of stock under employee stock plans. 13 15 We believe that existing cash and cash equivalent balances, short term investments, debt facilities and cash flows from operating activities will provide the Company with sufficient funds to finance its operations for at least the next 12 months. FACTORS THAT MAY AFFECT FUTURE RESULTS Except for the historical information contained herein, the information in this report constitutes forward-looking statements. When used in this report the words "shall," "should," "forecast," "all of," "projected," "believes," "anticipates," "expects," and similar expressions are intended to identify forward-looking statements. In addition, we may from time to time make oral forward-looking statements. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above in "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this report. OUR STOCK PRICE MAY BE VOLATILE WHICH COULD AFFECT THE VALUE OF YOUR INVESTMENT. The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. From January 1, 2000 through April 1, 2001, the market price has ranged from a low of $21.75 per share to a high of $203.25 per share. Several factors could impact our stock price including, but not limited to: - announcements concerning QLogic, our competitors or customers; - quarterly fluctuations in our operating results; - introduction of new products or changes in product pricing policies by us or our competitors; - conditions in the semiconductor industry; - changes in earnings estimates by industry analysts; or - market conditions for high technology equities in general. In addition, stock markets have experienced extreme price and volume volatility in recent years and stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of our common stock. OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE IF OUR RESULTS FAIL TO MEET INVESTORS' AND ANALYSTS' EXPECTATIONS. We have experienced, and expect to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that we will maintain our current profitability in the future. A significant portion of our net revenues in each fiscal quarter result from orders booked in that quarter. Orders placed by major customers are typically based on their forecasted sales and inventory levels for our products. Fluctuations in our quarterly operating results may be the result of: - changes in purchasing patterns by one or more of our major customers, order changes or rescheduling; - gain or loss of significant customers; - customer policies pertaining to desired inventory levels of our products; - negotiations of rebates and extended payment terms; - changes in our ability to anticipate in advance the mix of customer orders; 14 16 - level of inventory our customers require us to maintain in our field warehouses; - the time, availability and sale of new products; - changes in the mix of products having differing gross margins; - variations in manufacturing capacities, efficiencies and costs; - the availability and cost of components, including silicon wafers; - warranty expenses; - variations in product development and other operating expenses; - revenue adjustments related to product returns; - adoption of new accounting pronouncements and/or changes in our policies; or - general economic and other conditions effecting the timing of customer orders and capital spending. Our quarterly results of operations are also influenced by competitive factors, including the pricing and availability of our products and our competitors' products. Although we do not maintain our own wafer manufacturing facility, large portions of our expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet our expectations, our fixed expenses would magnify the effect on net income of such shortfall in net revenues. Furthermore, announcements regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely effected our quarterly results of operations. Due to these factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease. OUR BUSINESS IS DEPENDENT ON THE STORAGE AREA NETWORK (SAN) MARKET THAT IS NEW AND UNPREDICTABLE, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS WILL SUFFER. Fibre Channel-based storage area networks, or SANs, were first deployed in 1997. As a result, the market for SANs and related storage router products has only recently begun to develop and is rapidly evolving. Because this market is new, it is difficult to predict its potential size or future growth rate. A significant number of our products are used exclusively in SANs and, therefore, our business is dependent on the SAN market. Accordingly, the widespread adoption of SANs for use in organizations' computing systems is critical to our future success. Most of the organizations that potentially may purchase our products from our customers have invested substantial resources in their existing computing and data storage systems and, as a result, may be reluctant or slow to adopt a new approach like SANs. SANs are often implemented in connection with the deployment of new storage systems and servers. Therefore, our future success is also substantially dependent on the market for new storage systems and servers. Furthermore, the ability of the different components used in a SAN to function effectively, or interoperate, with each other when placed in a computing system has not yet been achieved on a widespread basis. Until greater interoperability is achieved, customers may be reluctant to deploy SANs. Our success in generating revenue in the emerging SAN market will depend on, among other things, our ability to: - educate potential OEM customers, distributors, resellers, system integrators, storage service providers and end-user organizations about the benefits of SANs; - maintain and enhance our relationships with OEM customers, distributors, resellers, system integrators, storage system providers; - predict and base our products on standards which ultimately become industry standards; and - achieve interoperability between our products and other SAN components from diverse vendors. 15 17 OUR FINANCIAL CONDITION WILL BE MATERIALLY HARMED IF WE DO NOT MAINTAIN AND GAIN MARKET OR INDUSTRY ACCEPTANCE OF OUR PRODUCTS. The markets in which our competitors and we compete involve rapidly changing technology, evolving industry standards and continuing improvements in products and services. Our future success depends on our ability to do the following: - enhance our current products and to develop and introduce in a timely manner new products that keep pace with technological developments and industry standards; - compete effectively on the basis of price and performance; or - adequately address original equipment manufacturer customer and end-user customer requirements and achieve market acceptance. We believe that to remain competitive in the future we will need to continue to develop new products, which will require a significant investment in new product development. A significant portion of our revenues is generated from Fibre Channel technology. We, along with our competitors are developing alternative technologies that may compete with the market acceptance of our Fibre Channel products, including, but not limited to, iSCSI and Infiniband. If this kind of alternative standard is adopted by the industry, we may not be able to develop products for the new standard in a timely manner. Further, even if these alternative technologies do augment Fibre Channel revenues, our products may not be fully developed in time to be accepted by our customers. If they are developed on time, we may not be able to manufacture them at competitive prices in sufficient volumes. WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ANY DECREASE IN REVENUE FROM ANY ONE OF OUR CUSTOMERS COULD CAUSE OUR STOCK PRICE TO DECLINE. A small number of customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. The loss of any of our major customers would have a material adverse effect on our business, financial condition and results of operations. Some of these customers are based in the Pacific Rim, which is subject to economic and political uncertainties. In addition, a majority of our customers order products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase products from us for any extended period. Major customers also have significant leverage over us and may attempt to change the terms, including pricing, which could materially adversely effect our business, financial condition and results of operations. This risk is increased due to the potential for some of these customers merging or acquiring another of our customers. As our original equipment manufacturer customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be obtained. If we are unable to achieve such cost reductions, our gross margins could decline and such decline could have a material adverse effect on our business, financial condition and results of operations. In addition, we provide some customers with price protection in the event that we reduce the price of our products. While we maintain reserves for this price protection, the impact of any future price reductions could exceed our reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a negative impact on our business, financial condition and results of operations. COMPETITION WITHIN OUR PRODUCT MARKETS IS INTENSE AND INCLUDES NUMEROUS ESTABLISHED COMPETITORS. The markets for our products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. We currently compete primarily with Adaptec Inc. and LSI Logic Corporation in the SCSI sector of the I/O market. In the Fibre Channel host bus adapter sector of the I/O market, we compete primarily with Agilent Technologies, LSI Logic Corporation, Emulex Corporation, JNI Corporation and Adaptec Inc. In the switch products sector, we compete with Brocade Communications and several smaller companies. In the enclosure management sector, we compete primarily with Vitesse Semiconductor Corporation. We may 16 18 compete with some of our larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their own products. At least one large original equipment manufacturer customer in the past has decided to vertically integrate and has therefore stopped purchasing from us. We will need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved performance characteristics. While we continue to devote significant resources to research and development, these efforts may not be successful, or may not be developed and introduced in a timely manner. Further, several of our competitors have greater resources devoted to securing semiconductor foundry capacity because of long-term agreements regarding supply flow, equity or financing agreements or direct ownership of a foundry. In addition, while relatively few competitors offer a full range of storage area networking products, additional domestic and foreign manufacturers may increase their presence in these markets. We may not be able to compete successfully against these or other competitors. If we are unable to design, develop and introduce competitive new products on a timely basis, our future operating results will be materially and adversely affected. OUR DISTRIBUTORS MAY NOT ADEQUATELY DISTRIBUTE OUR PRODUCTS WHICH COULD NEGATIVELY AFFECT OUR OPERATIONS. Our distributors generally offer a diverse array of products from several different manufacturers. Accordingly, we are at a risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell our products. A reduction in sales efforts by our current distributors could materially adversely impact our business or operating results. Our distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur rapidly as we anticipate, distributors may decrease the amount of product ordered from us in subsequent quarters. In addition, if we decrease our distributor-incentive programs, our distributors may temporarily decrease the amounts of product purchased from us. This could result in a change of business habits, and distributors may decide to decrease the amount of product held and reduce their inventory