-----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, JBDYL3coqJj93cYuHlvcv4CJq8YLmfqvOTpvxE/N6f9hn+DxaUqHE6WKwH4bdYGZ 4rO/QdJMYLUQ35Tsl7Z9DQ== 0000892569-97-001132.txt : 19970428 0000892569-97-001132.hdr.sgml : 19970428 ACCESSION NUMBER: 0000892569-97-001132 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970425 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: Q LOGIC CORP CENTRAL INDEX KEY: 0000918386 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330537669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25881 FILM NUMBER: 97587783 BUSINESS ADDRESS: STREET 1: 3545 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7144382200 S-3 1 FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ QLOGIC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 33-0537669 (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
------------------------ 3545 HARBOR BOULEVARD, COSTA MESA, CALIFORNIA 92626 (714) 438-2200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ THOMAS R. ANDERSON VICE PRESIDENT -- FINANCE, CHIEF FINANCIAL OFFICER QLOGIC CORPORATION 3545 HARBOR BOULEVARD, COSTA MESA, CALIFORNIA 92626 (714) 438-2200 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ COPIES TO: NICK E. YOCCA, ESQ. JORGE A. DEL CALVO, ESQ. K.C. SCHAAF, ESQ. STANTON D. WONG, ESQ. MICHAEL H. MULROY, ESQ. GEORGE A. GUCKER, ESQ. NUMAN J. SIDDIQI, ESQ. ANN E. TARDY, ESQ. STRADLING, YOCCA, CARLSON & RAUTH, PILLSBURY MADISON & SUTRO LLP A PROFESSIONAL CORPORATION 2700 SAND HILL ROAD 660 NEWPORT CENTER DRIVE, SUITE 1600 MENLO PARK, CALIFORNIA 94025 NEWPORT BEACH, CALIFORNIA 92660 PHONE: (415) 233-4500 PHONE: (714) 725-4000 FAX: (415) 233-4545 FAX: (714) 725-4100
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. ------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE =============================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF OF SECURITIES TO BE REGISTERED(1) REGISTERED(2) PER SHARE(3) PRICE (2)(3) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- Common Stock ($.10 par value)...... 2,300,000 shares $22.875 $52,612,500 $15,944 ===============================================================================================================
(1) This Registration Statement also applies to preferred stock purchase rights under the Registrant's Rights Agreement which are attached to and tradable only with the shares of Common Stock registered hereby. No registration fee is required for such rights as they will be issued for no additional consideration. (2) Includes 300,000 shares of Common Stock which may be purchased by the Underwriters to cover over-allotments, if any. (3) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the registration fee based upon the average of the high and low prices of the Company's Common Stock on the Nasdaq National Market on April 23, 1997. ------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (Subject to Completion) Dated April 25, 1997 2,000,000 Shares [QLOGIC LOGO] Common Stock ------------------------------ All of the 2,000,000 shares of Common Stock (the "Common Stock") offered hereby are being issued and sold by QLogic Corporation ("QLogic" or the "Company"). The Common Stock is quoted on the Nasdaq National Market under the symbol "QLGC." The last sale price for the Common Stock on April 24, 1997, as reported on the Nasdaq National Market, was $22.375 per share. See "Price Range of Common Stock." ------------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5 HEREOF. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
==================================================================================================== Price to Proceeds to Public Underwriting Company (2) Discounts and Commissions (1) - ---------------------------------------------------------------------------------------------------- Per Share............... $ $ $ Total (3)............... $ $ $ ====================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses, estimated to be $400,000, payable by the Company. (3) The Company has granted the Underwriters an option, exercisable within 30 days of the date hereof, to purchase an aggregate of up to 300,000 additional shares at the Price to Public less Underwriting Discounts and Commissions to cover over-allotments, if any. If all such shares are purchased, the total Price to the Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------------------ The Common Stock is offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of certificates for the shares will be made at the offices of Cowen & Company, New York, New York, on or about , 1997. COWEN & COMPANY PRUDENTIAL SECURITIES INCORPORATED MORGAN KEEGAN & COMPANY, INC. , 1997 3 [DIAGRAM DEPICTING THE COMPANY'S SEMICONDUCTOR PRODUCTS APPLICATIONS IN A COMPUTER MOTHERBOARD AND VARIOUS DATA STORAGE PERIPHERALS] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus or incorporated by reference to this Prospectus. The discussion in this Prospectus contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as statements of the Company's strategies, plans, objectives, expectations and intentions. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors discussed elsewhere in this Prospectus. Except as otherwise indicated, the information contained in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Certain technical terms are defined in the Glossary on page 41 of this Prospectus. THE COMPANY QLogic Corporation is a leading designer and supplier of semiconductor and board level I/O products. The Company's products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, CD-ROM drives and RAID subsystems. QLogic provides complete I/O technology solutions by designing and marketing single chip controller and adapter board products for both sides of the computer/peripheral device interlink, or "bus." Historically, the Company has targeted the high performance sector of the I/O market, focusing primarily on the SCSI industry standard. The Company is utilizing its I/O expertise to develop products for emerging I/O standards, such as Fibre Channel. Fibre Channel is experiencing early industry acceptance as a higher performance solution that maintains signal integrity while allowing for increased connectivity between a computer system and its data storage peripherals. QLogic's products utilize various I/O standards to service the needs of manufacturers and end users of various types of computer systems and components, such as workstations, servers and data storage peripherals. The Company believes that the increasing processing power of computers, the proliferation of networks, the rapid growth in the usage of the Internet and intranets, the wider application of computers in multimedia and telecommunications applications and the availability of higher performance data storage peripherals have driven the demand for increased data throughput among servers, workstations and data storage peripherals. To address this demand for increased I/O system performance, the Company provides high performance SCSI-based solutions and new I/O solutions based on the emerging Fibre Channel standard. In addition, the Company is leveraging its technological expertise to provide I/O solutions based on the IDE standard, a cost effective solution for the personal computer market. The Company believes that its technological leadership, extensive involvement in its customers' product development process and the ease of migration of its SCSI-based products to its new I/O products position QLogic to provide additional I/O solutions to its existing customer base. The Company believes that these attributes also provide it with competitive advantages in establishing new relationships with additional OEMs for both computer systems and data storage peripherals. QLogic markets and distributes its products through a direct sales organization supported by field application engineers, as well as through a network of independent manufacturers' representatives and regional and international distributors. The Company's primary OEM customers are major domestic and international suppliers and manufacturers of servers, workstations and data storage peripherals, such as Sun Microsystems, Inc., Fujitsu Limited and Digital Equipment Corporation. The Company is the successor to the Emulex Micro Devices division of Emulex Corporation. The Company was incorporated in Delaware in 1992, as Emulex Micro Devices Corporation, a wholly-owned subsidiary of Emulex Corporation, and, in 1993, substantially all of the assets of the Emulex Micro Devices division were transferred to the Company. In February 1994, pursuant to its spinoff from Emulex Corporation, the Company became a separate publicly held corporation. The terms "QLogic" and "Company" refer to QLogic Corporation and, for periods prior to January 1993, the Emulex Micro Devices division of Emulex Corporation. The Company's principal executive offices are located at 3545 Harbor Boulevard, Costa Mesa, California 92626, and its telephone number is (714) 438-2200. FAS, QLogic and the QLogic logo are trademarks of the Company. 3 5 THE OFFERING Common Stock offered by the Company.............. 2,000,000 shares Common Stock to be outstanding after the offering....................................... 7,840,701 shares (1) Use of proceeds.................................. For working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol.................... QLGC
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED NINE MONTHS ENDED --------------------------- ----------------- APR. 3, APR. 2, MAR. 31, DEC. 31, DEC. 29, 1994 1995 1996 1995 1996 ------- ------- ------- ------- ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues................................... $44,902 $57,675 $53,779 $37,561 $49,896 Gross profit................................... 16,754 23,390 19,366 13,640 21,298 Operating income (loss)........................ (3,531) 3,379 1,184 (92) 6,120 Net income (loss).............................. $(4,749) $ 1,965 $ 666 $ (66) $ 3,822 Net income (loss) per common and equivalent share (2)................................... $ 0.35 $ 0.12 $ (0.01) $ 0.61 Weighted average common and common equivalent shares (2).................................. 5,567 5,737 5,552 6,301
THREE MONTHS ENDED ------------------------------------------------------------------- JULY 2, OCT. 1, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 29, 1995 1995 1995 1996 1996 1996 1996 ------- ------- ------- ------- ------- ------- ------- CONSOLIDATED SELECTED QUARTERLY DATA (3): Net revenues.................. $ 9,570 $13,105 $14,886 $16,218 $15,740 $16,725 $17,431 Gross profit.................. 3,575 4,629 5,436 5,726 6,155 7,103 8,040 Operating income (loss)....... (1,162) 375 695 1,276 1,592 1,872 2,656 Net income (loss)............. $ (724) $ 214 $ 444 $ 732 $ 967 $ 1,178 $ 1,677 Net income (loss) per common and equivalent share....... $ (0.13) $ 0.04 $ 0.08 $ 0.13 $ 0.16 $ 0.20 $ 0.26
DECEMBER 29, 1996 --------------------------- ACTUAL AS ADJUSTED (4) ------- --------------- CONSOLIDATED BALANCE SHEET DATA: Working capital................................................... $16,853 $58,742 Total assets...................................................... 32,871 74,760 Long term obligations............................................. 1,325 1,325 Total stockholders' equity........................................ 21,829 63,718
- --------------- (1) Based on the number of shares outstanding as of April 15, 1997. Excludes 838,755 shares subject to options outstanding as of March 30, 1997 under the Company's stock option plans at a weighted average exercise price of $9.00 per share. (2) Share and per share data have not been presented for periods prior to the fiscal year ended April 2, 1995 as the Company operated as a wholly-owned subsidiary of Emulex Corporation. (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Selected Quarterly Results of Operations." (4) Adjusted to reflect the sale by the Company of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $22.375 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." 4 6 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should consider carefully the following risk factors in evaluating an investment in the Company and its business before purchasing any shares of the Common Stock offered hereby. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period to period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant portion of the Company's net revenues in each fiscal quarter results from orders booked in that quarter. In the past, a significant percentage of the Company's quarterly bookings and sales to major customers occurred during the last month of the quarter, and there can be no assurance that this trend will not return in the future. Orders placed by major customers are typically based on their forecasted sales and inventory levels for the Company's products. Changes in purchasing patterns by one or more of the Company's major customers, customer order changes or rescheduling, gain or loss of significant customers, customer policies pertaining to desired inventory levels of the Company's products, negotiations of rebates and extended payment terms, as well as changes in the ability of the Company to anticipate in advance the mix of customer orders, could result in material fluctuations in quarterly operating results. Certain large OEM customers may require the Company to maintain higher levels of inventory as such customers attempt to minimize their own inventories. In addition, the Company must order its products and build inventory substantially in advance of product shipments, and because the markets for the Company's products are subject to rapid technological and price changes, there is a risk the Company will forecast incorrectly and produce excess or insufficient inventory of particular products. To the extent the Company produces excess or insufficient inventory or is required to hold excess inventory, the Company's operating results could be adversely affected. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: the time, availability and sale of new products; seasonal OEM customer demand, such as the decline experienced in the fiscal quarter ended June 30, 1996; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components, including silicon wafers; warranty expenses; variations in product development and other operating expenses; and general economic and other conditions affecting the timing of customer orders and capital spending. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and its competitors' products. Although the Company does not maintain its own wafer manufacturing facility, a large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect on net income of such shortfall in net revenues. Furthermore, announcements by the Company, its competitors or others regarding new products and technologies could cause customers to defer purchases of the Company's products. Order deferrals by the Company's customers, delays in the Company's introduction of new products and longer than anticipated design-in cycles for the Company's products have in the past adversely affected the Company's quarterly results of operations. Due to all of the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. See "-- Reliance on High Performance Computer and Computer Peripheral Market," "-- Volatility of Stock Price" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON SMALL NUMBER OF CUSTOMERS A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The Company's six largest customers in each respective period accounted for approximately 73%, 81% and 71% of the Company's net revenues for the nine months 5 7 ended December 29, 1996 and for fiscal 1996 and 1995, respectively. For the nine months ended December 29, 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Fujitsu Limited accounted for approximately 24%, 18% and 16% of the Company's net revenues, respectively. For fiscal 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Avex Electronics, Inc. accounted for approximately 42%, 13% and 11% of the Company's net revenues, respectively. For fiscal 1995, Tokyo Electron Limited, Micropolis Corporation and Digital Equipment Corporation accounted for approximately 24%, 14% and 11% of the Company's net revenues, respectively. There can be no assurance that sales to such customers will continue or remain at comparable levels. In particular, the Company expects that sales to Tokyo Electron Limited will significantly decrease as the Company establishes a direct sales channel and a replacement distributor relationship in Japan. The Company's operating results have been, and may continue to be, adversely affected by the development of alternative input/output ("I/O") solutions including the internal development by the Company's customers of products competitive with those of the Company. For example, the Company's results of operations during fiscal year ended March 31, 1996 were adversely affected as a result of the loss of a large OEM customer as such customer transitioned to a more vertically integrated manufacturing policy, and industry consolidation that resulted in the acquisitions of other large customers. The loss of any of the Company's major customers would have a materially adverse effect on its business, financial condition and results of operations. In addition, a majority of the Company's customers order the Company's products through written purchase orders as opposed to long term supply contracts and, therefore, such customers are generally not obligated to purchase products from the Company for any specified period. Major customers also have significant leverage over the Company and may attempt to change the terms, including pricing, upon which the Company and such customers do business, which could materially adversely affect the Company's business, financial condition and results of operations. As the Company's OEM customers are pressured to reduce prices as a result of competitive factors, the Company may be required to contractually commit to price reductions for its products before it knows how, or if, cost reductions can be obtained. If the Company is unable to achieve such cost reductions, the Company's gross margins could decline and such decline could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company provides its major distributors and certain volume purchasers with price protection in the event that the Company reduces the prices of its products. While the Company maintains reserves for such price protection, there can be no assurance that the impact of future price reductions by the Company will not exceed the Company's reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Fluctuations in Quarterly Operating Results," "-- Volatility of Stock Price" and "Business -- Customers." COMPETITION The markets for both peripheral and host computer products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of shortened product life cycles and even shorter design-in cycles, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. A design win usually ensures a customer will purchase the product until a higher performance standard is available or a competitor can demonstrate a significant price/performance advantage. All of the Company's products compete with products available from several companies, many of which have substantially greater research and development, long term guaranteed supply capacity, marketing and financial resources, manufacturing capability and customer support organizations than those of the Company. The Company believes that its future operating results will depend, in part, upon its ability to continue to improve product and process technologies and develop new technologies in order to maintain the performance advantages of products and processes relative to competitors, to adapt products and processes to technological changes, and to identify and adopt emerging industry standards. Because of the complexity of its products, the Company has experienced delays from time to time in completing products on a timely basis. If the Company is unable to design, develop and introduce competitive new products on a timely basis, its future operating results would be adversely affected. 