levels. This could reduce our revenues in any given quarter and could negatively impact our operating results. In addition, we may from time to time take actions to reduce levels of our products at distributors. These actions could reduce our revenues in any given quarter and could negatively impact our operating results or revenues. WE DEPEND ON OUR RELATIONSHIPS WITH WAFER SUPPLIERS AND OTHER SUBCONTRACTORS AND A LOSS OF THESE RELATIONSHIPS MAY LEAD TO UNPREDICTABLE CONSEQUENCES WHICH MAY HARM OUR RESULTS OF OPERATIONS IF ALTERNATIVE SUPPLY SOURCES ARE NOT AVAILABLE. We currently rely on several independent foundries to manufacture our semiconductor products either in finished form or wafer form. Generally, we conduct business with some of our foundries through written purchase orders as opposed to long-term supply contracts. Therefore, these foundries are generally not obligated to supply products to us for any specific period, in any specific quantity or at any specified price. If a foundry terminates its relationship with us or if our supply from a foundry is otherwise interrupted, we may not have a sufficient amount of time to replace the supply of products manufactured by that foundry. As a result, we may not be able to meet customer demands, which could harm our business. Historically, there have been periods when there has been a worldwide shortage of advanced process technology foundry capacity. The manufacture of semiconductor devices is subject to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. We are continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries have in the past taken, and could in the future take, longer than anticipated. New supply sources may not be able or willing to satisfy our wafer requirements on a timely basis or at acceptable quality or unit prices. We use multiple sources of supply for some of our products, which may require customers to perform separate product qualifications. We have not developed alternate sources of supply for all of our products and our newly introduced products are typically produced initially by a single foundry until alternate sources can be 17 19 qualified. In particular, our integrated single chip Fibre Channel controller is manufactured by LSI Logic and integrates LSI Logic's transceiver technology. In the event that LSI Logic is unable or unwilling to satisfy our requirements for this technology, our marketing efforts related to Fibre Channel products would be delayed and, as such, our results of operations could be materially and adversely affected. The requirement that a customer perform separate product qualifications, or a customer's inability to obtain a sufficient supply of products from us, may cause that customer to satisfy its product requirements from our competitors. Constraints or delays in the supply of our products, due to capacity constraints, unexpected disruptions at our foundries or with our subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials or other reasons, could result in the loss of customers. OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS THAT COULD LEAD TO AN INCREASE IN OUR COSTS, REDUCE OUR NET REVENUES OR DAMAGE OUR REPUTATION. Products as complex as ours frequently contain undetected software or hardware errors when first introduced or as newer versions are released. We have from time to time found errors in existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. BECAUSE WE DEPEND ON FOREIGN CUSTOMERS AND SUPPLIERS, WE ARE SUBJECT TO INTERNATIONAL ECONOMIC, REGULATORY AND POLITICAL RISKS THAT COULD HARM OUR FINANCIAL CONDITION. We expect that export revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. As a result, we are subject to several risks, which include: - a greater difficulty of administering our business globally; - compliance with multiple and potentially conflicting regulatory requirements, such as export requirements, tariffs and other barriers; - differences in intellectual property protections; - difficulties in staffing and managing foreign operations; - potentially longer accounts receivable cycles; - currency fluctuations; - export control restrictions; - overlapping or differing tax structures; - political and economic instability; and - general trade restrictions. A significant number of our customers and suppliers are located in Japan. Historically, the Asian markets have suffered from economic uncertainty. This uncertainty has taken place especially in countries that have had a collapse in both their currency and stock markets. These economic pressures have reduced liquidity in the banking systems of the affected countries and, when coupled with spare industrial production capacity, could lead to widespread financial difficulty among the companies in this region. Our export sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of our foreign customers should increase, the resulting effective price increase of our products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations. 18 20 WE MAY NEED TO ENGAGE IN FINANCIALLY RISKY TRANSACTIONS TO GUARANTEE WE HAVE PRODUCTION CAPACITY WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING AND RESULT IN DILUTION TO OUR STOCKHOLDERS. The semiconductor industry and we have, in the past, experienced shortages of available foundry capacity. Accordingly, in order to secure an adequate supply of wafers, we may consider various possible supply agreements. Those types of agreements include the use of "take or pay" contracts, making 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 arrangements would involve financial risk to us and could require us to commit a substantial amount of our funds or provide technology licenses in return for guaranteed production capacity. The need to commit our own funds may require us to seek additional equity or debt financing. The sale or issuance of additional equity or convertible debt securities could result in dilution to our stockholders. This kind of additional financing, if necessary, may not be available on terms acceptable to us. WE ANTICIPATE ENGAGING IN MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS, HOWEVER, THESE ACTIVITIES MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND STOCK PRICE IF THEY DO NOT COMPLEMENT OUR BUSINESS. We anticipate that our future growth may depend in part on our ability to identify and acquire complementary businesses, technologies or product lines that are compatible with ours. Mergers and acquisitions involve numerous risks, including: - uncertainties in identifying and pursuing target companies; - difficulties in the assimilation of the operations, technologies and products of the acquired companies; - the diversion of management's attention from other business concerns; - risks associated with entering markets or conducting operations with which we have no or limited direct prior experience; - the potential loss of current customers and/or retention of the acquired company's customers; and - the potential loss of key employees of the acquired company. Further, we may never realize the perceived benefits of a business combination. Future acquisitions by us could dilute stockholders' investment, and cause us to incur debt, contingent liabilities and amortization expense related to goodwill and other intangible assets, all of which could materially adversely affect our results of operations. With respect to accounting for future business combinations, the Financial Accounting Standards Board, or FASB, has announced it will abolish pooling-of-interests accounting treatment. The standard, as currently proposed, would affect transactions after January 1, 2002. If the FASB does eliminate pooling-of-interests accounting treatment, we may not be able to complete a business combination without incurring goodwill or other intangible assets. While the new proposal would eliminate the quarterly and yearly recurring charges for the amortization of goodwill, a significant charge to earnings may be recorded if it can be determined that the goodwill is impaired. This potential charge could have a material impact on the Company's results of operations. We have, and plan to continue, to make investments in technology companies, including privately held companies in a development stage. Many of these private equity investments are inherently risky because the companies' businesses may never develop, and we may incur losses related to these investments. We may be required to reduce the value of those investments as reflected on our balance sheet, which also may affect our results of operations. If we incur a charge to reflect other than temporary declines in the value of our private equity investments below our recorded value, our balance sheet and results of operations will be reduced. OUR BUSINESS COULD BE MATERIALLY ADVERSELY AFFECTED AS A RESULT OF THE RISKS ASSOCIATED WITH STRATEGIC ALLIANCES. We have alliances with leading information technology companies and we plan to continue our strategy of developing key alliances in order to expand our reach into emerging markets. There can be no assurance that we will be successful in our ongoing strategic alliances or that we will be able to find further suitable business 19 21 relationships as we develop new products and strategies. Any failure to continue or expand such relationships could have a material adverse effect on our business, results of operations or financial conditions. There can be no assurance that companies with which we have strategic alliances, certain of which have substantially greater financial, marketing and technological resources than us, will not develop or market products in competition with us in the future, discontinue their alliances with us or form alliances with our competitors. CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE THAT WE INCUR COSTS TO UPGRADE OUR INFRASTRUCTURE. We have recently experienced a period of rapid growth and expansion that has placed, and continues to place, a significant strain on our resources. Unless we manage this growth effectively, we may make mistakes in executing our business such as inaccurate sales forecasting, material planning, inventory management or financial reporting, which may result in unanticipated fluctuations in our operating results. We may not be able to install adequate control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. In addition, we test substantially all of our products prior to shipment. If our capacity to conduct this testing does not expand concurrently with the anticipated growth of our business, product shipments could be delayed, which could result in delayed or lost revenues and customer dissatisfaction. IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS. Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers. We also must identify and hire additional personnel. If we lose the services of key personnel, our business would be adversely affected. We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, periodically we have experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. We may not be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future, or to manage our business, both in the United States and abroad. OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS OR ADVERSE JUDGMENTS COULD HARM OUR COMPETITIVE POSITION. Although we have patent protection on some aspects of our technology in some jurisdictions, we rely primarily on trade secrets, copyrights and contractual provisions to protect our proprietary rights. There can be no assurance that these protections will be adequate to protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain such technology as trade secrets. There also can be no assurance that any patents we possess will not be invalidated, circumvented or challenged. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States or at all. If we fail to protect our intellectual property rights, our business would be negatively impacted. Intellectual property claims have been made against us in the past, and patent or other intellectual property infringement claims could be made against us in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive and time consuming and could divert management's attention from other matters. Our business could suffer regardless of the outcome of the litigation. Our supply of wafers and other components can also be interrupted by intellectual property infringement claims against our suppliers. 20 22 OUR CHARTER DOCUMENT AND SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE COMPANIES FROM ACQUIRING US AND OFFERING OUR STOCKHOLDERS A PREMIUM FOR THEIR STOCK. Pursuant to our certificate of incorporation, our board of directors is authorized to approve the issuance of shares of currently undesignated preferred stock without any vote or future action by the stockholders. Pursuant to this authority, in June 1996 the board of directors adopted a shareholder rights plan and declared a dividend of a right to purchase one one-hundredths of a share of preferred stock for each outstanding share of our common stock. After adjustment for each of the three two-for-one stock splits effected by us to date, our common stock now carries one-eighth of the preferred stock purchase right per share. The shareholder rights plan may have the effect of delaying, deferring or preventing a change in control of our stock. This may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock. OUR CORPORATE HEADQUARTERS AND PRINCIPAL DESIGN FACILITIES ARE LOCATED IN A REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS, AS WELL AS ELECTRICITY SHORTAGES. Our California facilities, including our principal executive offices, our principal design facilities, and our critical business operations are located near major earthquake faults. We are not specifically insured for earthquakes, or other such natural disasters. Any personal injury or damage to the facilities as a result of such occurrences could have a material adverse effect on our business, results of operations and financial condition. Additionally, our operations depend upon a continuing adequate supply of electricity, natural gas and water. These energy sources have historically been available on a continuous basis and in adequate quantities for our needs. An interruption in the supply of raw materials or energy inputs for any reason would have an adverse effect on our manufacturing operations. Recently, California has had power shortages resulting in rolling blackouts, or the temporary and generally unannounced loss of electrical power. These shortages could affect our ability to supply products to our customers on a timely basis. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Sensitivity At April 1, 2001, our investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, with a fair value of $227.2 million (see Note 4 of Notes to Consolidated Financial Statements). The carrying amount of these securities approximates fair market value. These securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of April 1, 2001, the decline in the fair value of the portfolio would not be material to our financial position, results of operations and cash flows. Our export revenues are denominated in U.S. dollars. As such, the Company does not have a material exposure to fluctuation in foreign currency. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company are referenced in Item 14(a). 21 23 INDEPENDENT AUDITORS' REPORT The Board of Directors QLogic Corporation: We have audited the consolidated financial statements of QLogic Corporation and subsidiaries as listed in Item 14(a). In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 14(a). These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of QLogic Corporation and subsidiaries as of April 1, 2001 and April 2, 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended April 1, 2001, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Orange County, California May 15, 2001 22 24 QLOGIC CORPORATION CONSOLIDATED BALANCE SHEETS APRIL 1, 2001 AND APRIL 2, 2000 (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
2001 2000 -------- ---------- (RESTATED) Cash and cash equivalents................................... $128,273 $ 86,889 Short term investments...................................... 227,210 117,762 Accounts and notes receivable, less allowance for doubtful accounts of $2,372 and $1,014 as of April 1, 2001 and April 2, 2000, respectively............................... 53,588 27,489 Inventories................................................. 46,510 25,092 Deferred income taxes....................................... 32,558 28,726 Prepaid expenses and other current assets................... 2,358 1,716 -------- -------- Total current assets.............................. 490,497 287,674 Long term investments....................................... -- 39,797 Property and equipment, net................................. 56,843 50,533 Other assets................................................ 24,157 16,965 -------- -------- $571,497 $394,969 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 18,017 $ 7,958 Accrued compensation........................................ 15,413 11,091 Accrued warranty............................................ 2,887 2,172 Income taxes payable........................................ 6,295 207 Other accrued liabilities................................... 5,183 9,119 -------- -------- Total current liabilities......................... 47,795 30,547 -------- -------- Other non-current liabilities............................... -- 5,097 Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value; 1,000,000 shares authorized, (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); none issued and outstanding................................. -- -- Common stock, $0.001 par value; 500,000,000 shares authorized, 92,324,042 and 89,715,017 issued and outstanding at April 1, 2001 and April 2, 2000, respectively........................................... 92 90 Additional paid-in capital................................ 393,383 293,992 Deferred stock-based compensation......................... (5,751) -- Retained earnings......................................... 134,254 65,485 Other comprehensive income (loss)......................... 1,724 (242) -------- -------- Total stockholders' equity........................ 523,702 359,325 -------- -------- $571,497 $394,969 ======== ========
See accompanying notes to consolidated financial statements. 23 25 QLOGIC CORPORATION CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED APRIL 1, 2001, APRIL 2, 2000, AND MARCH 28, 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2001 2000 1999 -------- ---------- ---------- (RESTATED) (RESTATED) Gross revenues............................................. $362,781 $216,860 $121,575 Sales discounts............................................ 5,239 767 -- -------- -------- -------- Net revenues............................................... 357,542 216,093 121,575 Cost of revenues........................................... 128,739 70,982 49,034 -------- -------- -------- Gross profit.......................................... 228,803 145,111 72,541 -------- -------- -------- Operating expenses: Engineering and development.............................. 56,315 47,451 29,809 Selling and marketing.................................... 36,482 22,623 15,248 General and administrative............................... 14,828 11,202 8,803 Merger and related expenses.............................. 22,947 -- -- -------- -------- -------- Total operating expenses......................... 130,572 81,276 53,860 -------- -------- -------- Operating income........................................... 98,231 63,835 18,681 Interest and other income.................................. 18,706 9,181 5,759 -------- -------- -------- Income before income taxes............................ 116,937 73,016 24,440 Income tax provision....................................... 48,168 24,701 8,310 -------- -------- -------- Net income............................................ 68,769 48,315 16,130 Accretion on convertible preferred stock................... -- 12 762 -------- -------- -------- Net income attributable to common stockholders............. $ 68,769 $ 48,303 $ 15,368 ======== ======== ======== Net income per share: Basic.................................................... $ 0.76 $ 0.56 $ 0.20 ======== ======== ======== Diluted.................................................. $ 0.72 $ 0.52 $ 0.18 ======== ======== ======== Number of shares used in per share computations: Basic.................................................... 91,073 86,485 77,823 ======== ======== ======== Diluted.................................................. 95,139 92,533 87,232 ======== ======== ========
See accompanying notes to consolidated financial statements. 24 26 QLOGIC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED APRIL 1, 2001, APRIL 2, 2000 AND MARCH 28, 1999 (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL --------------- --------------- PAID-IN STOCK-BASED RETAINED COMP STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMP EARNINGS INCOME EQUITY ------ ------ ------ ------ ---------- ----------- -------- ------ ------------- Balance as of March 29, 1998... -- $-- 75,421 $75 $135,208 $ -- $ 3,972 $ -- $139,255 Net income and comprehensive income..................... -- -- -- -- -- -- 16,130 -- 16,130 Sales of Series C Preferred Stock (net)................ 1 -- -- -- 10,208 -- -- -- 10,208 Warrants issued in connection with license agreement..... -- -- -- -- 768 -- -- -- 768 Conversions of Series A preferred stock............ -- -- 71 -- -- -- -- -- -- Conversions of Series B preferred stock............ -- -- 2,110 2 (2) -- -- -- -- Conversions of Series C preferred stock............ (1) -- 3,796 4 (4) -- -- -- -- Issuance of common stock under employee stock plans (including tax benefit of $5,769).................... -- -- 2,719 4 9,345 -- -- -- 9,349 ---- -- ------ --- -------- ------- -------- ------ -------- Balance as of March 28, 1999... -- $-- 84,117 $85 $155,523 $ -- $20,102 $ -- $175,710 Adjustment to conform fiscal year of pooled entity...... -- -- 385 -- 6,410 -- (2,932) (242) 3,236 Net income and comprehensive income..................... -- -- -- -- -- -- 48,315 -- 48,315 Sales of common stock in secondary offering (net of issuance costs of $4,174).................... -- -- 1,319 1 64,888 -- -- -- 64,889 Sales of common stock........ -- -- 148 -- 14,820 -- -- -- 14,820 Warrants issued in connection with product sales and for services rendered.......... -- -- -- -- 798 -- -- -- 798 Conversions of Series C preferred stock............ -- -- 436 1 -- -- -- -- 1 Issuance of common stock under employee stock plans (including tax benefit of $34,007)................... -- -- 3,310 3 51,553 -- -- -- 51,556 ---- -- ------ --- -------- ------- -------- ------ -------- Balance as of April 2, 2000.... -- $-- 89,715 $90 $293,992 $ -- $65,485 $(242) $359,325 Net income................... -- -- -- -- -- -- 68,769 -- 68,769 Change in unrealized gain on securities, net of tax..... -- -- -- -- -- -- -- 1,966 1,966 -------- Total comprehensive income................... -- -- -- -- -- -- -- -- 70,735 Warrants issued in connection with product sales......... -- -- -- -- 5,239 -- -- -- 5,239 Shares issued for business acquisition................ -- -- 23 -- 11,403 (5,891) -- -- 5,512 Amortization of deferred stock-based compensation... -- -- -- -- -- 140 -- -- 140 Issuance of common stock under employee stock plans (including tax benefit of $52,742)................... -- -- 2,586 2 82,749 -- -- -- 82,751 ---- -- ------ --- -------- ------- -------- ------ -------- Balance as of April 1, 2001.... -- $-- 92,324 $92 $393,383 $(5,751) $134,254 $1,724 $523,702 ==== == ====== === ======== ======= ======== ====== ========
See accompanying notes to consolidated financial statements. 25 27 QLOGIC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED APRIL 1, 2001, APRIL 2, 2000, AND MARCH 28, 1999 (IN THOUSANDS)
2001 2000 1999 --------- ---------- ---------- (RESTATED) (RESTATED) Cash flows from operating activities: Net income................................................ $ 68,769 $ 48,315 $ 16,130 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for non-cash sales discounts and consulting services.............................................. 5,239 798 -- Depreciation and amortization........................... 10,806 6,447 4,709 Write-off of acquired in-process technology............. 554 8,410 1,220 Provision for doubtful accounts......................... 1,358 35 201 Loss on disposal of property and equipment.............. 449 219 189 Benefit from deferred income taxes...................... (5,829) (9,359) (6,283) Tax benefit from issuance of stock under employee stock plans................................................. 52,742 34,007 5,769 Changes in assets and liabilities: Accounts and notes receivable......................... (27,457) (11,296) (3,225) Inventories........................................... (21,418) (13,313) (5,340) Prepaid expenses and other current assets............. (642) 41 (1,431) Other assets.......................................... 1,389 (137) (1,158) Accounts payable...................................... 10,059 551 2,152 Accrued compensation.................................. 4,322 3,519 2,403 Income taxes payable.................................. 6,088 (7,117) (3,770) Accrued warranty...................................... 715 1,090 -- Other accrued liabilities............................. (3,907) 4,312 8,072 Other non-current liabilities......................... (5,097) -- (466) --------- --------- --------- Net cash provided by operating activities........... 98,140 66,522 19,172 --------- --------- --------- Cash flows from investing activities: Additions to property and equipment....................... (16,705) (42,403) (7,373) Purchases of investments.................................. (236,726) (659,692) (117,861) Acquisition of business, net of cash acquired............. (2,346) (8,860) (1,957) Maturities of investments................................. 169,041 600,398 78,179 Other, net................................................ -- (347) (49) --------- --------- --------- Net cash used in investing activities............... (86,736) (110,904) (49,061) --------- --------- --------- Cash flows from financing activities: Principal payments on other non-current liabilities....... (29) (358) (358) Proceeds from issuance of stock under stock plans......... 30,009 16,672 3,580 Proceeds from sale of common and preferred stock.......... -- 79,709 10,208 --------- --------- --------- Net cash provided by financing activities........... 29,980 96,023 13,430 --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 41,384 51,641 (16,459) Adjustment to conform fiscal year end of pooled entity...... -- (14,384) -- Cash and cash equivalents at beginning of year.............. 86,889 49,632 66,091 --------- --------- --------- Cash and cash equivalents at end of year.................... $ 128,273 $ 86,889 $ 49,632 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest.................................................. $ 60 $ 38 $ 53 ========= ========= ========= Income taxes.............................................. $ 2,318 $ 6,068 $ 6,068 ========= ========= ========= Supplemental schedule of non-cash investing and financing activities: Accrual for acquisition performance payment............... $ 1,244 $ 841 $ 1,321 ========= ========= ========= Stock option plan assumed in acquisition.................. $ 5,891 $ -- $ -- ========= ========= ========= Stock issued in connection with business acquisition...... $ 2,010 $ -- $ -- ========= ========= =========
See accompanying notes to consolidated financial statements. 26 28 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Business Information QLogic Corporation ("QLogic" or the "Company") designs and supplies semiconductor and board level input/output (I/O) products, full fabric switches, and enclosure management semiconductors. The Company's I/O products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk drives, tape drives, removable disk drives and redundant array of independent disks subsystems, or RAID subsystems. QLogic markets and distributes its products through a direct sales organization supported by field application engineers, as well as through a network of independent manufacturers' representatives and regional and international distributors. The Company's primary OEM customers are major domestic and international suppliers and manufacturers of servers, workstations and data storage peripherals. Principles of Consolidation and Financial Reporting Period The consolidated financial statements include the financial statements of QLogic Corporation and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. QLogic's fiscal year ends on the Sunday nearest March 31. The fiscal year ended April 1, 2001 ("fiscal 2001") comprised 52 weeks, the fiscal year ended April 2, 2000 ("fiscal 2000") comprised 53 weeks and the fiscal year ended March 28, 1999 ("fiscal 1999") comprised 52 weeks. As more fully described in Note (2), QLogic merged with Ancor Communications, Inc. ("Ancor") on August 1, 2000 in a pooling of interests transaction. Historically, the fiscal year of Ancor ended on December 31. In order to report the historical fiscal year ends, the Company's consolidated financial statements for the year ended March 28, 1999 were restated to include Ancor's consolidated financial statements for the year ended December 31, 1998. All years prior to March 28, 1999 were restated similarly. The Company's consolidated financial statements for the fiscal year ended April 2, 2000 were restated to include the Ancor balance sheet at March 31, 2000, and the results of operations and cash flows of Ancor for the twelve months ended December 31, 1999. Ancor's net revenues and net loss of $6.9 million and $2.9 million, respectively, in the three months ended March 31, 2000 were included as a retained earnings adjustment in the fiscal year ended April 2, 2000. During the three months ended March 31, 2000 Ancor issued 385,000 shares of common stock with net proceeds of $6.4 million. Net cash outflow during the three months ended March 31, 2000 amounted to $14.4 million. All references to share and per share data have been restated to give effect to the Company's stock splits. Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, 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 generally 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 recognizes revenue through these distribution channels based on management's estimate as to the approximate point the products have been resold. 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 27 29 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) estimates and establishes allowances and reserves for product returns, warranty obligations, doubtful accounts, and price adjustments. During fiscal year 2001, the Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements," as amended. The adoption of SAB 101 did not have a material impact on the Company's consolidated financial statements. 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 The Company applies the provisions of SFAS 128, "Earnings per Share." 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 and warrants which have been treated as dilutive potential common shares in computing diluted net income per share. 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, investments in 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 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. The Company's four largest customers comprise of 56% of total accounts receivable at April 1, 2001 and 53% at April 2, 2000. The 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. There have not been significant losses experienced on accounts receivable. 28 30 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 The Company invests primarily in debt securities. During the second fiscal quarter ended October 1, 2001, the Company changed its classification of these securities based on management's intent from "held to maturity" to "available for sale" according to the definitions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, the Company's debt securities are carried at fair value in short-term investments in the accompanying consolidated balance sheets. Unrealized gains and losses, net of the related tax effect, if any, are excluded from earnings and reported as a separate component of other comprehensive income until realized. Realized gains or losses and other than temporary declines in fair value are determined on a specific identification basis and reported in other income and expense as incurred. The Company also holds minority investments in companies that are not publicly traded. These investments are recorded at cost and are included in other assets in the accompanying consolidated balance sheets. The Company monitors these investments for impairment by reference to valuation of publicly traded companies in similar sectors and other factors such as the status of the investee's technology, product launch and customer acceptance. In some circumstances, the Company may obtain an independent valuation of the investment. If the Company determines that the investment has suffered an other than temporary decline in value, this decline is reported in other income or expense in the period in which the determination is made. As of April 1, 2001 no other than temporary declines in value had occurred. 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 undiscounted 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 39.5 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 the 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 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 29 31 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. During fiscal year 2001, the Company adopted the FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB No. 25", ("FIN 44"). The adoption of FIN 44 did not have a material impact on the Company's consolidated financial statements. 