6 8 The Company currently competes primarily with Adaptec, Inc. and Symbios Logic, Inc. In the Fibre Channel sector of the I/O market, the Company expects to compete primarily with Adaptec, Inc., Symbios Logic, Inc. and Hewlett-Packard Company. In the Integrated Drive Electronics ("IDE") sector, the Company expects to compete with Adaptec, Inc., and Cirrus Logic, Inc. The Company may compete with some of its larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their products. At least one large OEM customer in the past has decided to vertically integrate and has therefore ceased purchases from the Company. The Company will have to continue to develop products appropriate to its markets to remain competitive as its competitors continue to introduce products with improved performance characteristics. While the Company continues to devote significant resources to research and development, there can be no assurance that such efforts will be successful or that the Company will develop and introduce new technology and products in a timely manner. In addition, while relatively few competitors offer a full range of Small Computer System Interface ("SCSI") and other I/O products, additional domestic and foreign manufacturers may increase their presence in, and resources devoted to, these markets. There can be no assurance that the Company will compete successfully in the future. See "-- Rapid Technological Change; Dependence on New Products; Industry Standards" and "Business -- Competition." DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS The Company currently relies on several independent foundries to manufacture its semiconductor products either in finished form or wafer form. The Company conducts business with its foundries through written purchase orders as opposed to long term supply contracts and, therefore, such foundries are generally not obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order. To the extent a foundry terminates its relationship with the Company or should the Company's supply from a foundry be interrupted or terminated for any other reason, the Company may not have a sufficient amount of time to replace the supply of products manufactured by that foundry. Until recently, there has been a worldwide shortage of advanced process technology foundry capacity. The manufacture of semiconductor devices is subject to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries has in the past taken, and could in the future take, longer than anticipated. There can be no assurance that new supply sources will be able or willing to satisfy the Company's wafer requirements on a timely basis or at acceptable quality or per unit prices. While the quality, yield and timeliness of wafer deliveries to date have been acceptable, there can be no assurance that manufacturing yield problems will not occur in the future. The Company is using multiple sources of supply for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. In particular, the Company's integrated single chip Fibre Channel controller is manufactured by LSI Logic Corporation ("LSI Logic") and integrates LSI Logic's transceiver technology. In the event that LSI Logic is unable or unwilling to satisfy the Company's requirements for this technology, the Company's attempt to market Fibre Channel products would be delayed and, as such, its 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 the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. See "-- Rapid Technological Change; Dependence on New Products; Industry Standards." The Company's ability to obtain satisfactory wafer and other supplies is subject to a number of other risks. The Company's suppliers may be subject to injunctions arising from alleged violations of third party intellectual property rights. The enforcement of such an injunction could impede a supplier's ability to provide wafers, components or packaging services to the Company. In addition, the Company's flexibility to move production of any particular product from one foundry to another can be limited in that such a move can require significant re-engineering, which may take several quarters. These efforts also divert engineering resources which otherwise 7 9 could be dedicated to new product development and adversely affect new product development schedules. Accordingly, production may be constrained even though capacity is available at one or more foundries. In addition, the Company could encounter supply shortages if sales grow substantially. The Company uses domestic and offshore subcontractors for die assembly of its semiconductor products purchased in wafer form, and for assembly of its host adapter board products. The Company's reliance on independent subcontractors to provide these services involves a number of risks, including the absence of guaranteed capacity and reduced control over delivery schedules, quality assurance and costs. The Company is also subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of the Company's products. In addition, the Company may receive orders for large volumes of products to be shipped within short periods, and the Company may not have sufficient testing capacity to fill such orders. Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the Company's foundries or subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials, or other reasons, could result in the loss of customers and other material adverse effects on the Company's operating results, including effects that may result should the Company be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. See "Business -- Manufacturing." TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS Although the Company is currently not experiencing any difficulties in obtaining sufficient foundry capacity due to the current abundance of worldwide semiconductor fabrication capacity, the Company and the semiconductor industry have in the past experienced shortages of available foundry capacity. Accordingly, in order to obtain adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company may consider various possible transactions, including the use of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods or equity investments in or advances to wafer manufacturing companies in exchange for guaranteed production capacity, or the formation of joint ventures to own and operate or construct foundries or to develop certain products. Any of these transactions would involve financial risk to the Company and could require the Company to commit substantial capital or provide technology licenses in return for guaranteed production capacity. The need to commit substantial capital may require the Company to seek additional equity or debt financing. The sale or issuance of additional equity or convertible debt securities could result in dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, will be available when needed or, if available, will be on terms acceptable to the Company. See "Use of Proceeds." RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET A significant portion of the Company's host adapter board products are currently used in high-performance file servers, workstations and other office automation products. The Company's growth has been supported by increasing demand for sophisticated I/O solutions which support database systems, servers, workstations, Internet/intranet applications, multimedia and telecommunications. Should there be a slowing in the growth of demand for such systems, the Company's business, financial condition and results of operations could be materially and adversely affected. As a supplier of controller products to manufacturers of computer peripherals such as disk drives and other data storage devices, a portion of the Company's business is dependent on the overall market for computer peripherals. This market, which itself is dependent on the market for computers, has historically been characterized by periods of rapid growth followed by periods of oversupply and contraction. As a result, suppliers to the computer peripherals industry from time to time experience large and sudden fluctuations in demand for their products as their customers adjust to changing conditions in their markets. If these fluctuations are not accurately anticipated, such suppliers, including the Company, could produce excessive or insufficient inventories of various components which could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Fluctuations in Quarterly Operating Results." RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INDUSTRY STANDARDS The markets in which the Company and its competitors compete are characterized by rapidly changing technology, evolving industry standards and continuing improvements in products and services. The Company's 8 10 future success depends on its ability to enhance its current products and to develop and introduce in a timely manner new products that keep pace with technological developments and industry standards, compete effectively on the basis of price and performance, adequately address OEM customer and end-user customer requirements and achieve market acceptance. The Company believes that to remain competitive in the future it will need to continue to develop new products, which will require the investment of significant financial resources in new product development. In anticipation of the implementation of Fibre Channel data transfer interface technologies, the Company has invested and will continue to invest significant resources in developing its integrated circuit single chip PCI to Fibre Channel controllers. There can be no assurance that Fibre Channel will be adopted as a predominant industry standard. The Company is aware of products for alternative I/O standards and enabling technologies being developed by its competitors. The Company believes that certain competitors, including Symbios Logic, Inc., have extensive development efforts related to products based on the Low Voltage Differential ("LVD") technology. There can be no assurance that such technology will not be adopted as an industry standard and if an alternative standard is adopted, there can be no assurance the Company will timely develop products for such standard. Further, even if Fibre Channel is adopted, there can be no assurance that the Company's integrated PCI to Fibre Channel controller will be fully developed in time to be accepted for use in Fibre Channel technology or that, if developed, will achieve market acceptance, or be capable of being manufactured at competitive prices in sufficient volumes. In the event that Fibre Channel is not adopted as an industry standard, or that the Company's integrated circuit PCI to Fibre Channel controllers are not timely developed or do not gain market acceptance, the Company's business, financial condition and results of operations could be materially and adversely affected. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as IDE, SCSI, Ultra SCSI and PCI. In addition, the Company's Fibre Channel products have been designed to conform with a standard that has yet to be uniformly adopted. The Company's products must be designed to operate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, operating system software and peripherals. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading microprocessor, systems and peripheral suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability. If industry acceptance of these standards was to decline or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business, financial condition and results of operations could be materially and adversely affected. The Company could experience delays in product development that are common in the computer and semiconductor industry. Significant delays in product development and release would adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will respond effectively to technological changes or new product announcements by other companies or that the Company's research and development efforts will be successful. Furthermore, introduction of new products and moving production of existing products to different suppliers involves substantial business risks because of the possibility of product "bugs" or performance problems, in which event the Company could experience significant product returns, warranty expenses, expedite charges, in addition to lower sales and lower profits. See "Business -- Engineering and Development." IDENTIFICATION AND INTEGRATION OF ACQUISITIONS The Company anticipates that its future growth may depend in part on its ability to identify and acquire complementary businesses, technologies or product lines that are compatible to those of the Company. The Company may, if appropriate, use a portion of the net proceeds from this offering for such acquisitions. Acquisitions involve numerous risks, including identifying and pursuing acquisitions, difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that the anticipated benefits of an acquisition will be 9 11 realized. There can be no assurance that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could materially adversely affect the Company's business, financial condition, results of operations or stock price. With respect to the possible amortization of goodwill, the Financial Accounting Standards Board ("FASB") has announced that it may make pooling of interests accounting treatment for merger transactions more difficult to attain, or may abolish such treatment altogether. If the FASB does limit or eliminate pooling of interests accounting treatment, the Company's ability to consummate merger transactions without incurring goodwill would be materially and adversely affected. See "Use of Proceeds." DEPENDENCE ON KEY PERSONNEL The Company's future success is highly dependent on the continued services of its key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers, and its ability to identify and hire additional personnel. The loss of the services of key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the market for key personnel in the industries in which it competes is highly competitive. In particular, the Company has experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipates that competition for such personnel will increase in the future. There can be no assurance that the Company will be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future, or to manage the Company's business, both in the United States and abroad. See "Business -- Employees" and "Management." RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS International revenues of the Company's products were approximately 51%, 55% and 62% of net revenues for the nine months ended December 29, 1996 and for fiscal 1996 and 1995, respectively. The Company expects that international revenues will continue to account for a significant percentage of the Company's net revenues for the foreseeable future. As a result, the Company is subject to various risks, which include: a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; differences in intellectual property protections; difficulties in staffing and managing foreign operations; potentially longer accounts receivable cycles; currency fluctuations; export control restrictions; overlapping or differing tax structures; political and economic instability; and general trade restrictions. The Company's sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of the Company's foreign customers should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing" and "-- Customers." LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS Although the Company has patent protection on certain aspects of its technology, it relies primarily on trade secrets, copyrights and contractual provisions to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect its proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that the Company can maintain such technology as trade secrets. There also can be no assurance that any patents the Company possesses will not be invalidated, circumvented or challenged. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that patent or other intellectual property infringement claims will not be asserted against the Company in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and there can be 10 12 no assurance that necessary licenses would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling certain of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, should the Company decide to, or be forced to, litigate such claims, such litigation could be expensive and time consuming, could divert management's attention from other matters or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. The Company's supply of wafers and other components can also be interrupted by intellectual property infringement claims against its suppliers. See "-- Dependence on Wafer Suppliers and Other Subcontractors" and "Business -- Intellectual Property." VOLATILITY OF STOCK PRICE The market price of the Common Stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Future announcements concerning the Company or its competitors or customers, quarterly variations in operating results, the introduction of new products or changes in product pricing policies by the Company or its competitors, conditions in the semiconductor industry, changes in earnings estimates by analysts, market conditions for high technology stocks in general, or changes in accounting policies, among other factors, could cause the market price of the Common Stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years and the stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of the Common Stock. See "Price Range of Common Stock." POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS Pursuant to the Company's Restated Certificate of Incorporation, as amended, the Board of Directors is authorized to approve the issuance of shares of currently undesignated Preferred Stock, to determine the price, powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed on any unissued series of that Preferred Stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders. Pursuant to this authority, the Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one preferred stock purchase right for each outstanding share of the Company's Common Stock. The Shareholder Rights Plan, the undesignated Preferred Stock and certain provisions of the Delaware law may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Company's Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. See "Description of Capital Stock." DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical fact included in this Prospectus, including, without limitation, the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding the Company's strategies, plans, objectives and expectations; the Company's future operating results; the Company's ability to design, develop, manufacture and market products; the ability of the Company's products to achieve or maintain commercial acceptance; the Company's ability to achieve new product commercialization; the acceptance of new I/O standards and the continued acceptance of existing standards; and other matters are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable at this time, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are set forth in these "Risk Factors," as well as elsewhere in this Prospectus. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. 11 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby, at an assumed offering price of $22.375 per share (after deducting estimated underwriting discounts and commissions and offering expenses), are estimated to be approximately $41,888,750 (approximately $48,232,063 if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes. The Company may use all or a portion of the net proceeds to fund various possible transactions in order to secure additional manufacturing capacity, such as the use of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods or equity investments in or advances to wafer manufacturing companies in exchange for guaranteed production capacity. Any such transaction could require the Company to commit a significant amount of cash, including some or all of the net proceeds of this Offering. There can be no assurance that the Company will consummate any such transaction. In addition, the Company may use a portion of such net proceeds for acquisitions of complementary businesses, technologies or products, although there are currently no commitments or agreements with respect to any material acquisition. Pending such uses, the Company intends to invest the net proceeds in short term, investment grade, interest-bearing obligations. PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "QLGC." The following table sets forth the high and low sales prices for the Common Stock on the Nasdaq National Market for the periods indicated:
HIGH LOW ------ ------ Fiscal Year 1996 Quarter ended July 2, 1995....................................... $ 5.13 $ 4.25 Quarter ended October 1, 1995.................................... 6.63 4.50 Quarter ended December 31, 1995.................................. 8.88 5.63 Quarter ended March 31, 1996..................................... 9.13 6.50 Fiscal Year 1997 Quarter ended June 30, 1996...................................... $12.00 $ 8.50 Quarter ended September 29, 1996................................. 13.00 9.00 Quarter ended December 29, 1996.................................. 28.38 12.50 Quarter ended March 30, 1997..................................... 30.13 18.50 Fiscal Year 1998 Quarter ending June 29, 1997 (through April 24).................. $25.00 $18.75
The last sale price for the Common Stock on April 24, 1997, as reported on the Nasdaq National Market, was $22.375 per share. As of April 15, 1997, there were 416 holders of record of the Common Stock. DIVIDEND POLICY The Company has never declared or paid a cash dividend on its Common Stock. The Company presently intends to retain its earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's existing credit agreement restricts the Company from paying cash dividends. 12 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 29, 1996, on an actual basis, and as adjusted to reflect the issuance and sale by the Company of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $22.375 per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." The table should be read in conjunction with the Consolidated Financial Statements and Notes thereto, incorporated by reference to this Prospectus.
DECEMBER 29, 1996 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Capitalized lease obligations, excluding current installments........... $ 401 $ 401 ------- ------- Stockholders' equity: Preferred stock, $0.10 par value, 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value), none issued and outstanding..................... -- -- Common stock, $0.10 par value, 12,500,000 shares authorized; 5,777,211 shares issued and outstanding, actual; 7,777,211 shares issued and outstanding, as adjusted (1)....................................... 577 777 Additional paid-in capital............................................ 18,512 60,201 Retained earnings..................................................... 2,740 2,740 ------- ------- Total stockholders' equity......................................... 21,829 63,718 ------- ------- Total capitalization............................................. $22,230 $64,119 ======= =======
- --------------- (1) Excludes 838,755 shares subject to options outstanding as of March 30, 1997 under the Company's stock option plans at a weighted average exercise price of $9.00 per share. 13 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below with respect to the Company's consolidated statements of operations for each of the years in the three-year period ended March 31, 1996, and with respect to the Company's consolidated balance sheet data as of April 2, 1995 and March 31, 1996, are derived from financial statements of the Company which are incorporated by reference to this Prospectus and which have been audited by KPMG Peat Marwick LLP, the Company's independent certified public accountants, as indicated in their report, incorporated by reference to this Prospectus. The consolidated statements of operations data for the nine months ended December 31, 1995 and December 29, 1996, and the consolidated balance sheet data as of December 29, 1996, have been derived from unaudited condensed consolidated financial statements, incorporated by reference to this Prospectus, and reflect, in management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position and results of operations for such periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The data set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein and with the Consolidated Financial Statements and Notes thereto, incorporated by reference to this Prospectus.