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. The Company's comprehensive income consists of net income and the unrealized gain on the available-for-sale securities, net of income taxes. Research and Development Research and development costs, including costs related to the development of new products and process technology, as well as acquired in-process technology, are expensed as incurred. Reclassifications Certain reclassifications have been made to the fiscal 2000 and fiscal 1999 consolidated financial statements to conform to the fiscal 2001 presentation. NOTE (2) BUSINESS COMBINATIONS Little Mountain Group, Inc. On January 23, 2001, the Company acquired the outstanding common stock of Little Mountain Group, Inc. ("LMG"), for cash and stock which could amount to $30 million over a four-year period. LMG is a designer of iSCSI silicon and board level products to enable an ethernet Storage Area Network. The Company accounted for the transaction as a purchase. Accordingly, the excess purchase price paid over the fair value of the LMG net assets of $7.1 million was recorded as goodwill, and will be amortized over five years. The structure of the acquisition includes payments of stock based on performance milestones to be achieved over the next four fiscal years. These payments will be charged to engineering and development expense as the performance milestones are achieved. Ancor Communications, Inc. On August 1, 2000, the Company completed its merger with Ancor Communications, Incorporated ("Ancor"). Ancor was a leading provider of Fibre Channel switches. In connection with the merger, the Company issued 15,535,835 shares of its common stock in exchange for all shares of Ancor's common stock and reserved 1,724,036 shares of its common stock for issuance upon exercise of outstanding Ancor employee stock options and other rights assumed by the Company. The merger was accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated to include the pooled operations of Ancor as if it had combined with the Company since Ancor's inception. Included in net revenues for fiscal year 2000 and 1999 were net revenues from Ancor of $13.0 and $4.4 million, respectively. Included in restated net income for fiscal year 2000 and 1999 were net losses from Ancor of approximately $8.7 million and $15.3 million, respectively. Restated diluted net income per share for fiscal year 2000 and 1999 included losses of $0.09 and $0.18 per share, respectively, from Ancor. Included in net revenues for the year ended April 1, 2001, was $9.4 million from Ancor, recognized prior to the closing of the merger on August 1, 2000. Included in net income for the year ended April 1, 2001 were losses totaling $3.8 million from 30 32 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Ancor, incurred prior to August 1, 2000. There were no transactions between the Company and Ancor prior to the consummation of the merger. In connection with the merger with Ancor, the Company recorded approximately $22.9 million in charges for direct and other merger-related costs including fees of investment bankers, attorneys, accountants and other direct and incremental charges. Substantially all of the merger-related costs and fees have been paid at April 1, 2001. AdaptiveRAID Technology On January 10, 2000, the Company acquired certain intellectual property ("AdaptiveRAID(R) technology") from Borg Adaptive Technologies, Inc., a wholly owned subsidiary of nStor Corporation. The AdaptiveRAID(R) technology, which was expected to provide next generation embedded RAID storage solutions for the Intel Architecture workstation market, was purchased for $7.5 million in cash. At the time of the acquisition, the AdaptiveRAID(R) technology was in the development stage with no completed commercially viable storage solution products and thus the entire purchase price was written-off to acquired in-process technology. On February 26, 2001, the technology was sold to YottaYotta, Inc. in exchange for a note receivable. The note is immediately payable upon completion of YottaYotta, Inc.'s qualified financing, which is currently in process. Due to the uncertainty regarding collection of the note, the Company will record the ultimate gain from the sale of this technology upon the collection of the note receivable from YottaYotta, Inc. Silicon Design Resources, Inc. On August 20, 1998, the Company acquired the net assets of Silicon Design Resources, Inc. ("SDR") for $2 million in cash. In addition, the Company is obligated to pay up to an additional $8 million 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 $413,000 in professional fees related to the acquisition. At April 1, 2001 and April 2, 2000, a performance payment to the former shareholders of SDR of $1,244,000 and $841,000, respectively, was included in other accrued liabilities in the accompanying consolidated balance sheets. These payments were allocated to the intangible assets acquired: $820,000 and $554,000, respectively, were written-off as acquired in-process technology and $424,000 and $287,000, respectively, were 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 and warrants which have been treated as dilutive potential common shares. 31 33 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the computations of basic and diluted net income per share:
2001 2000 1999 ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator: Net income attributable to common stockholders...... $68,769 $48,303 $15,368 ======= ======= ======= Denominator: Denominator for basic net income per share -- weighted average shares................. 91,073 86,485 77,823 Dilutive potential common shares, using treasury stock method..................................... 4,066 6,048 9,409 ------- ------- ------- Denominator for diluted net income per share........ 95,139 92,533 87,232 ======= ======= ======= Basic net income per share............................ $ 0.76 $ 0.56 $ 0.20 ------- ------- ------- Diluted net income per share.......................... $ 0.72 $ 0.52 $ 0.18 ------- ------- -------
Options to purchase 716,818, 133,732 and 579,530 shares of common stock were outstanding as of April 1, 2001, April 2, 2000, and March 28, 1999, 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 as of April 1, 2001 consists of the following:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE -------- ---------- ---------- --------- (IN THOUSANDS) Debt securities Municipal bonds....................... $ 30,275 $ 284 $(11) $ 30,548 Corporate bonds....................... 80,003 1,455 (9) 81,449 U.S. Government securities............ 92,770 884 (23) 93,631 Other debt securities................. 153,522 109 -- 153,631 -------- ------ ---- -------- Total available for sale securities.................. 356,570 2,732 (43) 359,259 Less amounts classified as cash equivalents........................... 132,014 35 -- 132,049 -------- ------ ---- -------- $224,556 $2,697 $(43) $227,210 ======== ====== ==== ========
The gross realized gains and losses on the sales of marketable securities were immaterial in fiscal 2001, 2000 and 1999. The amortized cost and estimated fair value of investments in debt securities as of April 1, 2001, by contractual maturity, were as follows:
ESTIMATED FAIR COST VALUE -------- ---------- (IN THOUSANDS) Mature in one year or less............................. $238,438 $238,763 Mature after one year through five years............... 118,132 120,496 -------- -------- $356,570 $359,259 ======== ========
32 34 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At April 2, 2000 the gross unrealized gains and losses on securities were immaterial. The Company's portfolio of investments as of April 2, 2000, consisted of the following:
COST -------------- (IN THOUSANDS) Debt securities Municipal bonds........................................... $ 31,810 Corporate bonds........................................... 99,760 U.S. government securities................................ 44,619 Other debt securities..................................... 71,078 -------- Total debt securities............................. 247,267 Less amounts classified as cash equivalents................. 89,708 -------- $157,559 ========
NOTE (5) INVENTORIES Components of inventories are as follows:
2001 2000 ------- ------- (IN THOUSANDS) Raw materials............................................ $37,110 $17,797 Work in progress......................................... 8,021 4,796 Finished goods........................................... 1,379 2,499 ------- ------- $46,510 $25,092 ======= =======
NOTE (6) PROPERTY AND EQUIPMENT Components of property and equipment are as follows:
2001 2000 ------- ------- (IN THOUSANDS) Land..................................................... $11,663 $11,663 Building and improvements................................ 21,819 21,589 Product and test equipment............................... 43,267 33,227 Furniture and fixtures................................... 3,835 3,343 Semiconductor tooling.................................... 4,584 3,770 ------- ------- 85,168 73,592 Less accumulated depreciation and amortization........... 28,325 23,059 ------- ------- $56,843 $50,533 ======= =======
NOTE (7) CAPITAL ACCOUNTS Common Stock On April 1, 2001 and April 2, 2000, the Company's authorized common stock was 500,000,000 with 92,324,042 and 89,715,017 shares issued and outstanding, respectively. At April 1, 2001, 26,512,050 shares were reserved for the exercise of issued and unissued common stock options, 2,400,000 shares were reserved for issuance in connection with the Company's Employee Stock Purchase Plan, and 791,250 shares were reserved for the exercise of issued common stock warrants. 33 35 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. In January 2000, the par value was adjusted to $0.001. 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-eighth of one whole Right per one share of common stock, as adjusted pursuant to the Company's stock splits. Each share of common stock presently outstanding that had been issued since June 20, 1996 also includes one-eighth 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-eighth 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 amended to date, each Right entitles the registered holder, on and after the Distribution Date and until redemption of all Rights, to purchase from the Company 1/100 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 $425.00 per Unit. In the event of certain acquisitions involving the Acquiring Person , directly or indirectly, the holder of each Right will be entitled to purchase for $425.00 certain shares or assets of the Company or an Acquiring person that have a market value of $850.00 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 April 1, 2001. 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. 34 36 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Common Stock Splits In February 1999, July 1999 and February 2000, the Company effected two-for-one splits of the outstanding shares of common stock. All share and per share data presented in the consolidated financial statements and footnotes has been retroactively adjusted to reflect these two-for-one stock splits. 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 2,400,000. The total number of shares issued under the ESPP were 145,831 and 79,572 as of the years ended April 1, 2001 and April 2, 2000, respectively. 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 April 1, 2001, a total of 22,800,000 shares were reserved for issuance under the Stock Awards Plan, no shares of restricted stock were issued, options to purchase 6,404,664 shares of Common Stock were outstanding, and there were 7,447,180 shares available for future grants. Options granted under the Company's Stock Awards Plan provide that an employee holding a stock option may exchange mature stock which the employee already owns as payment against the exercise of an option. This provision applies to all options outstanding as of April 1, 2001. 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 64,000 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 32,000 shares of common stock. The plan also provides for annual grants to the Chairman of the Board of options to purchase 54,000 shares of common stock. A total of 1,800,000 shares have been reserved for issuance under the Director Plan. As of April 1, 2001, options for a total of 405,999 shares were outstanding, and 489,338 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 April 1, 2001, ad hoc stock options have been issued representing options to purchase 80,000 shares, with a total of 48,500 options outstanding. 35 37 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As a result of the Company's acquisitions, the Company assumed stock options granted under stock option plans established by each acquired company; no additional options will be granted under those plans. As of April 1, 2001, 1,832,050 shares of common stock were reserved for issuance under these stock option plans, with options to purchase 639,502 shares outstanding. Warrants As part of an agreement with Sun Microsystems, Inc. ("Sun"), the Company granted a warrant to Sun to purchase up to 791,250 shares of the Company's common stock at an exercise price of $13.84 per share. The warrant shares are earned at the rate of one share for each $127.00 of switch product revenue the Company receives from Sun through September 30, 2002. In each period in which the warrant shares are earned, a non-cash sales discount is recorded. The amount of non-cash sales discount is the fair value of the warrant shares which are earned in the period. The fair value of the warrant shares is calculated by using the Black-Scholes option pricing model. The assumptions used in the fair value calculation of the warrant shares was consistent with those assumptions disclosed in the Pro Forma Information later in this Note. None of the warrant shares vested until the Company received a total of $10 million in cumulative switch product revenue from Sun. During the fourth fiscal quarter of 2001, approximately 79,125 warrants became vested as switch revenues from Sun reached $10 million. Warrants will continue to vest quarterly through September 30, 2002. As of April 1, 2001, the number of warrants vested was 126,361. Stock option activity in fiscal 2001, 2000 and 1999 under the Company's Stock Option Plans was as follows:
AVERAGE OPTION PRICE SHARES PER SHARE ---------- ------------- Options outstanding as of March 29, 1998............ 7,157,608 $ 2.89 Granted............................................. 3,522,892 6.96 Canceled............................................ (236,183) 9.47 Exercised........................................... (2,644,494) 1.19 ---------- ------ Options outstanding as of March 28, 1999............ 7,799,823 4.43 Granted............................................. 2,931,456 40.98 Canceled............................................ (207,057) 3.75 Exercised........................................... (3,006,856) 6.17 ---------- ------ Options outstanding as of April 2, 2000............. 7,517,366 21.35 Granted............................................. 2,670,757 68.71 Canceled............................................ (259,799) 58.07 Exercised........................................... (2,429,659) 10.81 ---------- ------ Options outstanding as of April 1, 2001............. 7,498,665 $39.94 ========== ======
36 38 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of April 1, 2001, April 2, 2000, and March 28, 1999, the number of options exercisable was 2,696,620, 3,038,868 and 2,903,735 respectively, and the weighted average exercise price of those options was $22.95, $24.63 and $2.74, respectively.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------------ WEIGHTED WEIGHTED OUTSTANDING AVERAGE REMAINING EXERCISABLE AVERAGE RANGE OF AS OF EXERCISE PRICE CONTRACTUAL AS OF EXERCISE PRICE EXERCISE PRICES APRIL 1, 2001 PER OPTION LIFE (YEARS) APRIL 1, 2001 PER OPTION - ------------------ ------------- -------------- ------------ ------------- -------------- $ 0.11 to $ 7.53 2,054,778 $ 3.63 6.50 1,437,645 $ 3.18 $ 7.88 to $ 31.31 1,943,910 26.12 8.08 727,799 25.07 $34.12 to $ 63.98 1,962,639 58.73 9.10 275,321 51.24 $65.69 to $150.95 1,537,338 81.96 9.23 255,855 97.57 --------- ------ ---- --------- ------ $ 0.11 to $150.95 7,498,665 $39.94 8.15 2,696,620 $22.95 ========= ====== ==== ========= ======
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. For the purpose of pro forma disclosure, the estimated fair value of the options is amortized over the options vesting period. The Company's pro forma information is indicated below:
2001 2000 1999 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income attributable to common stockholders as reported.......................................... $68,769 $48,303 $15,368 Assumed stock compensation cost, net of tax......... $38,277 $19,675 $10,578 ------- ------- ------- Pro forma net income................................ $30,492 $28,628 $ 4,790 ------- ------- ------- Diluted net income per share as reported............ $ 0.72 $ 0.52 $ 0.18 Pro forma diluted net income per share.............. $ 0.32 $ 0.31 $ 0.05
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:
2001 2000 1999 ----------- ----------- ----------- Stock volatility....................... 98.5 - 136.6% 84.6 - 140.0% 79.5 - 131.0% Risk-free interest rate................ 4.9 - 5.9% 5.9 - 6.4% 5.1 - 5.6% Expected life (years).................. 5.0 3.5 - 5.0 3.5 - 5.0
The fair value of each option grant, as defined by SFAS 123, is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly effect the calculated fair value on the grant date. The weighted average estimated fair value of options granted under the Company's Stock Option Plans during fiscal 2001, 2000 and 1999 was $61.10, $30.35 and $22.32, respectively. NOTE (9) EMPLOYEE RETIREMENT SAVINGS PLAN The Company has established a pretax savings and profit sharing plan under Section 401(k) of the Internal Revenue Code for substantially all domestic employees. Under the plan, eligible employees are able to contribute up to 15% of their compensation. Company contributions match up to 3% of a participant's 37 39 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) compensation. The Company's direct contributions on behalf of its employees were $941,000, $647,000 and $458,000 in fiscal 2001, 2000, and 1999, respectively. NOTE (10) COMMITMENTS AND CONTINGENCIES Line of Credit On July 6, 2000, the Company renewed its unsecured line of credit from a bank. Maximum borrowings under the line of credit are $5.0 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 (8% at April 1, 2001). The line of credit expires on July 6, 2001. 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 April 1, 2001. There were no borrowings under the line of credit as of April 1, 2001. The Company expects to extend the line of credit through the end of fiscal year 2002. Leases The Company leases certain equipment and facilities under non-cancelable operating lease agreements, which expire at various dates through fiscal year 2006. Future minimum non-cancelable lease commitments are as follows:
(IN THOUSANDS) Fiscal year: 2002................................................. $1,951 2003................................................. 1,401 2004................................................. 843 2005................................................. 649 2006................................................. 45 ------ Total minimum lease payments................. $4,889 ======
Rent expense for fiscal 2001, 2000, and 1999 was $1,400,000, $2,287,000 and $1,791,000 respectively. 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 consolidated financial position, results of operations or liquidity. 38 40 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE (11) INCOME TAXES The components of the income tax provision are as follows:
2001 2000 1999 ------- ------- ------- (IN THOUSANDS) Current: Federal............................................. $45,597 $30,402 $12,892 State............................................... 7,952 2,564 1,701 Foreign............................................. 448 1,094 0 ------- ------- ------- Total current............................... 53,997 34,060 14,593 Deferred: Federal............................................. (3,544) (8,351) (6,179) State............................................... (2,285) (1,008) (104) ------- ------- ------- Total deferred.............................. (5,829) (9,359) (6,283) ------- ------- ------- Total income tax provision............................ $48,168 $24,701 $ 8,310 ======= ======= =======
A reconciliation of the income tax provision with the amount computed by applying the federal statutory tax rate to pretax income is as follows:
2001 2000 1999 ------- ------- ------- (IN THOUSANDS) Expected income tax provision at the statutory rate... $40,928 $25,555 $ 8,554 State income tax, net of Federal tax benefit.......... 3,683 2,522 1,283 Tax benefit of research and development and other credits............................................. (1,304) (2,120) (1,240) Foreign Sales Corporation tax benefit................. (1,137) (430) (203) Nondeductible business combination related costs...... 7,609 -- -- Tax exempt income..................................... (326) (617) (882) Other, net............................................ (1,285) (209) 798 ------- ------- ------- $48,168 $24,701 $ 8,310 ======= ======= =======
39 41 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
2001 2000 ------- ------- (IN THOUSANDS) Deferred tax assets: Reserves and accruals not currently deductible......... $21,685 $12,758 Property and equipment................................. 1,104 1,415 Acquired in-process technology......................... 4,157 4,072 Net operating losses................................... 16,694 26,623 Research credits....................................... 6,532 1,959 Other.................................................. 2,997 -- ------- ------- Total gross deferred tax assets................ 53,169 46,827 ------- ------- Deferred tax liabilities: Research and development expenditures.................. 1,534 1,524 State tax expense...................................... -- 508 Other.................................................. -- 349 ------- ------- Total gross deferred tax liabilities........... 1,534 2,381 ------- ------- Net deferred tax assets................................ $51,635 $44,446 ======= =======
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 April 1, 2001. 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 carry backs 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 benefits associated with dispositions from employee stock plans of approximately $52.7 million, $34 million and $5.8 million in fiscal 2001, 2000 and 1999 respectively, were recorded directly to additional paid-in capital. As of April 1, 2001 the Company has federal net operating loss carryforwards of approximately $45.3 million and aggregate state net operating loss carryforwards of approximately $29.6 million. The federal net operating loss carryforwards expire on various dates between 2009 and 2020. The aggregate state net operating loss carryforwards expire on various dates between 2002 and 2015. All net operating loss carryforwards relate to acquired companies and are subject to limitations on their utilization. As of April 1, 2001 the Company has federal and state tax credit carryforwards of approximately $7 million and $1 million respectively. If not utilized, the federal and state tax credit carryforwards will begin to expire in 2006. Approximately $2 million of the federal and $245,000 of the state tax credits relate to acquired companies and are subject to limitations on their utilization. NOTE (12) PRODUCT REVENUES, EXPORT REVENUES AND SIGNIFICANT CUSTOMERS 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 significant customers. The Company operates in one operating segment for purposes of SFAS 131. 40 42 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Product Revenues The Company designs and supplies switch products, 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.
2001 2000 1999 -------- -------- -------- (IN THOUSANDS) Fibre Channel...................................... $185,085 $ 73,026 $ 24,189 SCSI............................................... 167,527 131,694 96,761 IDE................................................ 4,930 11,373 625 -------- -------- -------- $357,542 $216,093 $121,575 ======== ======== ========
Geographic Revenues The Company's net revenues by country based on ship-to location are:
2001 2000 1999 -------- -------- -------- (IN THOUSANDS) United States...................................... $158,665 $101,190 $ 58,342 Japan.............................................. 131,691 78,395 39,732 United Kingdom..................................... 32,908 17,149 11,261 Rest of World...................................... 34,278 19,359 12,240 -------- -------- -------- $357,542 $216,093 $121,575 ======== ======== ========
Significant Customers The following table represents sales to customers accounting for greater than 10% of the Company's net revenues. With the exception of these customers, management believes that the loss of any one customer would not have a material adverse effect on its operations.
2001 2000 1999 ---- ---- ---- Customer 1.................................................. 29% 27% 24% Customer 2.................................................. 18% 13% 18%
41 43 QLOGIC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE (13) CONDENSED QUARTERLY RESULTS (UNAUDITED) The following summarizes certain unaudited quarterly financial information for fiscal 2001, 2000, and 1999.