FISCAL YEAR ENDED NINE MONTHS ENDED --------------------------- ------------------ APR. 3, APR. 2, MAR. 31, DEC. 31, DEC. 29, 1994 1995 1996 1995 1996 ------- ------- ------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues..................................... $44,902 $57,675 $53,779 $ 37,561 $49,896 Cost of sales.................................... 28,148 34,285 34,413 23,921 28,598 ------- ------- ------- ------- ------- Gross profit................................... 16,754 23,390 19,366 13,640 21,298 ------- ------- ------- ------- ------- Operating expenses: Engineering and development.................... 8,603 7,598 7,191 5,284 7,200 Selling and marketing.......................... 6,178 7,541 6,490 5,173 4,565 General and administrative..................... 4,356 4,872 4,501 3,275 3,413 Impairment of goodwill......................... 542 -- -- -- -- Amortization of goodwill....................... 99 -- -- -- -- Consolidation charges.......................... 507 -- -- -- -- ------- ------- ------- ------- ------- Total operating expenses.................... 20,285 20,011 18,182 13,732 15,178 ------- ------- ------- ------- ------- Operating income (loss)................... (3,531) 3,379 1,184 (92) 6,120 Transaction costs................................ 1,142 -- -- -- -- Interest income (expense)........................ (104) (53) 19 (6) 289 ------- ------- ------- ------- ------- Income (loss) before income taxes.............. (4,777) 3,326 1,203 (98) 6,409 Income tax provision (benefit)................... (28) 1,361 537 (32) 2,587 ------- ------- ------- ------- ------- Net income (loss)................................ $(4,749) $ 1,965 $ 666 $ (66) $ 3,822 ======= ======= ======= ======= ======= Net income (loss) per common and equivalent share (1)...................................... $ 0.35 $ 0.12 $ (0.01) $ 0.61 ======= ======= ======= ======= Weighted average common and common equivalent shares (1)..................................... 5,567 5,737 5,552 6,301 ======= ======= ======= =======
APR. 3, APR. 2, MAR. 31, DECEMBER 29, 1994 1995 1996 1996 ------- ------- ------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital.................................. $ 6,424 $10,564 $13,334 $16,853 Total assets..................................... 22,613 24,592 28,539 32,871 Long term obligations............................ 1,156 2,234 2,592 1,325 Total stockholders' equity....................... 13,615 15,581 16,277 21,829
- --------------- (1) Share and per share data have not been presented for periods prior to the fiscal year ended April 2, 1995 as the Company operated as a wholly-owned subsidiary of Emulex Corporation. 14 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed hereunder, in "Risk Factors" and "Business," as well as those discussed elsewhere in this Prospectus. OVERVIEW QLogic Corporation is a leading designer and supplier of semiconductor and board level I/O products. The Company's products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, CD-ROM drives and RAID subsystems. QLogic provides complete I/O technology solutions by designing and marketing single chip controller and adapter board products for both sides of the computer/peripheral device interlink, or "bus." Historically, the Company has targeted the high performance sector of the I/O market, focusing primarily on the SCSI industry standard. The Company is utilizing its I/O expertise to develop products for emerging I/O standards, such as Fibre Channel. Fibre Channel is experiencing early industry acceptance as a higher performance solution that maintains signal integrity while allowing for increased connectivity between a computer system and its data storage peripherals. The Company's products include semiconductors for computer peripheral devices and semiconductors and adapter boards for computer systems. The Company's peripheral products are comprised of the FAS and TEC product lines, and its computer systems products are comprised of the ISP and Host Board product lines. The Company's products have traditionally been based on the SCSI standard, and the Company is currently developing products for the Fibre Channel and IDE I/O standards. Net revenues from the Company's computer systems products are relatively less subject to fluctuations than those from the Company's peripheral device products due to generally longer product life cycles. In addition, the Company's computer systems products are manufactured to meet the specific solution needs of its OEM customers and, as a result, tend to carry higher gross margins. The Company is attempting to increase its proportionate sales of computer systems products. The Company is also identifying new sectors of the peripheral device market with the goal of expanding its business. For example, the Company is leveraging its I/O technological expertise to develop high performance IDE-based peripheral controllers. The Company recognizes revenue from the sale of products at the time of shipment. The Company currently sells a majority of its products directly to OEMs such as Sun Microsystems, Inc., Fujitsu Limited, Digital Equipment Corporation, and Silicon Graphics, Inc. The Company also sells its products through a network of independent manufacturers' representatives and regional and international distributors. The Company believes that by establishing and developing direct relationships with leading OEMs within the computer industry, the Company will have greater opportunities to expand its SCSI-based sales and to leverage these relationships into design wins for its IDE and Fibre Channel products. The Company believes that sales to OEMs result in lower product return rates and require a smaller customer support infrastructure. In addition, OEMs historically have not required the Company to maintain excess inventory, though this trend appears to be changing as OEMs attempt to minimize their own inventories. However, there is a limited number of potential OEM customers. As a result, the loss of a large OEM customer would have a material adverse effect on the Company's business, results of operations and financial condition. Also, the Company has historically experienced seasonality resulting in somewhat lower net revenues in its first fiscal quarter as compared to the previous quarter, which the Company believes is due to reduced spending by its OEM customers in advance of scheduled production slowdowns in the forthcoming summer months. The Company also generates revenues by licensing certain of its technology. License revenues are recognized as payment is received from the customer. The Company is the successor to the Emulex Micro Devices division of Emulex Corporation ("Emulex"). On February 24, 1994, Emulex declared a special dividend consisting of the distribution (the "Distribution") to its stockholders of all outstanding shares of Common Stock of QLogic. The purpose of the Distribution was to enable the Company to gain independent access to equity markets so that it may use its capital stock as a source of funding. 15 17 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's net revenues.
FISCAL YEAR ENDED NINE MONTHS ENDED -------------------------------- -------------------- APR. 3, APR. 2, MAR. 31, DEC. 31, DEC. 29, 1994 1995 1996 1995 1996 -------- -------- -------- -------- -------- Net revenues................................... 100% 100% 100% 100% 100% Cost of sales.................................. 63 59 64 64 57 --- --- --- --- --- Gross profit................................. 37 41 36 36 43 --- --- --- --- --- Operating expenses: Engineering and development.................. 19 13 13 14 15 Selling and marketing........................ 14 13 12 14 9 General and administrative................... 10 9 9 8 7 Impairment of goodwill....................... 1 -- -- -- -- Amortization of goodwill..................... -- -- -- -- -- Consolidation charges........................ 1 -- -- -- -- --- --- --- --- --- Total operating expenses.................. 45 35 34 36 31 --- --- --- --- --- Operating income (loss)................. (8) 6 2 -- 12 Transaction costs.............................. 3 -- -- -- -- Interest income (expense)...................... -- -- -- -- 1 --- --- --- --- --- Income (loss) before income taxes............ (11) 6 2 -- 13 Income tax provision (benefit)................. -- 3 1 -- 5 --- --- --- --- --- Net income (loss).............................. (11)% 3% 1% --% 8% === === === === ===
NET REVENUES The Company's net revenues are derived primarily from the sale of SCSI-based I/O products. License fees also contribute to the Company's net revenues. Net revenues for the nine months ended December 29, 1996 increased $12.3 million or 33% from the nine months ended December 31, 1995, to $49.9 million. The increase was primarily the result of an increase in sales of the TEC, Host Board and ISP product lines. A partially offsetting decline in sales of $2.5 million occurred in the FAS product line. Net revenues for fiscal 1996 decreased $3.9 million or 7% from fiscal 1995, to $53.8 million. The decrease was primarily due to decreases in sales of the TEC, Host Board and other product lines of $11.4 million, $1.5 million and $700,000, respectively. The decreases were partially offset by an increase in sales of the FAS and ISP product lines of $6.7 million and $3.7 million, respectively. The overall decline was due to unfavorable market conditions, the loss of a large OEM customer as such customer transitioned to a more vertically integrated manufacturing policy and industry consolidation that resulted in the acquisitions of other large customers. Net revenues for fiscal 1995 increased $12.8 million or 28% over fiscal 1994, to $57.7 million. The increase was primarily the result of increased sales in the Host Board, ISP and other product lines of $9.6 million, $4.8 million, and $300,000, respectively. A partially offsetting sales decrease occurred in the TEC product line of $1.9 million. Export revenues for fiscal 1996 decreased $6.0 million or 17% from fiscal 1995, to approximately $29.8 million. The decrease resulted primarily from U.S. exports to Singapore declining $14.9 million. The decline in revenues to Singapore was the result of a loss of the large OEM customer discussed above and decreased sales to another large OEM customer. This decline was partially offset by an increase in sales to Japan-based customers of $9.1 million. Export revenues for fiscal 1995 increased $3.9 million or 12% from fiscal 1994, to $35.8 million. The increase resulted primarily from U.S. exports to Pacific Rim countries. A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The Company's six largest customers in each respective 16 18 period accounted for approximately 73%, 81% and 71% of the Company's net revenues for the nine months ended December 29, 1996 and for fiscal 1996 and 1995, respectively. For the nine months ended December 29, 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Fujitsu Limited accounted for approximately 24%, 18% and 16% of the Company's net revenues, respectively. For fiscal 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Avex Electronics, Inc. accounted for approximately 42%, 13% and 11% of the Company's net revenues, respectively. For fiscal 1995, Tokyo Electron Limited, Micropolis Corporation and Digital Equipment Corporation accounted for approximately 24%, 14% and 11% of the Company's net revenues, respectively. The Company believes that its major customers continually evaluate whether or not to purchase products from alternate or additional sources. Accordingly, there can also be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss of purchases could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Small Number of Customers." COST OF SALES Cost of sales consists primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The cost of sales percentage for the nine months ended December 29, 1996 was 57%, a decrease of 7% over the comparable period in the prior fiscal year. The percentage decrease was due to computer systems products accounting for a greater percentage of net revenues. Computer system products contain higher levels of integration and functionality and are generally associated with higher average selling prices and gross margins. The Company continued to focus on reducing component costs as well as implementing design efficiencies during the nine months ended December 29, 1996. The Company's ability to maintain its current gross margin can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and the Company's ability to achieve manufacturing cost reductions. The Company anticipates that it will be increasingly more difficult to reduce manufacturing costs. In addition, the Company believes that cost of sales percentage will be adversely impacted by sales of IDE-based products, which carry lower margins. As a result, the Company does not anticipate cost of sales to decrease at a rate consistent with historic trends. The cost of sales percentage for fiscal 1996 was 64%, an increase of 5% over fiscal 1995. The increase in the cost of sales percentage was primarily due to inventory write-down charges being higher in fiscal 1996 compared to the prior year. The cost of sales percentage for fiscal 1995 was 59%, a decrease of 4% over the comparable period in the prior fiscal year. The decrease in the cost of sales percentage was primarily due to inventory write-down charges in fiscal 1994, which were not required in fiscal 1995. OPERATING EXPENSES Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development related equipment, occupancy costs and depreciation. For the nine months ended December 29, 1996, engineering and development expenditures increased by $1.9 million from the corresponding nine month period of 1995, primarily due to increased salary and occupancy expenses related to increased headcount. In particular, the Company significantly expanded its engineering staff in the nine months ended December 29, 1996, in connection with its development of Fibre Channel products. The Company expects that engineering and development expenses will increase in absolute dollars in fiscal 1998. In fiscal 1996, engineering and development expenditures decreased by $407,000, from the prior fiscal year, primarily due to reduced equipment repair, consulting and depreciation expenses. In fiscal 1995, engineering and development expenditures decreased by $1.0 million from fiscal 1994 expenditures. Selling and Marketing. Selling and marketing expenses consist primarily of sales commissions, salaries and other expenses for selling and marketing personnel, travel expenses and trade shows. During the nine months ended December 29, 1996, selling and marketing expenses decreased by $608,000 compared to the same period in fiscal 1995, primarily as a result of reduced advertising and trade show expenses, due to the Company's shift 17 19 away from selling to resellers, which typically requires more advertising and other promotions. The Company expects that selling and marketing expenses will increase in absolute dollars in fiscal 1998. In fiscal 1996, selling and marketing expenses decreased by $1.1 million compared to fiscal 1995, primarily due to a reduction in advertising. In fiscal 1995, selling and marketing expenditures increased by $1.4 million compared to fiscal 1994, reflecting costs to support expanded reseller marketing efforts. General and Administrative. General and administrative expenses consist primarily of salaries and other expenses for corporate management, finance, accounting and human resources. For the nine months ended December 29, 1996, general and administrative expenses increased $138,000 from the prior year's period, primarily due to expenses related to implementing a new computer system and salaries. For fiscal year 1996, general and administrative expenses decreased $371,000 compared to fiscal 1995, primarily due to decreased bad debt expense. For fiscal 1995, general and administrative expenditures increased by $516,000 compared to fiscal 1994. This increase was related to bad debt expense. INTEREST INCOME (EXPENSE) Interest income, net of expense, increased $295,000 during the nine months ended December 29, 1996 compared to the nine months ended December 31, 1995, due to larger cash balances. In addition, the Company continued to make payments to reduce its capital leases. Interest income, net of expense, increased in fiscal 1996 to $19,000 from a net expense of $53,000 in fiscal 1995. In fiscal 1995, interest expense decreased $51,000 to $53,000, from $104,000 in fiscal 1994. In each case the change was a result of the Company's continuing to make payments to reduce its capital leases. INCOME TAX PROVISION (BENEFIT) The Company's effective tax rates were 40%, 45% and 41% for the nine months ended December 29, 1996, and fiscal 1996 and 1995, respectively. The Company received a tax benefit of 1% for fiscal 1994. 18 20 SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables present unaudited quarterly financial information for the last seven quarters, and such data expressed as a percentage of the Company's net revenues for the periods indicated. The information has been presented by the Company on a basis consistent with the Company's audited Consolidated Financial Statements incorporated in this Prospectus by reference and includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the audited Consolidated Financial Statements of the Company and the Notes thereto. These operating results are not necessarily indicative of results that may be expected for any subsequent periods.