THREE MONTHS ENDED ------------------------------------------- JUNE SEPTEMBER DECEMBER MARCH ------- --------- -------- ------- FISCAL 2001: Net revenues....................................... $76,773 $85,971 $95,129 $99,669 Operating income(1)................................ 25,849 6,888 33,252 32,242 Net income (loss)(1)............................... 19,624 (1,308) 25,208 25,245 Net income (loss) per diluted share(1)............. 0.20 (0.01) 0.26 0.27 ======= ======= ======= ======= FISCAL 2000: Net revenues....................................... $44,706 $51,091 $56,350 $63,946 Operating income................................... 13,831 16,836 19,241 13,929 Net income......................................... 10,112 12,325 14,392 11,486 Net income per diluted share....................... 0.11 0.14 0.15 0.12 ======= ======= ======= ======= FISCAL 1999: Net revenues....................................... $25,157 $27,829 $30,529 $38,060 Operating income (loss)............................ 3,070 (857) 6,249 10,219 Net income......................................... 2,951 419 5,092 7,668 Net income per diluted share....................... 0.03 0.00 0.06 0.08 ======= ======= ======= =======
- --------------- (1) Operating income, net income (loss) and net income (loss) per diluted share includes a $22.9 million charge for merger and related expenses in the third-quarter of fiscal 2001. 42 44 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 2001 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2001, for information relating to the Company's Directors under the heading "Nomination and Election of Directors," for information relating to the Company's executive officers under the heading "Executive Officers" and for information relating to reporting compliance under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the Company's Definitive Proxy Statement for its 2001 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2001, 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 2001 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2001, for information relating to security ownership of certain beneficial owners and management under the headings "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 2001 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of fiscal 2001, 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. 43 45 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 April 1, 2001, April 2, 2000, and March 28, 1999 are filed as part of this report: FINANCIAL STATEMENT INDEX
PAGE STATEMENT NUMBER --------- ------ QLogic Corporation: Independent Auditors' Report.............................. 22 Consolidated Balance Sheets as of April 1, 2001 and April 2, 2000................................................ 23 Consolidated Statements of Income for the years ended April 1, 2001, April 2, 2000 and March 28, 1999........ 24 Consolidated Statements of Stockholders' Equity for the years ended April 1, 2001, April 2, 2000 and March 28, 1999................................................... 25 Consolidated Statements of Cash Flows for the years ended April 1, 2001, April 2, 2000 and March 28, 1999........ 26 Notes to Consolidated Financial Statements................ 27
(2) Financial Statement Schedule The following consolidated financial statement schedule of the Company for the years ended April 1, 2001, April 2, 2000 and March 28, 1999 is filed as part of this report:
PAGE NUMBER OF THIS REPORT -------------- Schedule II -- Valuation and Qualifying Accounts............ 48
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. (3) Exhibit Index
EXHIBIT NUMBER ITEM CAPTION ------- ------------ 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California Corporation and QLogic Corporation.(1) 2.2 Agreement and Plan of Merger dated as of May 8, 2000 by and among QLogic Corporation, Amino Acquisition Corp. and Ancor Communications, Incorporated.(10) 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.(2)
44 46
EXHIBIT NUMBER ITEM CAPTION ------- ------------ 3.6 Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993.(1) 3.7 Certificate of Amendment of Certificate of Incorporation, dated February 15, 1999.(7) 3.8 Certificate of Amendment of Certificate of Incorporation, dated January 5, 2000.(8) 4.1 Rights Agreement, dated as of June 4, 1996 between QLogic Corporation and Harris Trust Company of California, which includes as Exhibit B thereto the form of Rights Certificate.(3) 4.2 Amendment to Rights Agreement, dated as of November 19, 1997 between QLogic Corporation and Harris Trust Company of California.(4) 4.3 Amendment to Rights Agreement, dated as of January 24, 2000 between QLogic Corporation and Harris Trust Company of California.(9) 10.1.2 Form of QLogic Corporation Non-Employee Director Stock Option Plan, as amended. 10.2.2 QLogic Corporation Stock Awards Plan, as amended. 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 dated July 6, 1998.(5) 10.11 Form of Indemnification Agreement between QLogic Corporation and Directors.(2) 10.13 Industrial Lease Agreement between the Registrant, as lessee, and AEW/Parker South, LLC, as lessor.(6) 10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(7) 10.16 Loan and Security Agreement with Silicon Valley Bank dated July 6, 2000.(11) 21.2 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP.
- --------------- (1) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 on 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 2, 1995, and incorporated herein by reference. (3) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A on June 19, 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A/A on November 25, 1997, and incorporated herein by reference. 45 47 (5) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1998, and incorporated herein by reference. (6) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1998, and incorporated herein by reference. (7) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999, and incorporated herein by reference. (8) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 26, 1999, and incorporated herein by reference. (9) Previously filed as and exhibit to Registrant's Registration Statement on Form 8-A/A dated June 1, 2000, and incorporated herein by reference. (10) Previously filed as an exhibit to Registrant's Amendment No. 1 to Registration Statement on Form S-4 on June 22, 2000, and incorporated herein by reference. (11) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2000, and incorporated herein by reference. * 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 (1) The Registrant filed a Current Report on Form 8-K on May 8, 2000, with respect to an Agreement and Plan of Merger by and between QLogic Corporation and Ancor Communications, Inc., reported under Item 5. (2) The Registrant filed a Current Report on Form 8-K on August 1, 2000, with respect to the Registrant issuing a press release regarding the completion of merger between QLogic Corporation and Ancor Communications, Inc., reported under Item 5. (3) The Registrant filed a Current Report on Form 8-K on January 23, 2001, with respect to a merger pursuant to which a wholly owned subsidiary of QLogic Corporation merged with and into Little Mountain Group, Inc. a California Corporation with Little Mountain Group surviving as a wholly owned subsidiary of the Company, reported under Item 5. (4) The Company filed a Current Report on Form 8-K on March 6, 2001, with respect to the Company issuing a press release detailing the sale of certain of its assets located at its Boulder, Colorado facility, including the sale of its AdaptiveRAID(R) technology, to YottaYotta, Inc., a New Brunswick Canada corporation, reported under Item 5. 46 48 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 and President Date: July 2, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on.
SIGNATURE TITLE --------- ----- PRINCIPAL EXECUTIVE OFFICER: /s/ H.K. DESAI Chairman of the Board, Chief Executive - --------------------------------------------- Officer and President H.K. Desai PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER: /s/ THOMAS R. ANDERSON Vice President and Chief Financial Officer - --------------------------------------------- Thomas R. Anderson /s/ GEORGE D. WELLS Director - --------------------------------------------- George D. Wells /s/ CAROL L. MILTNER Director - --------------------------------------------- Carol L. Miltner /s/ LARRY R. CARTER Director - --------------------------------------------- Larry R. Carter /s/ JIM FIEBIGER Director - --------------------------------------------- Jim Fiebiger /s/ KENNETH E. HENDRICKSON Director - --------------------------------------------- Kenneth E. Hendrickson
47 49 SCHEDULE II QLOGIC CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED APRIL 1, 2001, APRIL 2, 2000 AND MARCH 28, 1999 (IN THOUSANDS)
ADDITIONS DEDUCTIONS-- BALANCE AT CHARGED TO AMOUNTS BALANCE AT BEGINNING OF COSTS AND WRITTEN OFF/ END OF PERIOD EXPENSES RECOVERED PERIOD ------------ ---------- ------------- ---------- CLASSIFICATION: Year ended April 1, 2001 Allowance for doubtful accounts............ $1,014 $1,358 $ -- $2,372 Year ended April 2, 2000 Allowance for doubtful accounts............ $ 979 $ 35 $ -- $1,014 Year ended March 28, 1999 Allowance for doubtful accounts............ $ 778 $ 201 $ -- $ 979
48 50 EXHIBIT INDEX
EXHIBIT NUMBER ITEM CAPTION - ------- ------------ 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California Corporation and QLogic Corporation.(1) 2.2 Agreement and Plan of Merger dated as of May 8, 2000 by and among QLogic Corporation, Amino Acquisition Corp. and Ancor Communications, Incorporated.(10) 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.(2) 3.6 Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993.(1) 3.7 Certificate of Amendment of Certificate of Incorporation, dated February 15, 1999.(7) 3.8 Certificate of Amendment of Certificate of Incorporation, dated January 5, 2000.(8) 4.1 Rights Agreement, dated as of June 4, 1996 between QLogic Corporation and Harris Trust Company of California, which includes as Exhibit B thereto the form of Rights Certificate.(3) 4.2 Amendment to Rights Agreement, dated as of November 19, 1997 between QLogic Corporation and Harris Trust Company of California.(4) 4.3 Amendment to Rights Agreement, dated as of January 24, 2000 between QLogic Corporation and Harris Trust Company of California.(9) 10.1.2 Form of QLogic Corporation Non-Employee Director Stock Option Plan, as amended. 10.2.2 QLogic Corporation Stock Awards Plan, as amended. 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 dated July 6, 1998.(5) 10.11 Form of Indemnification Agreement between QLogic Corporation and Directors.(2) 10.13 Industrial Lease Agreement between the Registrant, as lessee, and AEW/Parker South, LLC, as lessor.(6) 10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(7) 10.16 Loan and Security Agreement with Silicon Valley Bank dated July 6, 2000.(11) 21.2 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP.