THREE MONTHS ENDED ------------------------------------------------------------------- JULY 2, OCT. 1, DEC. 31, MAR. 31, JUNE 30, SEPT. 29, DEC. 29, 1995 1995 1995 1996 1996 1996 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues.............................. $ 9,570 $13,105 $14,886 $16,218 $15,740 $16,725 $17,431 Cost of sales............................. 5,995 8,476 9,450 10,492 9,585 9,622 9,391 ------- ------- ------- ------- ------- ------- ------- Gross profit............................ 3,575 4,629 5,436 5,726 6,155 7,103 8,040 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Engineering and development............. 1,653 1,672 1,959 1,907 2,089 2,536 2,575 Selling and marketing................... 1,989 1,642 1,542 1,317 1,357 1,466 1,742 General and administrative.............. 1,095 940 1,240 1,226 1,117 1,229 1,067 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 4,737 4,254 4,741 4,450 4,563 5,231 5,384 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)............. (1,162) 375 695 1,276 1,592 1,872 2,656 Interest income (expense)................. (18) (15) 27 25 59 92 138 ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes....... (1,180) 360 722 1,301 1,651 1,964 2,794 Income tax provision (benefit)............ (456) 146 278 569 684 786 1,117 ------- ------- ------- ------- ------- ------- ------- Net income (loss)......................... $ (724) $ 214 $ 444 $ 732 $ 967 $ 1,178 $ 1,677 ======= ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF NET REVENUES: Net revenues.............................. 100% 100% 100% 100% 100% 100% 100% Cost of sales............................. 63 65 63 65 61 58 54 ------- ------- ------- ------- ------- ------- ------- Gross profit............................ 37 35 37 35 39 42 46 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Engineering and development............. 17 13 13 12 13 15 15 Selling and marketing................... 21 12 10 8 9 9 10 General and administrative.............. 11 7 8 7 7 7 6 ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 49 32 32 27 29 31 31 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)............. (12) 3 5 8 10 11 15 Interest income (expense)................. -- -- -- -- -- 1 1 ------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes....... (12) 3 5 8 10 12 16 Income tax provision (benefit)............ (5) 1 2 3 4 5 6 ------- ------- ------- ------- ------- ------- ------- Net income (loss)......................... (7)% 2% 3% 5% 6% 7% 10% ======= ======= ======= ======= ======= ======= =======
The Company's operating results for the first quarter of fiscal 1996 were adversely affected by the loss of a large OEM customer as such customer transitioned to a more vertically integrated manufacturing policy, decreases in revenues from other large OEM customers, and proportionately higher selling and marketing expenses due to sales promotion, advertising and related marketing expenses associated with the Company's reseller business. 19 21 The Company's net revenues declined in the first quarter of fiscal 1997 from the prior quarter, due to a seasonal slowdown in OEM demand. The Company anticipates that its results of operations will continue to experience seasonality in the future. The Company's operating expense levels have fluctuated over time. For example, engineering and development expenses increased substantially in the second quarter of fiscal 1997, primarily as a result of increased headcount and associated development costs as the Company staffed new I/O systems development projects, including Fibre Channel. In addition, selling and marketing expenses decreased throughout fiscal 1996, although from the first quarter of fiscal 1997, selling and marketing expenses increased steadily. The substantial decrease in selling and marketing expenses during fiscal 1996 was the result of a substantial restructuring of sales and marketing away from resellers, and the reduced associated advertising and trade show expenses. Selling and marketing expenses increased during the first three quarters of fiscal 1997, reflecting the Company's expansion of its marketing efforts into new I/O technology markets. The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period to period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. As a result of numerous factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected. See "Risk Factors -- Fluctuations in Quarterly Operating Results." LIQUIDITY AND CAPITAL RESOURCES QLogic has financed its recent working capital needs and capital expenditure requirements primarily from internally generated funds and facilities and equipment leases. Cash provided by operations was approximately $9.0 million for the nine months ended December 29, 1996. Cash provided by operations was approximately $8.8 million in fiscal 1996, compared to cash used in operations of $146,000 in fiscal 1995, and cash provided by operations of $477,000 in fiscal 1994. The growth in cash provided by operations is primarily attributable to improved profitability, accounts receivable collection, cash management and internal efficiency. Cash used in investing activities was approximately $3.1 million, $1.2 million, $1.3 million and $3.0 million for the nine months ended December 29, 1996 and fiscal years 1996, 1995 and 1994, respectively, reflecting expenditures for property and equipment. Cash provided by financing activities was approximately $1.5 million for the nine months ended December 29, 1996, which reflected proceeds from the exercise of stock options, offset in part by principal payments under capital leases. Cash used in financing activities, reflecting primarily principal payments under capital leases, was approximately $275,000 and $277,000 in fiscal 1996 and 1995, respectively, compared to cash provided by financing activities of approximately $5.3 million for fiscal 1994. Fiscal 1994 was significantly impacted by the Distribution. Working capital at December 29, 1996 was $16.9 million, as compared to $13.3 million at March 31, 1996. At December 29, 1996, the Company's principal sources of liquidity included cash of $15.9 million. In addition, the Company has a line of credit of up to $7.5 million with Silicon Valley Bank. The line of credit allows the Company to borrow at the bank's prime rate plus 0.5%. There were no borrowings under the line of credit as of December 29, 1996. The line of credit with Silicon Valley Bank expires July 5, 1997, and, although there can be no assurances, the Company currently expects to renew this line of credit. The Company currently anticipates capital expenditures in fiscal 1997 will be approximately $4.0 million. The Company also has long term capital lease commitments of $401,000 which are due over the next three years. The Company believes that the net proceeds of the offering, together with existing cash balances, facilities and equipment leases, cash flow from operating activities and its available line of credit will provide the Company with sufficient funds to finance its operations for at least the next 12 months. However, should the Company experience any difficulty in obtaining sufficient foundry capacity in the future, the Company may undertake 20 22 certain transactions to secure its supply of semiconductors. Such transactions could require the Company to commit substantial capital and could require the Company to seek additional equity or debt financing. See "Risk Factors -- Transactions to Obtain Manufacturing Capacity; Future Capital Needs" and "Use of Proceeds." Prior to the Distribution, QLogic and Emulex entered into a Tax Sharing Agreement (the "Tax Sharing Agreement") for purposes of allocating pre-Distribution tax liabilities between QLogic and Emulex and to implement the Distribution as a tax free distribution. The total amount due Emulex pursuant to the Tax Sharing Agreement at December 29, 1996 was $458,000 which was included in other noncurrent liabilities. Amounts due Emulex under the Tax Sharing Agreement are payable on December 30, 1999, and commenced bearing interest on January 1, 1996, at the rate applicable to underpayments of Federal income taxes, which was 9% at December 29, 1996. Interest due Emulex is payable quarterly and the Company commenced interest payments in April 1996. 21 23 BUSINESS OVERVIEW QLogic Corporation is a leading designer and supplier of semiconductor and board level I/O products. The Company's products provide a high performance interface between computer systems and their attached data storage peripherals, such as hard disk and tape drives, CD-ROM drives and RAID subsystems. QLogic provides complete I/O technology solutions by designing and marketing single chip controller and adapter board products for both sides of the computer/peripheral device interlink, or "bus." Historically, the Company has targeted the high performance sector of the I/O market, focusing primarily on the SCSI industry standard. The Company is utilizing its I/O expertise to develop products for emerging I/O standards, such as Fibre Channel. Fibre Channel is experiencing early industry acceptance as a higher performance solution that maintains signal integrity while allowing for increased connectivity between a computer system and its data storage peripherals. QLogic's products utilize various I/O standards to service the needs of manufacturers and end users of various types of computer systems and components, such as workstations, servers and data storage peripherals. The Company provides high performance SCSI-based solutions and new I/O solutions based on the emerging Fibre Channel standard, and is leveraging its technological capabilities to provide solutions based on the IDE standard. The Company believes that its technological leadership, extensive involvement in its customers' product development process and the ease of migration of its SCSI-based products to its new I/O products position the Company to provide additional I/O solutions to its existing customer base. The Company believes that these attributes also provide it with competitive advantages in establishing new relationships with additional OEMs for both computer systems and data storage peripherals. QLogic markets and distributes its products through a direct sales organization supported by field application engineers, as well as through a network of independent manufacturers' representatives and regional and international distributors. The Company's primary OEM customers are major domestic and international suppliers and manufacturers of servers, workstations and data peripherals, such as Sun Microsystems, Inc., Fujitsu Limited and Digital Equipment Corporation. INDUSTRY BACKGROUND The increasing processing power of computers, the proliferation of networks, the rapid growth in the usage of the Internet and intranets, the wider application of computers in multimedia and telecommunications applications and the availability of higher performance data storage peripheral devices have driven the demand for increased data throughput among servers, workstations and data storage peripherals and, as a result, for increased I/O system performance. The I/O system is the electronic link between the host CPU and the computer's data storage peripheral devices, such as hard disk drives, tape drives, removable disk drives, CD-ROM drives and RAID subsystems. The I/O system must utilize industry standard hardware and software interfaces to manage and direct the flow of large volumes of data at high speeds between the CPU and multiple data storage peripherals, and, at the same time, minimize the consumption of CPU processing power and maintain peripheral data storage integrity. As microprocessors run at higher speeds and levels of performance, they require I/O systems which support faster and more autonomous data transmission and other advanced capabilities in order to function optimally. 22 24 The following diagram illustrates the use of the I/O system in a computer system using multiple data storage peripherals. [GRAPHIC DISPLAYING I/O INTERFACE BETWEEN HOST COMPUTER AND MULTIPLE DATA STORAGE PERIPHERALS] IDE was an early standard for data interchange for personal computers. Historically, IDE-based I/O systems managed and directed the flow of data between personal computers and up to two hard disk drives. As PC-based servers became increasingly sophisticated, the relatively low data throughout and minimal connectivity of IDE became a limiting factor for system performance. As a result, high performance systems, such as servers and workstations, migrated to faster standards. Nevertheless, it is anticipated that IDE will remain an important and cost-effective solution to the I/O needs of the personal computer market due to the large installed base of personal computers and due to the increasing performance capabilities of new IDE standards, such as EIDE and Ultra IDE, which operate at higher data transfer rates and support up to four data storage peripherals. International Data Corporation ("IDC"), an independent market research firm, estimates that the overall market for IDE hard disk controller devices will increase from approximately 95 million units in 1996 to over 197 million units in 2000. In 1996, approximately 23% of this market, or approximately 22 million unit sales, was available to independent silicon suppliers. In response to the increased data throughput required by networks and workstations, SCSI was developed and adopted as the industry high performance I/O communications standard. The overall growth of the SCSI marketplace has been driven by rapid technological change and the evolving dynamics of high performance computer and computer data storage peripheral devices, including, the increased variety of higher performance peripheral devices and the continual shift toward higher capacity and higher data rate disk drives; the demand for I/O interfacing capabilities with greater numbers and types of attached peripherals; the movement toward more distributed network architectures across greater distances; the need for greater volumes of data transfer; and the demand for increased data throughput. Additionally, SCSI is also benefiting from the emerging "plug and play" standard, that is supported by Windows operating systems and Intel microprocessor-based systems, which simplifies the installation process, and from the growing usage of multi-tasking, multi-threading operating systems for which the prevailing IDE technology is less suited. For the computer systems products market, IDC projects shipments of workstations, servers and other high performance systems to exceed 8.5 million units in the year 2000, up from approximately 3.7 million units in 1996, representing a 23% compound annual growth rate. For the peripheral controller market, IDC projects the shipments of peripheral products, hard disk drives, tape drives, removable disk drives and CD-ROM/DVD drives to grow from approximately 166 million units shipped in 1996 to over 390 million units shipped in the year 2000, representing a 23% compound annual growth rate. 23 25 The continuing evolution towards higher performance computer systems has led to the development of new connectivity solutions that provide even greater data interchange between computer systems and data storage peripherals. Fibre Channel is emerging as a new industry standard to meet the demand for increased connectivity and data transfer rates. Fibre Channel is an advanced I/O standard which provides data transmission speeds up to approximately two and one-half times the rate currently provided by the fastest SCSI-based solutions. In addition, Fibre Channel is designed to maintain signal integrity while allowing for data interchange between a computer system and up to eight times more peripherals than SCSI. Furthermore, Fibre Channel is designed to support the use of either a fibre optic connection or a more compact version of the copper cable traditionally used for SCSI solutions. Fibre optic connection allows the distance between a computer system and its data storage peripherals to extend up to 10 kilometers. The Company believes Fibre Channel will likely be the I/O technology of choice for larger, higher performance data and network applications while SCSI-based products will continue to be used in applications requiring less functionality and performance. Computer system and peripheral device manufacturers select I/O technologies for incorporation into their products primarily on the basis of application, performance and connectivity needs. The I/O products selected must be specifically tailored to the manufacturer's requirements, in order to be compatible with the manufacturer's system or peripherals either on a turn-key basis or with minimum developmental effort. In addition to being compatible with the present system or peripherals, I/O products ideally must be both "forward" and "backward" compatible with future and past computers and peripherals. That is, there must be a ready migration path between the I/O product and other products sold and under development by the manufacturer. Also, it is critical that the I/O product be available at a reasonable cost and in a timely manner, so as not to delay the manufacturer's time to market, which has become increasingly important in an era of short product life cycles. In order to achieve these goals, manufacturers increasingly seek to involve I/O product suppliers in their product validation and development cycles. By including the I/O system providers in their planning and development process, manufacturers not only ensure compatibility between product lines but also reduce the average time to market for their products. THE QLOGIC SOLUTION QLogic is a leading designer and supplier of semiconductor and board-level I/O products. The Company has been designing and marketing SCSI-based products for over 10 years and is a leading supplier of connectivity solutions to this market sector. The Company is leveraging its technological expertise in SCSI into higher and lower end hardware and software solutions for its OEM customer base. In 1996, the Company introduced the industry's first fully integrated single chip PCI to Fibre Channel controller. The Company also recently has introduced devices based on IDE standards to address additional I/O needs of its OEM customer base. The Company works closely with its customers in order to anticipate and help identify their needs. Even after a product is identified and validated, the Company continues to work with the customer in a joint product development process to ensure compatibility with the customer's future product designs. As a result of this partnership oriented approach, the Company believes that its customers benefit from significant time to market advantages. By gaining insight into the customers' system needs, the Company believes that it is in a better position to deliver I/O products with an easier migration path, thus reducing the customers' firmware and software development costs and associated implementation risks. In addition, by utilizing selected wafer fabrication suppliers, the Company seeks to ensure that it has ready access to the latest developments in wafer fabrication, in addition to avoiding the fixed costs associated with foundry ownership. The Company's products are designed to reduce board space requirements on plug-in cards, computer motherboards and peripheral controller boards by integrating multiple I/O controller functions on a single chip. The Company believes its products offer superior compatibility and ease of migration across multiple I/O standards due to their use of common software. The Company believes that its experience and focus on the SCSI market sector, the ease of migration of its products, its current development efforts into I/O standards such as IDE and Fibre Channel and its close customer relationships with leading server, workstation and peripheral manufacturers provide the Company with competitive advantages in the I/O product market. 24 26 STRATEGY QLogic's objective is to be a leading provider of high performance I/O solutions to the IDE, SCSI and Fibre Channel sectors of the I/O market. Key elements of the Company's strategy to achieve this objective include the following: Maintain Technological Leadership. The Company conducts active engineering and development programs, in concert with its customers, to remain at the forefront of I/O technology. The Company has traditionally been a leader in I/O technologies, from the early developments in the SCSI standard to modern developments in Fibre Channel connectivity. In 1985 the Company's predecessor developed the first board level product for the SCSI standard, in 1990 the Company's predecessor developed the industry's first fast SCSI solution and in 1996 QLogic introduced the industry's first fully integrated single chip PCI to Fibre Channel controller. The Company recently has significantly expanded its design and engineering resources to support its growing engineering and development programs. Facilitate Migration to New I/O Technologies. The Company intends to broaden its product lines to allow its customers to quickly transition to Fibre Channel and other new I/O technologies. The Company has designed its existing I/O chip architecture to support new higher performance I/O technologies, including Fibre Channel. By providing a more flexible chip architecture, the Company seeks to minimize its customers' firmware and software migration expenses and associated risks of implementation. The Company believes that OEMs and end users will increasingly demand new I/O technologies with a ready migration path from current products. Increase Penetration of Existing Customer Base. The Company seeks to serve a broad range of the I/O needs of its installed base of SCSI product customers. The Company seeks to leverage its technological expertise in SCSI products, in addition to its long standing vendor and product development relationships with its customers, to successfully market its IDE, Fibre Channel and new SCSI solutions to its existing customers. The Company believes that its existing relationships, demonstrated commitment to customer support and the ease of migration between its various product lines will provide it with a competitive advantage with respect to other I/O providers. Broaden Customer Base and Sales Channels. As the Company enters into new sectors of the I/O market, it intends to market its products to a variety of customers that traditionally have not been candidates for sales of the Company's SCSI-based products. The Company believes that the proliferation of Intel microprocessor-based servers and workstations, as opposed to those based on traditional RISC architectures, represents a significant new market opportunity. The Company will attempt to serve this market initially through its existing direct sales channel and distributors. The Company additionally intends to identify new independent manufacturers' representatives and regional and international distributors to facilitate its marketing efforts. Improve Time to Market. The Company continually seeks to improve the time to market of its products in order to improve the time to market of its customers' products and thereby enhance their competitiveness. The Company is significantly involved in many of its customers' product identification and development processes. By maintaining this partnership approach to the product development cycle, the Company's products are tailored for, and designed into, its customers' products. The Company's IDE, SCSI and Fibre Channel products are designed to preserve a substantial portion of a customer's existing firmware investment and operate on substantially similar software, thus minimizing the design time necessary during customers' product and technology