49 51 - --------------- (1) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 on 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 2, 1995, and incorporated herein by reference. (3) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A on June 19, 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A/A on November 25, 1997, and incorporated herein by reference. (5) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1998, and incorporated herein by reference. (6) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1998, and incorporated herein by reference. (7) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999, and incorporated herein by reference. (8) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 26, 1999, and incorporated herein by reference. (9) Previously filed as and exhibit to Registrant's Registration Statement on Form 8-A/A dated June 1, 2000, and incorporated herein by reference. (10) Previously filed as an exhibit to Registrant's Amendment No. 1 to Registration Statement on Form S-4 on June 22, 2000, and incorporated herein by reference. (11) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 2, 2000, and incorporated herein by reference. * Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. 50 EX-10.1.2 2 a73890ex10-1_2.txt EXHIBIT 10.1.2 1 EXHIBIT 10.1.2 QLOGIC CORPORATION NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN (AS AMENDED; CURRENT AS OF JUNE 2001) 2 QLOGIC CORPORATION NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN TABLE OF CONTENTS
Page ---- 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............................................................4 6.6 No Transfer of Option.........................................................4 6.7 Rights as a Stockholder or Director...........................................4 6.8 No Fractional Shares..........................................................4 6.9 Exercisability in the Event of Death..........................................4 6.10 Recapitalization, Reorganization or Change in Control of Company..............4 6.11 Modification, Extension, and Renewal of Options...............................5 6.12 1994 Distribution.............................................................6 (a) Adjustment of Options for Reverse Stock Split..........................6 (b) Conversion of Options Upon the Distribution............................6 (c) Option Terms and Conditions............................................6 (d) Option Price...........................................................6 (e) Fair Market Value......................................................7 6.13 Other Provisions..............................................................7 7. TERMINATION OR AMENDMENT OF PLAN.....................................................7 8. INDEMNIFICATION......................................................................7 9. STOCKHOLDER APPROVAL AND TERM OF PLAN................................................8
i 3 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 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 4 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 1,800,000(1) 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, (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"). Effective as of July 1, 1996, an option to purchase 40,000(2) shares of common stock of the Company shall be granted automatically to each Eligible Director upon the Initial Grant Date. In the event of a stock dividend, stock split or like change in the capital structure of the Company on or after June 13, 2001 resulting in an increase in the number of its outstanding shares of stock, the option to purchase the number of shares of common stock pursuant to the automatic grant described in this subsection will not be correspondingly increased with respect to automatic grants made on or following the date of such stock dividend (but only on common stock), stock split or like change in the capital structure of the Company. (b) 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 20,000(3) 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 - ---------- (1) As amended on June 21, 2000 and after giving effect to stock splits through February 8, 2000. (2) As amended in June 2001 and after giving effect to stock splits through February 8, 2000. (3) As amended in June 2001 and after giving effect to stock splits through February 8, 2000. 2 5 Annual Grant Date, an option to purchase 54,000(3) 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. In the event of a stock dividend, stock split or like change in the capital structure of the Company on or after June 13, 2001 resulting in an increase in the number of its outstanding shares of stock, the option to purchase the number of shares of common stock pursuant to the automatic grant described in this subsection will not be correspondingly increased with respect to automatic grants made on or following the date of such stock dividend (but only on common stock), stock split or like change in the capital structure of the Company. 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: (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 3 6 (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 (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), 4 7 stock split, reverse stock split, recapitalization, reorganization, merger, consolidation, separation, or like change in the capital structure of the Company. Notwithstanding the foregoing, in the event of a stock dividend, stock split or like change in the capital structure of the Company on or after June 13, 2001 resulting in an increase in the number of its outstanding shares of stock, the option to purchase the number of shares of common stock pursuant to the automatic grants described in Section 6.1 will not be correspondingly increased with respect to automatic grants made on or following the date of such stock dividend (but only on common stock), stock split 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 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 under the Securities Exchange Act of 1934 or any successor provision. 5 8 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 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 6 9 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 receive options granted under 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 the 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 7 10 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(4). - ---------- (4) As amended in June 1996. 8 EX-10.2.2 3 a73890ex10-2_2.txt EXHIBIT 10.2.2 1 EXHIBIT 10.2.2 QLOGIC CORPORATION STOCK AWARDS PLAN (AS AMENDED; CURRENT AS OF JUNE 21, 2000) 2 TABLE OF CONTENTS
Page ---- 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................................................................2 4. ADMINISTRATION.......................................................................2 4.1 Administration by Board.......................................................2 4.2 Administration by Compensation Committee......................................3 5. ELIGIBILITY..........................................................................3 6. SHARES SUBJECT TO THE PLAN...........................................................3 6.1 Available Shares..............................................................3 6.2 Limitation on Number of Shares Subject to Awards..............................4 6.3 Capital Structure Adjustments.................................................4 7. TERMS AND CONDITIONS OF STOCK OPTIONS................................................4 7.1 Number of Shares Subject to Stock Option......................................4 7.2 Stock Option Price............................................................4 7.3 Notice and Payment............................................................5 7.4 Term of Stock Option..........................................................5 7.5 Exercise of Stock Option......................................................6
i 3 TABLE OF CONTENTS (continued)
Page ---- 7.6 No Transfer of Stock Option...................................................6 7.7 Limit on Incentive Stock Options..............................................6 7.8 No Fractional Shares..........................................................6 7.9 Exercisability in the Event of Death..........................................6 7.10 Modification, Extension, and Renewal of Stock Options.........................6 7.11 1994 Distribution.............................................................7 7.12 Other Provisions..............................................................8 8. STOCK APPRECIATION RIGHTS............................................................8 8.1 General.......................................................................8 8.2 Grant and Exercise............................................................9 8.3 Terms and Conditions of Stock Appreciation Rights.............................9 8.4 Rules Relating to Exercise...................................................10 9. RESTRICTED STOCK....................................................................10 9.1 General......................................................................10 9.2 Award Agreement and Certificates.............................................10 9.3 Rights as a Stockholder......................................................10 9.4 Restrictions.................................................................11 9.5 Section 83(b) Election.......................................................11 10. UNRESTRICTED STOCK..................................................................11 11. DEFERRED STOCK AWARDS...............................................................12 11.1 General......................................................................12 11.2 Award Agreement..............................................................12 11.3 Elective Deferral............................................................12 11.4 Termination..................................................................12 11.5 Payments in Respect of Deferred Stock........................................12 12. PERFORMANCE UNIT AWARDS.............................................................12 12.1 General......................................................................12 12.2 Award Agreement..............................................................13 12.3 Termination..................................................................13 12.4 Acceleration; Waiver.........................................................13 12.5 Exercise.....................................................................13 13. OTHER STOCK-BASED AWARDS............................................................13 13.1 General......................................................................13 13.2 Purchase Price; Form of Payment..............................................14 13.3 Forfeiture of Awards; Repurchase of Stock; Acceleration of Waiver of Restrictions.......................................................14
ii 4 TABLE OF CONTENTS (continued)
Page ---- 13.4 Award Agreements.............................................................14 13.5 Deemed Dividend Payments; Deferrals..........................................14 14. SUPPLEMENTAL GRANTS.................................................................14 14.1 Loans........................................................................14 14.2 Cash Payments................................................................15 15. TERMINATION OR AMENDMENT OF THE PLAN................................................15 16. INDEMNIFICATION.....................................................................15 17. WITHHOLDING.........................................................................15 17.1 Irrevocable Election.........................................................16 17.2 Approval by Plan Administrator...............................................16 17.3 Timing of Election...........................................................16 17.4 Window Period................................................................16 17.5 Timing of Delivery...........................................................16 17.6 Terms in Agreement...........................................................16 18. UNFUNDED STATUS OF PLAN.............................................................16 19. GENERAL PROVISIONS..................................................................17 19.1 Restrictions on Issuance of Shares...........................................17 19.2 Rights as a Stockholder or Employee..........................................17 19.3 Governing Law................................................................17 20. EFFECTIVE DATE OF PLAN..............................................................17 21. TERM OF PLAN........................................................................17
iii 5 QLOGIC CORPORATION STOCK AWARDS PLAN (AS AMENDED; CURRENT AS OF JUNE 21, 2000) 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 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. 6 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. 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 16b-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 2 7 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 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 22,800,000(1) shares of Common Stock (after giving effect to stock splits effected on or before February 8, 2000 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. - ---------- (1) As amended on June 25, 1999, and June 21, 2000. 3 8 6.2 LIMITATION ON NUMBER OF SHARES SUBJECT TO AWARDS. In no event shall any participant in the Plan be granted Awards in any one calendar year pursuant to which the aggregate number of shares of Common Stock that may be acquired thereunder exceeds 500,000(2) shares. 6.3 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 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. - ---------- (2) As amended on August 11, 1997. 4 9 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 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. 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 10% of the total combined voting power of all classes of stock of the Company or any of its parent or subsidiary 5 10 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 on 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_% 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. 7.8 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, 6 11 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 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 7 12 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 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. 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 8 13 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 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. 9 14 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 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 10 15 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 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 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 11 16 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 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 12 17 between groups of participants and shall be based upon such Company, business unit or individual performance factors or criteria as the Plan Administrator may deem 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. 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 13 18 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 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 14 19 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 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. 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 15 20 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 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, 16 21 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 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. 17 EX-21.2 4 a73890ex21-2.txt EXHIBIT 21.2 1 EXHIBIT 21.2 QLOGIC CORPORATION SUBSIDIARIES OF REGISTRANT QLogic Foreign Sales Corporation, A U.S. Virgin Islands Corporation QLogic Enclosure Management Products, Inc. QLogic Switch Products Group, Inc. QLogic Roseville, Inc. 51 EX-23.1 5 a73890ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors QLogic Corporation: We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-75814, 333-13137 and 333-66407) of QLogic Corporation of our report dated May 15, 2001, related to the consolidated balance sheets of QLogic Corporation and subsidiaries as of April 1, 2001, and April 2, 2000 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended April 1, 2001, and the related financial statement schedule, which report appears in the April 1, 2001, annual report on Form 10-K of QLogic Corporation. KPMG LLP Orange County, California July 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----