migration. Additionally, the Company believes that using selected third-party foundries provides it with the flexibility to adopt new technologies and obtain increased capacity, thereby allowing the Company to bring its products to market more quickly. TECHNOLOGY The Company develops and markets I/O products for both the host and peripheral connections of the I/O bus. For the host interface, the Company's products include a variety of adapters, in both board and single chip integrated circuit form, which address the server and workstation segments of the computer market. For peripheral applications, the Company provides single chip controllers for data storage peripherals, including hard 25 27 disk drives, tape drives, removable disk drives, CD-ROM drives and RAID subsystems. The Company's I/O products are currently based on the three most prevalent interface standards: IDE, SCSI and Fibre Channel. The Company has historically focused on the SCSI standard interface for its I/O product development. The Company's initial design wins for SCSI-based host products came from manufacturers of workstations and servers using Reduced Instruction Set Computer ("RISC") processors. The Company developed an embedded RISC-based controller, which is supplied with executable firmware capable of being custom tailored. The Company's leading peripheral technological developments include a broad range of Very Large Scale Integration ("VLSI") SCSI and IDE controllers, which incorporate intelligent I/O controllers with powerful data error correction capability, in order to ensure data integrity between the CPU and its peripherals. After accumulating significant architectural and systems expertise in designing SCSI devices over successive generations of the products, the Company expanded its SCSI-based host adapter board and peripheral controller product lines to address additional computer systems and data storage peripheral market segments, such as IDE and Fibre Channel. In 1996, the Company introduced the industry's first fully integrated single chip PCI to Fibre Channel controller. Fibre Channel is a scalable data transfer interface technology (currently implemented at 100 megabytes per second) that maps multiple standard transport protocols, and utilizes compact copper cables, or fiber optics to transmit data over a distance of up to 10 kilometers, while supporting various topologies for data transfer. The Company's single chip design with an embedded transceiver provides certain advantages over existing multi-chip solutions, including a smaller footprint, increased reliability and a more cost-effective solution. The Company believes Fibre Channel will become an important I/O interface for high performance peripherals and networks over the next several years. The Company's host adapter chip product line incorporates its Intelligent SCSI Processor ("ISP"), which integrates certain controller functions, such as proprietary RISC processor, host interface (PCI or SBus) and protocol processor (SCSI or Fibre Channel). By incorporating an I/O processor to control SCSI or Fibre Channel operations and by including a proprietary RISC processor to control and direct memory and software activities, the Company's ISP architecture facilitates faster throughput and is designed to minimize customer resource requirements as I/O standards evolve. Furthermore, the Company's product architecture is designed to facilitate both upward and downward compatibility. Customers' significant software investments can be preserved during transition from Fast SCSI to Ultra SCSI, with only minimal additional software design necessary to complete the upward migration to the Company's Fibre Channel solutions. For the peripherals market, the Company's triple embedded controller ("TEC") architecture integrates certain control functions such as buffer controller, powerful data error correction and disk formatting, microprocessor interface and I/O interface (SCSI, IDE or Fibre Channel). The Company's products are designed to facilitate backward migration from SCSI to IDE and forward migration from SCSI to Fibre Channel by ensuring that a substantial portion of a customer's firmware investments can be preserved during the transition. The Company's common architecture modules for ISP and TEC products are designed to benefit the Company's customers by providing faster time to market, reduced support costs, simplified technology transitions and increased performance. The markets in which the Company competes are characterized by rapidly changing technology, evolving industry standards and continuing improvements in products and services. There can be no assurance that the Company will respond effectively to technological changes or that the Company's products will conform to evolving industry standards and protocols. The Company has invested and will continue to invest significant resources in the development of its Fibre Channel based products; there can be no assurance that Fibre Channel will be adopted as a predominant industry standard, or that the Company's Fibre Channel products will conform to an industry standard which has yet to be uniformly adopted. The failure of the Company's products to gain acceptance within industry standards and protocols would adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Rapid Technological Change; Dependence on New Products; Industry Standards." 26 28 PRODUCTS QLogic designs and supplies semiconductor and board level I/O solutions for peripheral and computer systems products. The Company's products have traditionally been based on the SCSI standard, and the Company is currently developing products for the Fibre Channel and IDE standards. - ---------------------------------------------------------------------------------------------- PRODUCT DESCRIPTION - ---------------------------------------------------------------------------------------------- PERIPHERAL PRODUCTS - ---------------------------------------------------------------------------------------------- Fast Architecture SCSI - First introduced in 1991 (FAS) - Supports latest SCSI standards - Supports Fast and Ultra SCSI transfer rates (up to 40 MB/sec.) - Supports 8- or 16-bit data handling - May be used in host or peripheral applications - ---------------------------------------------------------------------------------------------- Triple Embedded - First introduced in 1991 Controllers (TEC) - Single chip disk controllers - Integrated buffer controller, formatter and SCSI processor - Powerful on-chip data error correction - Supports transfer rates compatible with Fast, Wide and Ultra SCSI (up to 40 MB/sec.) - Supports 8- or 16-bit data handling - ---------------------------------------------------------------------------------------------- COMPUTER SYSTEMS PRODUCTS - ---------------------------------------------------------------------------------------------- Intelligent SCSI - First introduced in 1992 Processor (ISP) - - Embedded RISC single chip solution Host Adapter Chips - Supports latest SCSI standards - Supports transfer rates up to 40 MB/sec. - Supports 8- or 16-bit data handling - Supports direct PCI and SBus connection - Recently shipped Fibre Channel evaluation units which operate at transfer rates up to 100 MB/sec. - ---------------------------------------------------------------------------------------------- QLA Product Family - - First introduced in 1993 Host Adapter Boards - Full line of host adapter cards with direct PCI and SBus connection - Supports latest SCSI standards - Incorporates the Company's ISP host adapter chips - Provides a fully integrated, high performance board level I/O interface solution - Recently shipped Fibre Channel evaluation units which operate at transfer rates up to 100 MB/sec. - ----------------------------------------------------------------------------------------------
SALES AND MARKETING QLogic markets and distributes its products through a direct sales organization supported by field application engineers, as well as through a network of independent manufacturers' representatives and regional and international distributors. In North America, the Company uses a tiered sales and marketing approach, with a direct sales force to serve large and strategic OEM accounts, OEM representatives that are focused on specific medium sized accounts, and regional distributors and resellers that serve smaller accounts. Throughout the Pacific Rim, the Company sells directly as well as through a master distributor. In Europe, the Company sells its products through distributors and through a representative. The Company believes that it is important to work closely with its large peripheral and computer system manufacturer OEMs during their design cycles. The Company supports these customers with extensive applications and system design support, as well as training 27 29 classes and seminars both in the field and from its offices in Costa Mesa, California. The Company also maintains a high level of customer support through technical hotlines and Internet communications. The Company's manufacturers' representatives and distributors are not subject to minimum purchase requirements and can discontinue marketing any of the Company's products at any time. The Company's distributors are permitted to return to the Company a portion of the products purchased by them. In addition, the Company provides its distributors with price protection in the event that the Company reduces the prices of its products. The loss of one or more manufacturers' representatives or distributors could have an adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Small Number of Customers." The Company's marketing efforts are focused on establishing and developing long term relationships with OEMs and other potential customers. The sales cycle typically begins with a design win, which entails a product of the Company being selected to be incorporated into a potential customer's computer system or data storage peripherals. Once the Company secures a design win with a given customer, the time to production shipment can range between six and 18 months. After winning a design with a potential customer, QLogic works closely with the customer to integrate its product with the customer's current and next generation products. Due to the extensive amounts of resources required for each customer design, typically only one I/O solution is designed into any given customer product. After being designed into a customer's product, sales are typically made through purchase orders which are subject to cancellation, postponement or other types of delays. International sales of the Company's products accounted for approximately 51%, 55% and 62% of net revenues for the nine months ended December 29, 1996 and for fiscal years 1995 and 1996, respectively. International sales are denominated in U.S. dollars. Due to its international sales, the Company is subject to a number of risks, including restrictions related to export regulations as well as those related to political upheaval and economic downturns in foreign nations. See "Risk Factors--Risks of Doing Business in International Markets." CUSTOMERS The Company's primary customers are regional and international distributors and major domestic and international suppliers and manufacturers of servers, workstations and data storage peripherals. The following is a representative list of the Company's leading customers during the nine months ended December 29, 1996: Atto Technology, Inc. Jabil Circuit, Inc. Avex Electronics, Inc. Micropolis Corporation Axis Components, Inc. NewTek Incorporated Digital Equipment Corporation Silicon Graphics, Inc. Distributed Processing Technology Sun Microsystems, Inc. Fujitsu Limited Tokyo Electron Limited GDL Corporation, Ltd. Vela Research, Inc. Hitachi Computer Products (America), Inc.
A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The Company's six largest customers in each respective period accounted for approximately 73%, 81% and 71% of the Company's net revenues for the nine months ended December 29, 1996 and for fiscal 1996 and 1995, respectively. For the nine months ended December 29, 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Fujitsu Limited accounted for approximately 24%, 18% and 16% of the Company's net revenues, respectively. For fiscal 1996, Tokyo Electron Limited, Sun Microsystems, Inc. and Avex Electronics, Inc. accounted for approximately 42%, 13% and 11% of the Company's net revenues, respectively. For fiscal 1995, Tokyo Electron Limited, Micropolis Corporation and Digital Equipment Corporation accounted for approximately 24%, 14% and 11% of the Company's net revenues, respectively. Many of the Company's leading customers purchase several types of the Company's products, and the Company believes that the sale of any particular product does not comprise a significant percentage of total 28 30 sales to such customers. Nevertheless, the Company is seeking to diversify its customer base so that total sales to any one customer or any small number of customers is not a significant percentage of overall sales. The Company has recently established new channels of distribution in the Pacific Rim. The Company expects that sales to Tokyo Electron Limited will significantly decrease as a result of the Company establishing direct sales channels and securing a new master distributorship in Japan. There can be no assurances, however, that the Company will be successful in further diversifying its customer base. The Company believes that its major customers continually evaluate whether or not to purchase products from alternate or additional sources. Accordingly, there can also be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss of purchases could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Small Number of Customers." ENGINEERING AND DEVELOPMENT In order to compete successfully, the Company believes that it must continually design, develop and introduce new products that take advantage of market opportunities and address emerging standards. The Company's strategy is to leverage its substantial base of architectural and systems expertise and product innovation capabilities to address a broad range of I/O solutions as well as to develop products for its core SCSI business. The Company is currently engaged in the development of integrated circuit I/O controllers for additional I/O standards and enabling technologies, such as Fibre Channel, Ultra SCSI, Low Voltage Differential (LVD), Ultra IDE and 1394 (Firewire). The Company intends to broaden its product lines while continuing to allow its customers to transition rapidly to Fibre Channel and other emerging I/O standards. At December 29, 1996, the Company employed approximately 90 engineers, including technicians and support personnel engaged in the development of new products and the improvement of existing products. There can be no assurance that the Company will continue to be successful in attracting and retaining key personnel with the skills and expertise necessary to develop new products in the future. Engineering and development expenses were approximately $7.2 million, $7.2 million and $7.6 million for the nine months ended December 29, 1996 and for fiscal 1996 and 1995, respectively. The markets for the Company's products are characterized by rapid technological change, evolving industry standards and product obsolescence. The Company's success is highly dependent upon the timely completion and introduction of new products at competitive prices and performance levels. There can be no assurance that the Company will be able to identify new product opportunities successfully and develop and bring to market new products in a timely manner, or that the Company will be able to respond effectively to technological advancements or new product announcements. See "Risk Factors -- Rapid Technological Change; Dependence on New Products; Industry Standards." BACKLOG The Company's backlog of orders was approximately $17.0 million at December 29, 1996, compared to approximately $15.5 million at March 31, 1996. All backlog is scheduled for delivery within six months or less. Most orders are subject to rescheduling and/or cancellation with little or no penalty. Purchase order release lead times depend upon the scheduling practices of the individual customer, and the rate of booking new orders fluctuates from month to month. The Company's customers have in the past encountered uncertain and changing demand for their products. Orders are typically placed based on customer forecasts. If demand falls below customers' forecasts, or if customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. In the past, the Company has experienced, and may at any time and with minimal notice in the future experience, cancellations and postponements of orders. Therefore, the level of backlog at any particular date is not necessarily indicative of sales for any future period. COMPETITION The markets for both peripheral and host computer products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance 29 31 improvements and evolving industry standards. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of shortened product life cycles and even shorter design-in cycles, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. A design win usually ensures a customer will purchase the product until a higher performance standard is available or a competitor can demonstrate a significant price/performance advantage. All of the Company's products compete with products available from several companies, many of whom have research and development, long term guaranteed supply capacity, marketing and financial resources, manufacturing capability and customer support organizations that are substantially greater than those of the Company. The Company believes that its future operating results will depend, in part, upon its ability to continue to improve product and process technologies and develop new technologies in order to maintain the performance advantages of products and processes relative to competitors, to adapt products and processes to technological changes, and to identify and adopt emerging industry standards. Because of the complexity of its products, the Company has experienced delays from time to time in completing products on a timely basis. If the Company is unable to design, develop and introduce competitive new products on a timely basis, its future operating results would be adversely affected. The Company currently competes primarily with Adaptec, Inc. and Symbios Logic, Inc. The Fibre Channel sector of the I/O market, the Company expects to compete primarily with Adaptec, Inc., Symbios Logic, Inc. and Hewlett-Packard Company. In the IDE sector, the Company expects to compete with Adaptec and Cirrus Logic, Inc. The Company may compete with some of its larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their products. At least one large OEM customer in the past has decided to vertically integrate and has therefore ceased purchases from the Company. The Company believes that one of its principal competitive strengths in the integrated circuit I/O controller market is its ability to obtain major design wins as the result of its systems level expertise, integrated circuit design capability and substantial experience in I/O applications, particularly SCSI. The Company believes competitive factors in design wins are time to market, performance, product features, price, quality, technical support and ease of migration path to other I/O standards. The Company will have to continue to develop products appropriate to its markets to remain competitive, as its competitors continue to introduce products with improved performance characteristics. While the Company continues to devote significant resources to research and development, there can be no assurance that such efforts will be successful or that the Company will develop and introduce new technology and products in a timely manner. In addition, while relatively few competitors offer a full range of SCSI and other I/O products, additional domestic and foreign manufacturers may increase their presence in, and resources devoted to, these markets. There can be no assurance that the Company will compete successfully in the future against its existing competitors or potential competitors. See "Risk Factors -- Competition" and "-- Rapid Technological Change; Dependence on New Products; Industry Standards." MANUFACTURING The Company subcontracts the manufacturing of its semiconductor chips and its host adapter boards to independent foundries and subcontractors, which allows the Company to avoid the high costs of owning, operating and constantly upgrading a wafer fabrication facility and a host adapter board assembly factory. As a result, the Company focuses its resources on product design and development, quality assurance, sales and marketing and customer support. The Company designs both its semiconductor and host adapter board products, and performs final tests on products, including tests required under the Company's ISO9001/TickIT Certification. The Company also provides fab process reliability tests, conducts failure analysis and audits its finished goods inventory to confirm the integrity of its quality assurance procedures. The Company's semiconductor products are ASICs, currently manufactured for the Company by a number of domestic and offshore foundries. The Company's major semiconductor suppliers are Toshiba, NEC Electronics, LSI Logic and Samsung Semiconductor, Inc. Most of the Company's products are manufactured using 0.8, 0.6 or 0.5 micron process technology. 30 32 The Company is dependent on its foundries to allocate to the Company a portion of their foundry capacity sufficient to meet the Company's needs and to produce products of acceptable quality and with acceptable manufacturing yields in a timely manner. These foundries fabricate products for other companies and manufacture products of their own design. The Company does not have long-term agreements with any of its foundries, and purchases both wafers and finished chips on a purchase order basis. Therefore, the foundries generally are not obligated to supply products to the Company for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. The Company works with its existing foundries, and intends to qualify new foundries, as needed, to obtain additional manufacturing capacity. There can be no assurance, however, that the Company will be able to obtain additional capacity. The Company currently purchases its semiconductor products from its foundries either in finished form or wafer form. The Company uses subcontractors for die assembly of its semiconductor products purchased in wafer form, and for assembly of its host adapter board products. In the assembly process for the Company's semiconductor products, the silicon wafers are separated into individual die, which are then assembled into packages and tested. Following assembly, the packaged devices are further tested and inspected by the Company prior to shipment to customers. For its host adapter board products, the Company purchases components and printed circuit boards as kits. The Company provides these kits to contract manufacturing companies that work together with the Company's component suppliers to assemble the boards to the Company's specifications. The Company believes most component parts used in its host adapter boards are standard off-the-shelf items which are, or can be, purchased from two or more sources. The Company selects suppliers on the basis of technology, manufacturing capacity, quality and cost. Whenever possible and practicable, the Company strives to have at least two manufacturing locations for each host adapter board and chip product. Nevertheless, the Company's reliance on third-party manufacturers involves risks, including possible limitations on availability of products due to market abnormalities, unavailability of, or delays in obtaining access to, certain product technologies and the absence of complete control over delivery schedules, manufacturing yields, and total production costs. The inability of the Company's suppliers to deliver products of acceptable quality and in a timely manner or the inability of the Company to procure adequate supplies of its products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence on Wafer Suppliers and Other Subcontractors." INTELLECTUAL PROPERTY Although the Company has seven patents issued and two additional patent applications pending in the United States, the Company relies primarily on its trade secrets, trademarks and copyrights to protect its intellectual property. The Company attempts to protect its proprietary information through agreements with its customers, suppliers, employees and consultants, and through other security measures. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will be successful. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. While the Company's ability to compete may be affected by its ability to protect its intellectual property, the Company believes that, because of the rapid pace of technological change in the I/O solutions markets, its technical expertise and ability to introduce new products on a timely basis will be more important in maintaining its competitive position than protection of its intellectual property. Although the Company continues to implement protective measures and intends to defend vigorously its intellectual property rights, there can be no assurance that these measures will be successful. The Company has received notices of claimed infringement of trademark rights in the past, and there can be no assurance that third parties will not assert claims of infringement of trademarks or any other intellectual property rights against the Company with respect to existing and future products. In the event of a patent or other intellectual property dispute, the Company may be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the claim. There can be no assurance that the Company would be successful in such development or that any such license would be 31 33 available on commercially reasonable terms, if at all. In the event of litigation to determine the validity of any third party's claims, such litigation could result in significant expense to the Company, and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. See "Risk Factors -- Lack of Significant Patent Protection; Infringement Risks." EMPLOYEES The Company had 183 employees as of December 29, 1996. The Company believes that its future prospects will depend, in part, on its ability to continue to attract, train, motivate, retain and manage skilled engineering, sales, marketing and executive personnel. None of QLogic's employees is represented by a labor union. The Company believes that its relations with its employees are good. See "Risk Factors -- Dependence on Key Personnel." PROPERTIES The Company's corporate offices and principal product development, sales and operational facilities are currently located in one, approximately 70,000 square foot building in Costa Mesa, California. The Company occupies the facility pursuant to a lease that expires in 1999. The Company believes that its current facilities are adequate for its present level of operations. LEGAL PROCEEDINGS From time to time, the Company is a party to ordinary disputes arising in the normal course of business. The Company does not believe that the outcome of these matters will have a material adverse effect on the Company's business, financial condition or results of operations. 32 34 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with respect to the executive officers and directors of the Company, including their ages as of December 29, 1996:
NAME AGE POSITION WITH THE COMPANY - ------------------------------ --- --------------------------------------------------------- Gary E. Liebl (1)............. 55 Chairman of the Board of Directors H.K. Desai.................... 50 President, Chief Executive Officer and Director Thomas R. Anderson............ 52 Vice President and Chief Financial Officer Michael R. Manning............ 42 Secretary and Treasurer Mark E. Edwards............... 38 Vice President -- Sales and Corporate Marketing David Tovey................... 52 Vice President and General Manager -- Peripheral Products Group Lawrence F. Fortmuller, Jr.... 48 Vice President and General Manager -- Computer Systems Group James A. Bixby (1)............ 49 Director Carol L. Miltner (2).......... 54 Director George D. Wells (2)........... 61 Director
- --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Mr. Liebl has been Chairman of the Board of Directors of the Company since the Distribution in February 1994. Mr. Liebl currently serves as a director of Smartflex Systems, Inc., a manufacturing services provider of sophisticated electronic assemblies. He is also Vice Chairman of the Board of Directors of Artisoft, Inc., a local area network company. Beginning in October 1985, Mr. Liebl held senior management positions, including Chairman of the Board and Chief Executive Officer, at Cipher Data Products, Inc., a manufacturer of tape and optical disk drives to the computer industry, until such corporation was acquired by Archive Corporation in April 1990. Mr. Desai joined the Company in August 1995 as President and Chief Technical Officer of QLogic and President of QLogic Foreign Sales Corporation. He was subsequently promoted to President and Chief Executive Officer and became a Director in January 1996. From May 1995 to August 1995, he was Vice President, Engineering (Systems Products) at Western Digital Corporation, a manufacturer of disk drives. From July 1990 until May 1995, he served as Director of Engineering, and subsequently Vice President of Engineering at the Company. From 1980 until joining the Company in 1990, Mr. Desai was an Engineering Section manager at Unisys Corporation, a computer system manufacturer. Mr. Anderson joined the Company in July 1993 as Vice President and Chief Financial Officer. From October 1990 to July 1993, he was corporate Senior Vice President and Chief Financial Officer of Distributed Logic Corporation, a manufacturer of tape and disk controllers and computer subsystems. From June 1982 to April 1990, he held various positions with Cipher Data Products, Inc., including corporate Vice President, Chief Financial Officer, Treasurer and Assistant Secretary. Before joining Cipher, Mr. Anderson held various financial positions with Dataproducts Corporation, Rockwell International and Arthur Andersen, LLP. Mr. Manning joined the Company in June 1993 as Treasurer and Secretary. Previously, Mr. Manning held various positions at Emulex, including Senior Director and Treasurer from April 1991 with the additional role of Secretary in 1992. Mr. Manning joined Emulex in July 1983 as Tax Director. Prior to joining Emulex, Mr. Manning was a Tax Manager at KPMG Peat Marwick LLP, independent certified public accountants. Mr. Edwards joined the Company in October 1996 as Vice President -- Sales and Corporate Marketing. Prior to joining the Company, Mr. Edwards served as Vice President -- Sales and Marketing for the Storage Systems Division of Unisys Corporation, from August 1994 to September 1996, and as Director -- European Channels from August 1993 through August 1994. Prior to joining Unisys, Mr. Edwards served as Regional Sales 33 35 Manager for Zitel Corporation from April 1991 through August 1993. Prior to joining Zitel, Mr. Edwards held a sales and management position with Digital Equipment Corporation. Mr. Tovey has served as Vice President and General Manager -- Peripheral Products Group since October 1996. From April 1994 to October 1996, Mr. Tovey served as Vice President -- Marketing of the Company. From March 1985 to April 1994, he held various positions in the Disk Products Division of Toshiba America Information Systems, a computer system and disk drive manufacturer, including Director of Technology Planning and Vice President -- HDD Marketing. Prior to 1985, Mr. Tovey held various marketing and sales management positions with Unisys Corporation and engineering positions with Ferranti, Ltd. in the U.K. Mr. Fortmuller joined the Company in October 1996 as Vice President and General Manager -- Computer Systems Group. Prior to joining the Company, Mr. Fortmuller held various positions with AST Research, Inc., a manufacturer of microprocessor-based systems, for nine years, including Vice President -- Americas Marketing from September 1995 to October 1996; Vice President and General Manager -- Server Business Unit from August 1994 through September 1995; Director of Product Marketing from 1990 through August 1994; and various product marketing positions. Prior to joining AST Research, Inc., Mr. Fortmuller held various product marketing positions with Data Card Corporation, MSI Data Corporation and Litton Industries, Inc. Mr. Bixby became a director of the Company in February 1994. He is Vice President -- Business Development of Rockwell Semiconductor Systems, a producer of high-performance, mixed-signal integrated circuits. Since 1996, Mr. Bixby has been an officer of Rockwell Semiconductor. Previously, Mr. Bixby served as an officer of Brooktree Corporation, most recently as Chairman, President and Chief Executive Officer, from 1983 until its acquisition by Rockwell Semiconductor in 1996. Before joining Brooktree, Mr. Bixby was Director of Engineering at Spin Physics, a division of Eastman Kodak Company. Ms. Miltner became a director of the Company in February 1994. She is President of Miltner & Associates, a management consultant and seminar firm. Ms. Miltner also serves as a director of Multiple Zones International. From December 1993 until March 1995, she served as Executive Vice President of Sales and Marketing of AmeriQuest Technologies, Inc., a subassembler of storage products and distributor of microcomputer products. From July 1991 to December 1993 she was President of Motivation by Miltner. From April 1989 to July 1991, she was Senior Vice President -- Sales of Merisel, a distributor of microcomputer products. For the previous four years, she was Senior Vice President -- Sales of Ingram Micro, Inc. a distributor of computer products. Mr. Wells became a director of the Company in February 1994. He also currently serves as a member of the Boards of Directors of Exar Corporation, a manufacturer of analog and mixed-signal integrated circuits, and Align Rite Corporation, a manufacturer of photomasks. He was President and Chief Executive Officer of Exar Corporation, from June 1992 until October 1996. Before joining Exar, he served as President and Chief Operating Officer of LSI Logic, a manufacturer of HCMOS and BiCMOS application specific integrated circuits, for seven years. 34 36 PRINCIPAL STOCKHOLDERS The following table sets forth, as of April 15, 1997, information regarding beneficial ownership of the Company's Common Stock by each director and each executive officer and by all directors and executive officers of the Company as a group. As of April 15, 1997, there were no persons known by the Company to own beneficially more than 5% of the Company's Common Stock.
SHARES BENEFICIALLY OWNED (1) ------------------------------------------- PERCENT PRIOR PERCENT AFTER NUMBER TO OFFERING OFFERING ------- ------------- ------------- Gary E. Liebl (2)....................................... 15,500 * * H.K. Desai (3).......................................... 57,782 * * Thomas R. Anderson (4).................................. 33,251 * * Michael R. Manning (5).................................. 35,476 * * Mark E. Edwards......................................... -- * * David Tovey (6)......................................... 28,925 * * Lawrence F. Fortmuller, Jr.............................. 1,500 * * James A. Bixby (7)...................................... 12,500 * * Carol L. Miltner (8).................................... 5,491 * * George D. Wells......................................... 5,500 * * All Directors and Executive Officers as a group (10 Persons)............................... 195,925 3.3% 2.5%
- --------------- * Less than 1% of the outstanding shares of Common Stock. (1) Based upon 5,840,701 shares of Common Stock outstanding prior to the Offering and 7,840,701 shares of Common Stock outstanding after the Offering. Each named person and all directors and executive officers as a group are deemed to be the beneficial owners of shares of Common Stock that may be acquired within 60 days upon exercise of stock options. Accordingly, the number of shares and percentages set forth next to the name of such person and all directors and executive officers as a group include the shares of Common Stock issuable upon stock options exercisable within 60 days. However, the shares of Common Stock so issuable upon such exercise by any such person are not included in calculating the percentage of Common Stock beneficially owned by any other stockholder. (2) Includes 12,500 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (3) Includes 50,782 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (4) Includes 28,751 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (5) Includes 3,400 shares held for the benefit of Mr. Manning's minor children. Also includes 18,625 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (6) Includes 20,625 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (7) Consists entirely of shares which may purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. (8) Includes 4,166 shares which may be purchased pursuant to stock options which are currently, or within the next 60 days, will be, exercisable. 35 37 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 12,500,000 shares of common stock, $0.10 par value ("Common Stock"), of which 5,840,701 shares were issued and outstanding at April 15, 1997, and 1,000,000 shares of Preferred Stock, $0.10 par value ("Preferred Stock"), of which 200,000 shares have been designated as Series A Junior Participating Preferred Stock, $0.001 par value (the "Series A Preferred Stock"), none of which was issued and outstanding at April 15, 1997. COMMON STOCK Each stockholder is entitled to one vote for each share of Common Stock held of record on all matters to be voted on by stockholders, and stockholders are not entitled to cumulate votes for the election of directors. Stockholders have no preemptive rights or other subscription rights. There are no conversion rights or redemption rights with respect to shares of Common Stock. All outstanding shares of Common Stock are, and those offered hereby will be, when issued, validly issued, fully paid and nonassessable. Holders of Common Stock are entitled to such dividends as may be declared by the Board of Directors out of funds legally available therefor. On liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the net assets of the Company remaining after the payment of debts, expenses and the liquidation preference of any outstanding shares of Preferred Stock. PREFERRED STOCK The Company's Board of Directors, pursuant to the Company's Restated Certificate of Incorporation, as amended, is authorized to issue the Preferred Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences of the Preferred Stock. The Board of Directors, without stockholder approval, can therefore, issue Preferred Stock with voting, conversion and other rights which could adversely affect the voting power and other rights of, and amounts payable with respect to, the Common Stock. This may be deemed to have a potential anti-takeover effect because the issuance of Preferred Stock in accordance with such provision may delay, defer or prevent a change of control of the Company and could adversely affect the price of the Company's Common Stock. In connection with the Company's Shareholder Rights Plan, the Board of Directors designated rights, preferences and privileges of the Series A Preferred Stock with the purpose of preventing hostile takeovers of the Company that are unfair to the holders of Common Stock. See "-- Shareholder Rights Plan." SHAREHOLDER RIGHTS PLAN On June 4, 1996 the Company's Board of Directors adopted the Shareholder Rights Plan, pursuant to which preferred stock rights (the "Rights") were distributed in the form of a dividend to stockholders of record on the close of business on June 20, 1996 (the "Dividend Date") on the basis of one Right for each share of Common Stock held. One Right will also attach to each share of Common Stock issued by the Company subsequent to the Dividend Date and prior to the Distribution Date (as defined below). In general, the Rights become exercisable or transferable only upon the occurrence of certain events related to changes in ownership of the Common Stock. Once exercisable, each Right entitles its holder to purchase from the Company one one-hundredth of a share ("Unit") of Series A Preferred Stock at a purchase price of $45.00 per Unit, subject to adjustment. The Rights will separate from the Common Stock and become exercisable or transferable on a distribution date (the "Distribution Date"), which will occur on the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of securities representing 15% or more of the Common Stock or (ii) 10 business days following the commencement of a tender or exchange offer that would result in a person or group of related persons becoming an Acquiring Person. Upon the occurrence of certain other events related to changes in the ownership of the Common Stock, each holder of a Right would be entitled to purchase shares of the Common Stock, or an acquiring corporation's common stock, having a market value equal to two times the exercise value of the Right. 36 38 The Rights expire on the earliest of (i) June 4, 2006, (ii) consummation of a merger transaction with a person or group who acquires Common Stock pursuant to a transaction approved by a majority of the disinterested members of the Company's Board of Directors, and (iii) redemption of the Rights. Subject to certain conditions, the Rights may be redeemed by the Company's Board of Directors at any time at a price of $0.001 per Right. The Rights are not currently exercisable and trade together with the shares of Common Stock associated therewith. The Rights, if exercised, will cause a substantial dilution to the equity interest in QLogic to a person's or group's ownership interest in the Company's Common Stock that attempts to acquire the Company on terms not approved by the Company's Board of Directors. See "Risk Factors -- Potential Effect of Anti-Takeover Provisions" and "Description of Capital Stock-- Delaware Law." DELAWARE LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either (i) prior to the date at which the person becomes an interested stockholder, the Board of Directors approves such transaction or business combination, (ii) the stockholder acquires more than 85% of the outstanding voting stock of the corporation (excluding shares held by directors who are officers or held in certain employee stock plans) upon consummation of such transaction, or (iii) the business combination is approved by the Board of Directors and by two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at a meeting of stockholders (and not by written consent). A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to such interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is Harris Trust Company of California. 37 39 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, for whom Cowen & Company, Prudential Securities Incorporated and Morgan Keegan & Company, Inc. are acting as representatives (the "Representatives"), and each of the Underwriters has severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite the name of such Underwriters below:
NUMBER OF NAME SHARES ------------------------------------------------------- --------- Cowen & Company......................................... Prudential Securities Incorporated...................... Morgan Keegan & Company, Inc. .......................... --------- Total......................................... 2,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of the shares of Common Stock offered hereby (other than those covered by the over-allotment option described below), if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock directly to the public initially at the public offering price set forth on the cover page of this Prospectus and in part to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain brokers and dealers. After the shares of Common Stock are released for sale to the public, the offering price and other selling terms may from time to time be varied by the Representatives. The Company has granted the Underwriters an option, exercisable for up to 30 days after the date of this Prospectus, to purchase up to an aggregate of 300,000 additional shares of Common Stock to cover over-allotments, if any. If the Underwriters exercise their over-allotment option, the Underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares to be purchased by each of them as shown in the foregoing table bears to the 2,000,000 shares of Common Stock offered hereby. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the 2,000,000 shares of Common Stock offered hereby. The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act and to contribute to payments that the Underwriters may be required to make in respect thereof. The Company and the Company's officers and directors have agreed not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or any right to acquire Common Stock for a period of 90 days after the date of this Prospectus without the prior written consent (which consent may be given without notice to the Company's stockholders or other public announcement) of Cowen & Company, on behalf of the Underwriters. Cowen & Company has advised the Company that it has no present intention of releasing any of the Company's stockholders or option holders from such lock-up agreements until the expiration of such 90-day period. In connection with this Offering, certain Underwriters and selling group members (if any) or their respective affiliates may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934 or any successor rule or regulation thereto. Passive market making consists of displaying bids on the Nasdaq National Market limited by the highest independent bid for the security and effecting purchases limited by such prices and 38 40 in response to order flow. Net purchases by a passive market maker on each day are generally limited in amount to 30% of the passive market maker's average daily trading volume in Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. In order to facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot in connection with the offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of the Common Stock in the open market. The Underwriters may also reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in the offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short positions, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of the Common Stock in market making transactions and impose penalty bids. These activities may stabilize or maintain the market price of the Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. Cowen & Company has in the past and may in the future provide certain financial advisory services to the Company for which it has received and may receive customary fees and reimbursement of expenses. LEGAL MATTERS The legality of the shares of Common Stock offered hereby will be passed upon for the Company by Stradling, Yocca, Carlson & Rauth, a Professional Corporation, Newport Beach, California. Pillsbury Madison & Sutro LLP, Menlo Park and San Francisco, California, is acting as counsel for the Underwriters in connection with certain legal matters relating to the shares of Common Stock offered hereby. EXPERTS The consolidated financial statements and schedule as of April 2, 1995 and March 31, 1996 and for each of the years in the three-year period ended March 31, 1996, have been incorporated by reference herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. The Registration Statement, including exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith, files reports, proxy or information statements, and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington, 39 41 D.C. 20549, as well as at the following Regional Offices: 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, by mail at prescribed rates. In addition, the Commission has a Web site on the World Wide Web http://www.sec.gov, containing registration statements, reports, proxy and information statements and other information that registrants, such as the Company, file electronically with the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The documents listed below have been filed by the Company with the Commission under the Exchange Act and are incorporated herein by reference: (i) The description of the Common Stock contained in the Company's Registration Statement on Form 10, filed on February 15, 1994; (ii) The description of the Rights contained in the Company's Registration Statement on Form 8-A, filed on June 19, 1996; (iii) The Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 including portions of the Company's definitive Proxy Statement for the 1996 Annual Meeting of Stockholders incorporated therein by reference; and (iv) The Company's Quarterly Reports on Form 10-Q for the quarterly periods ended December 29, 1996, September 29, 1996, and June 30, 1996. All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein, or in any other subsequently filed document that also is or is deemed to be incorporated herein by reference, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide, without charge, to each person, including any beneficial owner, to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any and all of the information that has been incorporated by reference herein (other than exhibits to the information that is incorporated by reference unless such exhibits are specifically incorporated by reference into the information this Prospectus incorporates). Such requests should be directed to QLogic Corporation, Attention: Thomas R. Anderson, Vice President and Chief Financial Officer, 3545 Harbor Boulevard, Costa Mesa, California 92626, telephone number (714) 438-2200. 40 42 GLOSSARY Bus. Any of the internal control paths which travel from the central processing unit to any of the adapters, the I/O ports, or to the random access memory of a computer. The bus is the primary means of communications between components in a personal computer, workstation or server. Controller. A functional unit that controls one or more I/O channels. Peripheral controllers receive data from the host computer, arrange and store the data in a manner suitable for the storage media, retrieve data, correct data for errors and return the data to the host computer. Host controllers receive commands from the host computer, execute data transfers to and from the peripheral device and supervise the placement of the data in the host computer memory. Fibre Channel. An interface standard for connecting peripheral devices to computer systems and networks. Fibre Channel was developed and standardized in order to provide increased data transfer speed, reduced wiring complexity, greater connectivity and to enable greater distances between the connected devices. IDE. Integrated Drive Electronics. A basic interface between the computer and a limited number of data storage devices. Enhanced IDE and Ultra IDE refer to newer technology that offers improved performance, higher capacity support and increased options. IDE is the I/O interface commonly associated with personal computers. ISP. Intelligent SCSI Processor. The Company's integrated circuit I/O architecture which integrates an I/O processor and a proprietary RISC-based processor on a single chip, facilitating faster host I/O transfers, software transparency across multiple I/O standards and greater I/O transfer autonomy from the host CPU. LVD. Low Voltage Differential. A proposed signaling standard which increases SCSI cable length and speed. LVD is used to implement I/O products based on Ultra2 SCSI, which can operate at speeds up to 80 megabytes per second, and is significantly, but not completely, backward compatible with the current Ultra SCSI standard. PCI. Peripheral Component Interconnect. Introduced in 1993, PCI is a local bus architecture designed to support peripherals on a dedicated electronic pathway closer to the central processing unit in order to improve system performance. RAID. Redundant Array of Independent Disks. In order to prevent system data loss due to hard drive failure, RAID devices share data across multiple lower capacity hard drives. By adding some redundancy, the system can tolerate the failure of a single disk without shutdown or data loss. In addition, the system can obtain significant improvements in data transfer rates and time to data, as compared to a single disk solution. RISC. Reduced Instruction Set Computing. A microprocessor architecture designed to reduce the number of instructions and accelerate processing power for workstations, servers and, more recently, personal computers. SCSI. Small Computer System Interface. An interface standard for connecting peripheral devices to a computer system. SCSI defines a special bus cable dedicated to data transfer between the computer and up to 15 peripherals, each with its own controller. The original standard has an 8-bit wide bus and a transfer rate of five megabytes (MB) per second. Fast SCSI has an 8-bit wide bus and a maximum data transfer rate of 10 MB/sec. Fast Wide SCSI has a 16-bit wide bus and a maximum data transfer rate of 20 MB/sec. Ultra SCSI has an 8- or 16-bit wide bus and a maximum data transfer rate of 40 MB/sec. Ultra2 SCSI, which has not yet been deployed, has an 8- or 16-bit wide bus and a maximum data transfer rate of 80 MB/sec. 41 43 [GRAPHIC DEPICTING COMPUTER SYSTEMS AND DATA STORAGE PERIPHERAL PRODUCTS THAT UTILIZE THE COMPANY'S PRODUCTS FROM 1994 THROUGH 1997] 42 44 ============================================================ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................... 3 Risk Factors................................ 5 Use of Proceeds............................. 12 Price Range of Common Stock................. 12 Dividend Policy............................. 12 Capitalization.............................. 13 Selected Consolidated Financial Data........ 14 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 15 Business.................................... 22 Management.................................. 33 Principal Stockholders...................... 35 Description of Capital Stock................ 36 Underwriting................................ 38 Legal Matters............................... 39 Experts..................................... 39 Additional Information...................... 39 Incorporation of Certain Documents by Reference................................. 40 Glossary.................................... 41
============================================================ ============================================================ 2,000,000 Shares [QLOGIC LOGO] Common Stock ------------------------------ PROSPECTUS ------------------------------ COWEN & COMPANY PRUDENTIAL SECURITIES INCORPORATED MORGAN KEEGAN & COMPANY, INC. , 1997 ============================================================ 45 PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Stock being registered hereunder. All of the amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the Nasdaq National Market application fee, all of which, shall be borne by the registrant, in connection with the offering of the shares of Common Stock pursuant to this Registration Statement: Securities and Exchange Commission Fee............................ $ 15,944 NASD Filing Fee................................................... 5,761 Nasdaq National Market Listing Fee................................ 17,500 Accounting Fees and Expenses...................................... 75,000 Legal Fees and Expenses........................................... 200,000 Printing Fees..................................................... 70,000 "Blue Sky" Fees................................................... 5,000 Transfer Agent and Registrar Fees................................. 10,000 Miscellaneous Expenses............................................ 795 ------- Total................................................... $400,000 =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) Section 145 of the Delaware General Corporation Law makes provision for the indemnification of officers and directors in terms sufficiently broad to include indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Section 145 of the Delaware General Corporation Law permits indemnification by a corporation of its officers and directors against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with actions or proceedings against them if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reason to believe their conduct was unlawful. Section 145 provides that no indemnification may be made, however, without court approval, in respect of any claim as to which the officer or director is adjudged to be liable to the corporation. Such indemnification provisions of Delaware law are expressly not exclusive of any other rights which the officers or directors may have under the corporation's by-laws or agreements, pursuant to the vote of stockholders or disinterested directors or otherwise. (b) The Restated Certificate of Incorporation of the registrant provides that the registrant will, to the maximum extent permitted by law, indemnify each of its officers and directors against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was a director or officer of the registrant. The Company also carries directors and officers liability insurance. (c) The Underwriting Agreement (Exhibit 1.1) provides that the Company shall indemnify the Underwriters for certain liabilities, including liabilities arising under the Securities Act. II-1 46 ITEM 16. EXHIBITS. 1.1 Form of Underwriting Agreement. 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and QLogic Corporation (incorporated by reference to same numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996). 5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation. 23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional Corporation (included in Exhibit 5.1). 23.2 Consent of Independent Auditors. 24.1 Power of Attorney (included in the signature pages to the Registration Statement -- see page II-4).
ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) If the securities to be registered are to be offered at competitive bidding: The undersigned registrant hereby undertakes (1) to use its best efforts to distribute prior to the opening of bids, to prospective bidders, underwriters, and dealers, a reasonable number of copies of a prospectus which at that time meets the requirements of Section 10(a) of the Act, and relating to the securities offered at competitive bidding, as contained in the registration statement, together with any supplements thereto, and (2) to file an amendment to the registration statement reflecting the results of bidding, the terms of the reoffering and related II-2 47 matters to the extent required by the applicable form, not later than the first use, authorized by the issuer after the opening of bids, of a prospectus relating to the securities offered at competitive bidding, unless no further public offering of such securities by the issuer and no reoffering of such securities by the purchasers is proposed to be made. (e) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (f) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 48 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Costa Mesa, State of California, on the 25th day of April, 1997. QLOGIC CORPORATION By: /s/ THOMAS R. ANDERSON ------------------------------------ Thomas R. Anderson Vice President and Chief Financial Officer POWER OF ATTORNEY We, the undersigned directors and officers of QLogic Corporation, do hereby constitute and appoint Gary E. Liebl and Thomas R. Anderson, and each of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) to this Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------- ---------------- /s/ GARY E. LIEBL Chairman of the Board of April 25, 1997 - ----------------------------------------------- Directors Gary E. Liebl /s/ H.K. DESAI President, Chief April 25, 1997 - ----------------------------------------------- Executive Officer and H.K. Desai Director /s/ THOMAS R. ANDERSON Vice President and Chief April 25, 1997 - ----------------------------------------------- Financial Officer Thomas R. Anderson /s/ MICHAEL R. MANNING Secretary and Treasurer April 25, 1997 - ----------------------------------------------- Michael R. Manning /s/ JIM BIXBY Director April 25, 1997 - ----------------------------------------------- Jim Bixby /s/ CAROL MILTNER Director April 25, 1997 - ----------------------------------------------- Carol Miltner /s/ GEORGE WELLS Director April 25, 1997 - ----------------------------------------------- George Wells
II-4 49 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ------- ----------------------------------------------------------------------- ------------- 1.1 Form of Underwriting Agreement......................................... 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and QLogic Corporation (incorporated by reference to same numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)...................................... 5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation............................................................ 23.1 Consent of Stradling, Yocca, Carlson & Rauth, a Professional Corporation (included in Exhibit 5.1).................................. 23.2 Consent of Independent Auditors........................................ 24.1 Power of Attorney (included in the signature pages to the Registration Statement -- see page II-4)............................................
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 2,000,000 SHARES QLOGIC CORPORATION COMMON STOCK UNDERWRITING AGREEMENT ___________, 1997 COWEN & COMPANY PRUDENTIAL SECURITIES INCORPORATED MORGAN KEEGAN & COMPANY, INC. As Representatives of the several Underwriters c/o Cowen & Company Financial Square New York, New York 10005 Ladies and Gentlemen: 1. Introductory. QLogic Corporation, a Delaware corporation (the "Company"), proposes to sell, pursuant to the terms of this Agreement, to the several underwriters named in Schedule A hereto (the "Underwriters," or, each, an "Underwriter"), an aggregate of 2,000,000 shares of Common Stock, $0.10 par value (the "Common Stock"). The aggregate of 2,000,000 shares so proposed to be sold is hereinafter referred to as the "Firm Stock." The Company also proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 3 hereof, up to an additional 300,000 shares of Common Stock (the "Optional Stock"). The Firm Stock and the Optional Stock are hereinafter collectively referred to as the "Stock". Cowen & Company ("Cowen"), Prudential Securities Incorporated ("Prudential") and Morgan Keegan & Company, Inc. ("Morgan Keegan") are acting as representatives of the several Underwriters and in such capacity are hereinafter referred to as the "Representatives." 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement on Form S-3 (File No. 333-_________) in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto shall become effective with respect to the Stock, including any preeffective prospectuses included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, copies of which (including all documents incorporated by reference therein) have heretofore been delivered to you, has been prepared by the Company in conformity with the requirements of the Securities Act and has been filed with the Commission under the Securities Act; one or more amendments to such registration statement, including in each case an amended preeffective prospectus, copies of which amendments (including all documents incorporated by reference therein), have heretofore been delivered to you, have been so prepared and filed. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Stock may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. The term "Registration Statement" as used in this Agreement shall also include any registration statement relating to the Stock that is filed and declared effective pursuant to Rule 462(b) under the Securities Act. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, (A) if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Securities Act and such information is -1- 2 included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the requirements of Section 10(a) of the Securities Act are delivered pursuant to Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in this Agreement means the "prospectus subject to completion" (as such term is defined in Rule 434(g) under the Securities Act) as supplemented by (a) the addition of Rule 430A information or other information contained in the form of prospectus delivered pursuant to Rule 434(c)(2) under the Securities Act or (b) the information contained in the abbreviated term sheets described in Rule 434(c)(3) under the Securities Act, and (ii) the date of such prospectuses shall be deemed to be the date of the abbreviated term sheets. The term "Preeffective Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the Registration Statement at the time of the initial filing of the Registration Statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. Any reference herein to any Preeffective Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Form S-3 under the Securities Act, as of the date of such Preeffective Prospectus or Prospectus, as the case may be, and any reference to any amendment or supplement to any Preeffective Prospectus or the Prospectus shall be deemed to refer to and include any documents filed after such date under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and so incorporated by reference. (b) The Commission has not issued or, to the best of the Company's knowledge, threatened to issue any order preventing or suspending the use of any Preeffective Prospectus, and, at its date of issue, each Preeffective Prospectus conformed in all material respects with the requirements of the Securities Act and did not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, other than any such nonconformance or untrue statement or omission in a Preeffective Prospectus which has been corrected in the Prospectus; and, when the Registration Statement becomes effective and at all times subsequent thereto up to and including each of the Closing Dates (as hereinafter defined), the Registration Statement and the Prospectus and any amendments or supplements thereto contained and will contain all material statements and information required to be included therein by the Securities Act and conformed and will conform in all material respects to the requirements of the Securities Act and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, included or will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing representations, warranties and agreements shall not apply to information contained in or omitted from any Preeffective Prospectus or the Registration Statement or the Prospectus or any such amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter, directly or through you, specifically for use in the preparation thereof; there is no franchise, lease, contract, agreement or document required to be described in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed therein as required; and all descriptions of any such franchises, leases, contracts, agreements or documents contained in the Registration Statement are accurate and complete descriptions of such documents in all material respects. (c) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as set forth or contemplated in the Prospectus, neither the Company nor its subsidiary has incurred any liabilities or obligations, direct or contingent, not in the ordinary course of business nor entered into any transactions not in the ordinary course of business, and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company and its subsidiary considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiary considered as a whole. -2- 3 (d) The financial statements, together with the related notes and schedules, set forth in the Prospectus and elsewhere in the Registration Statement fairly present, on the basis stated in the Registration Statement, the financial position and the results of operations and changes in financial position of the Company and its consolidated subsidiaries at the respective dates or for the respective periods therein specified. Such statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a consistent basis except as may be set forth in the Prospectus. The selected financial and statistical data set forth in the Prospectus and in the Company's Annual Report on Form 10-K for the fiscal year ended March __ , 199_, incorporated by reference in the Prospectus fairly present, on the basis stated in the Registration Statement and such Annual Report, the information set forth therein. (e) KPMG Peat Marwick, LLP, who have expressed their opinions on the audited financial statements and related schedules included in the Registration Statement and the Prospectus are independent public accountants as required by the Securities Act and the Rules and Regulations. (f) The Company and its subsidiary have been duly organized and are validly existing and in good standing as corporations under the laws of their respective jurisdictions of organization, with power and authority (corporate and other) to own or lease their properties and to conduct their businesses as described in the Prospectus; the Company and its subsidiary are in possession of and operating in compliance with all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders required for the conduct of its business, all of which are valid and in full force and effect or the absence of which would not have a material adverse effect on the business or financial condition of the Company and its subsidiary considered as a whole; and the Company and such subsidiary are duly qualified to do business and in good standing as foreign corporations in all other jurisdictions where their ownership or leasing of properties or the conduct of their businesses requires such qualification, except where the failure to so qualify would not have a material adverse effect on the business or financial condition of the Company and its subsidiary considered as a whole. The Company has and its subsidiary have all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public regulatory or governmental agencies and bodies to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. The Company owns or controls, directly or indirectly, only the following corporations, associations or other entities: QLogic Foreign Sales Corporation, a U.S. Virgin Islands Corporation and a wholly-owned subsidiary. (g) The Company's authorized and outstanding capital stock is on the date hereof, and will be on the Closing Date[s], as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of common stock of the Company conform to the description thereof in the Prospectus and have been duly authorized and validly issued and are fully paid and nonassessable; are duly listed on the Nasdaq National Market and have been issued in compliance with all federal and state securities laws and were not issued in violation of or subject to any preemptive rights or similar rights to subscribe for or purchase securities and conform to the description thereof contained in the Prospectus. Except as disclosed in and or contemplated by the Prospectus and the financial statements of the Company and related notes thereto included in the Prospectus, the Company does not have outstanding any options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations, except for options granted subsequent to the date of information provided in the Prospectus pursuant to the Company's employee and stock option plans as disclosed in the Prospectus. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, as set forth in the Prospectus, accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. All outstanding shares of capital stock of each -3- 4 subsidiary have been duly authorized and validly issued, and are fully paid and nonassessable and (except for directors' qualifying shares) are owned directly by the Company or by another wholly owned subsidiary of the Company free and clear of any liens, encumbrances, equities or claims. (h) The Stock to be issued and sold by the Company to the Underwriters hereunder has been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and nonassessable and free of any preemptive or similar rights and will conform to the description thereof in the Prospectus. (i) Except as set forth in the Prospectus, there are no legal or governmental proceedings pending to which the Company or its subsidiary is a party or of which any property of the Company or its subsidiary is subject, which, if determined adversely to the Company or its subsidiary, might individually or in the aggregate (i) prevent or adversely affect the transactions contemplated by this Agreement, (ii) suspend the effectiveness of the Registration Statement, (iii) prevent or suspend the use of the Preeffective Prospectus in any jurisdiction or (iv) result in a material adverse change in the condition (financial or otherwise), properties, business, management prospects, net worth or results of operations of the Company and its subsidiary considered as a whole and there is no valid basis for any such legal or governmental proceeding; and to the best of the Company's knowledge no such proceedings are threatened or contemplated against the Company or its subsidiary by governmental authorities or others. The Company is not a party nor subject to the provisions of any material injunction, judgment, decree or order of any court, regulatory body or other governmental agency or body. The description of the Company's litigation under the heading "Legal Proceedings" in the Prospectus is true and correct and complies with the Rules and Regulations. (j) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated (A) will not result in any violation of the provisions of the certificate of incorporation, by-laws or other organizational documents of the Company or its subsidiary, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its subsidiary or any of their properties or assets, (B) will not conflict with or result in a breach or violation of any of the terms or provisions of or constitute a default under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or its subsidiary is a party or by which it or any of its properties is or may be bound, the Certificate of Incorporation, By-laws or other organizational documents of the Company or any of its subsidiaries, or any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its subsidiary or any of their properties or will result in the creation of a lien. (k) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Stock by the Underwriters. (l) The Company has the full corporate power and authority to enter into this Agreement and to perform its obligations hereunder (including to issue, sell and deliver the Stock), and this Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that rights to indemnity and contribution hereunder may be limited by federal or state securities laws or the public policy underlying such laws. (m) The Company and its subsidiary are in all material respects in compliance with, and conduct their businesses in conformity with, all applicable federal, state, local and foreign laws, rules and regulations or any court or governmental agency or body; to the knowledge of the Company, otherwise than as set forth in the Registration Statement and the Prospectus, no prospective change in any of such -4- 5 federal or state laws, rules or regulations has been adopted which, when made effective, would have a material adverse effect on the operations of the Company and its subsidiary considered as a whole. In the ordinary course of business, employees of the Company conduct periodic reviews of the effect of Environmental Laws (as defined below) on the business operations and properties of the Company and its subsidiaries, in the ordinary course of which they seek to identify and evaluate associated costs and liabilities. Except as disclosed in the Registration Statement, the Company and its subsidiary are in compliance with all applicable existing federal, state, local and foreign laws and regulations relating to the protection of human health or the environment or imposing liability or requiring standards of conduct concerning any Hazardous Materials ("Environmental Laws"), except for such instances of noncompliance which, either singly or in the aggregate, would not have a material adverse effect. The term "Hazardous Material" means (i) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material, waste or substance regulated under or within the meaning of any other Environment Law. (n) The Company and its subsidiary have filed all necessary federal, state, local and foreign income, payroll, franchise and other tax returns and have paid all taxes shown as due thereon or with respect to any of their properties, and there is no tax deficiency that has been, or to the knowledge of the Company is likely to be, asserted against the Company or its subsidiary or any of their respective properties or assets that would materially adversely affect the financial position, business or operations of the Company and its subsidiary considered as a whole. (o) No person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement or otherwise, except for persons and entities who have expressly waived such right and notice of such right or who have been given required notice and have failed to exercise such right within the time or times required under the terms and conditions of such right. (p) Neither the Company nor any of its officers, directors or affiliates has taken or will take, directly or indirectly, any action designed or intended to stabilize or manipulate the price of any security of the Company, or which caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company. (q) The Company has provided you with all financial statements since __________ to the date hereof that are available to the officers of the Company, including financial statements for the months of _______, ____________ and ________ of 1997. (r) The Company and its subsidiary own or possess the right to use all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or either of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and its subsidiary with respect to the foregoing. Except as disclosed in the Prospectus, the Company's business as now conducted and as proposed to be conducted does not and will not infringe or conflict with in any material respect patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses or other intellectual property or franchise right of any person. Except as described in the Prospectus, no claim has been made against the Company alleging the infringement by the Company of any patent, trademark, service mark, trade name, copyright, trade secret, license in or other intellectual property right or franchise right of any person. (s) The Company and its subsidiary have performed all material obligations required to be performed by them under all contracts required by Item 601(b)(10) of Regulation S-K under the Securities -5- 6 Act to be filed as exhibits to the Registration Statement, and neither the Company nor its subsidiary nor any other party to such contract is in default under or in breach of any such obligations. Neither the Company nor its subsidiary has received any notice of such default or breach. (t) The Company is not involved in any labor dispute nor, to the best of the Company's knowledge, is any such dispute threatened. The Company is not aware that (A) any executive, key employee or significant group of employees of the Company or its subsidiary plans to terminate employment with the Company or any such subsidiary or (B) any such executive or key employee is subject to any noncompete, nondisclosure, confidentiality, employment, consulting or similar agreement that would be violated by the present or proposed business activities of the Company and its subsidiary. Neither the Company nor its subsidiary has or expects to have any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or its subsidiary makes or ever has made a contribution and in which any employee of the Company or its subsidiary is or has ever been a participant. With respect to such plans, the Company and its subsidiary are in compliance in all material respects with all applicable provisions of ERISA. (u) The Company has obtained the written agreement described in Section 8(j) of this Agreement from each of its officers, directors and holders of Common Stock listed on Schedule B hereto. (v) The Company and its subsidiary have, and the Company and its subsidiary as of the Closing Date[s] will have, good and marketable title in fee simple to all real property and good and marketable title to all personal property owned or proposed to be owned by them which is material to the business of the Company or of its subsidiary, in each case free and clear of all liens, encumbrances and defects except such as are described the Prospectus or such as would not have a material adverse effect on the Company and its subsidiary considered as a whole; and any real property and buildings held under lease by the Company and its subsidiary or proposed to be held after giving effect to the transactions described in the Prospectus are, or will be as of each of the Closing Dates, held by them under valid, subsisting and enforceable leases with such exceptions as would not have a material adverse effect on the Company and its subsidiary considered as a whole, in each case except as described in or contemplated by the Prospectus. (w) The Company and its subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which they are engaged or propose to engage after giving effect to the transactions described in the Prospectus; and neither the Company nor its subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue their business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiary considered as a whole, except as described in or contemplated by the Prospectus. (x) The Company has complied with all provisions of Section 517.075 Florida Statutes (Chapter 92-198; Laws of Florida). (y) Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any of the transactions contemplated by this Agreement. (z) The Company and its subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain -6- 7 accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (aa) To the Company's knowledge, neither the Company nor its subsidiary nor any employee or agent of the Company or its subsidiary has made any payment of funds of the Company or its subsidiary or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. (bb) Neither the Company nor its subsidiary is or, after application of the net proceeds of this offering as described under the caption "Use of Proceeds" in the Prospectus, will become an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. (cc) Each certificate signed by any officer of the Company and delivered to the Underwriters or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company as to the matters covered thereby. 3. Purchase by, and Sale and Delivery to, Underwriters--Closing Dates. The Company agrees to sell to the Underwriters the Firm Stock, and on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase the Firm Stock from the Company, the number of shares of Firm Stock to be purchased by each Underwriter being set opposite its name in Schedule A, subject to adjustment in accordance with Section 12 hereof. The purchase price per share to be paid by the Underwriters to the Company will be $____ per share (the "Purchase Price"). The Company will deliver the Firm Stock to the Representatives for the respective accounts of the several Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the First Closing Date (as defined below) or, if no such direction is received, in the names of the respective Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine, against payment of the aggregate Purchase Price therefor by certified or official bank check or checks in immediately available funds (same day funds), payable to the order of the Company, all at the offices of Stradling, Yocca, Carlson & Rauth, a Professional Corporation, 660 Newport Center Drive, Suite 1600, Newport Beach, CA 92660. The time and date of the delivery and closing shall be at 10:00 A.M., New York Time, on _________, 1997, in accordance with Rule 15c6-1 of the Exchange Act. The time and date of such payment and delivery are herein referred to as the "First Closing Date." The First Closing Date and the location of delivery of, and the form of payment for, the Firm Stock may be varied by agreement between the Company and Cowen. The First Closing Date may be postponed pursuant to the provisions of Section 12. The Company shall make the certificates for the Stock available to the Representatives for examination on behalf of the Underwriters not later than 10:00 A.M., New York Time, on the business day preceding the First Closing Date at the offices of Cowen & Company, Financial Square, New York, New York 10005. It is understood that Cowen, Prudential or Morgan Keegan, individually and not as Representatives of the several Underwriters, may (but shall not be obligated to) make payment to the Company on behalf of any Underwriter or Underwriters, for the Stock to be purchased by such Underwriter or Underwriters. Any such payment by Cowen, Prudential or Morgan Keegan shall not relieve such Underwriter or Underwriters from any of its or their other obligations hereunder. -7- 8 The several Underwriters agree to make an initial public offering of the Firm Stock at the initial public offering price as soon after the effectiveness of the Registration Statement as in their judgment is advisable. The Representatives shall promptly advise the Company of the making of the initial public offering. For the purpose of covering any over-allotments in connection with the distribution and sale of the Firm Stock as contemplated by the Prospectus, the Company hereby grants to the Underwriters an option to purchase, severally and not jointly, up to the aggregate number of shares of Optional Stock set forth opposite the Company's name on Schedule A hereto, for an aggregate of up to 300,000 shares. The price per share to be paid for the Optional Stock shall be the Purchase Price. The option granted hereby may be exercised as to all or any part of the Optional Stock at any time, and from time to time, not more than thirty (30) days subsequent to the effective date of this Agreement. No Optional Stock shall be sold and delivered unless the Firm Stock previously has been, or simultaneously is, sold and delivered. The right to purchase the Optional Stock or any portion thereof may be surrendered and terminated at any time upon notice by the Underwriters to the Company. The option granted hereby may be exercised by the Underwriters by giving written notice from Cowen to the Company setting forth the number of shares of the Optional Stock to be purchased by them and the date and time for delivery of and payment for the Optional Stock. Each date and time for delivery of and payment for the Optional Stock (which may be the First Closing Date, but not earlier) is herein called the "Option Closing Date" and shall in no event be earlier than two (2) business days nor later than ten (10) business days after written notice is given. (The Option Closing Date and the First Closing Date are herein called the "Closing Dates".) All purchases of Optional Stock from the Company shall be made on a pro rata basis. Optional Stock shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Stock set forth opposite such Underwriter's name in Schedule A hereto bears to the total number of shares of Firm Stock (subject to adjustment by the Underwriters to eliminate odd lots). Upon exercise of the option by the Underwriters, the Company agrees to sell to the Underwriters the number of shares of Optional Stock set forth in the written notice of exercise and the Underwriters agree, severally and not jointly and subject to the terms and conditions herein set forth, to purchase the number of such shares determined as aforesaid. The Company will deliver the Optional Stock to the Underwriters (in the form of definitive certificates, issued in such names and in such denominations as the Representatives may direct by notice in writing to the Company given at or prior to 12:00 Noon, New York Time, on the second full business day preceding the Option Closing Date or, if no such direction is received, in the names of the respective Underwriters or in such other names as Cowen may designate (solely for the purpose of administrative convenience) and in such denominations as Cowen may determine, against payment of the aggregate Purchase Price therefor by certified or official bank check or checks in immediately available funds (same day funds), payable to the order of the Company, all at the offices of Stradling, Yocca, Carlson & Rauth, a Professional Corporation, 660 Newport Center Drive, Suite 1600, Newport Beach, CA 92660. The Option Closing Date and the location of delivery of, and the form of payment for, the Option Stock may be varied by agreement between the Company and Cowen. The Option Closing Date may be postponed pursuant to the provisions of Section 12. 4. Covenants and Agreements of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company will (i) if the Company and the Representatives have determined not to proceed pursuant to Rule 430A of the of the Rules and Regulations, use its best efforts to cause the Registration Statement to become effective, (ii) if the Company and the Representatives have determined to proceed pursuant to Rule 430A of the Rules and Regulations, use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and (iii) if the Company and the Representatives have determined to deliver Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best efforts to comply with all the applicable provisions thereof. The Company will advise the Representatives promptly as to the time at which the Registration Statement becomes effective, will advise the Representatives promptly of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the institution of any proceedings for that purpose, and will use its best efforts to prevent -8- 9 the issuance of any such stop order and to obtain as soon as possible the lifting thereof, if issued. The Company will advise the Representatives promptly of the receipt of any comments of the Commission or any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for additional information and will not at any time file any amendment to the Registration Statement or supplement to the Prospectus which shall not previously have been submitted to the Representatives a reasonable time prior to the proposed filing thereof or to which the Representatives shall reasonably object in writing or which is not in compliance with the Securities Act and the Rules and Regulations. (b) The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendments or supplements to the Registration Statement or the Prospectus which in the opinion of the Representatives may be necessary to enable the several Underwriters to continue the distribution of the Stock and will use its best efforts to cause the same to become effective as promptly as possible. The Company will promptly file all reports and any definitive proxy or information statements required to be filed with the Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Stock. (c) If at any time after the effective date of the Registration Statement when a prospectus relating to the Stock is required to be delivered under the Securities Act any event relating to or affecting the Company or its subsidiary occurs as a result of which the Prospectus or any other prospectus as then in effect would include an untrue statement of a material fact, or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Securities Act, the Company will promptly notify the Representatives thereof and will prepare an amended or supplemented prospectus or make an appropriate filing pursuant to Section 13 or 14 of the Exchange Act which will correct such statement or omission; and in case any Underwriter is required to deliver a prospectus relating to the Stock nine (9) months or more after the effective date of the Registration Statement, the Company upon the request of the Representatives and at the expense of such Underwriter will prepare promptly such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Securities Act. (d) The Company will deliver to the Representatives, at or before the Closing Date, signed copies of the Registration Statement, as originally filed with the Commission, and all amendments thereto including all financial statements and exhibits thereto and all documents theretofore incorporated by reference therein, and will deliver to the Representatives such number of copies of the Registration Statement, including such financial statements and all documents theretofore incorporated by reference therein but without exhibits, and all amendments thereto, as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives, from time to time until the effective date of the Registration Statement, as many copies of the Preeffective Prospectus as the Representatives may reasonably request. The Company will deliver or mail to or upon the order of the Representatives on the date of the initial public offering, and thereafter from time to time during the period when delivery of a prospectus relating to the Stock is required under the Securities Act, as many copies of the Prospectus, in final form or as thereafter amended or supplemented as the Representatives may reasonably request; provided, however, that the expense of the preparation and delivery of any prospectus required for use nine (9) months or more after the effective date of the Registration Statement shall be borne by the Underwriters required to deliver such prospectus. (e) The Company will make generally available to its stockholders as soon as practicable, but not later than fifteen (15) months after the effective date of the Registration Statement, an earnings statement which will be in reasonable detail (but which need not be audited) and which will comply with Section 11(a) of the Securities Act, covering a period of at least twelve (12) months beginning after the "effective date" (as defined in Rule 158 under the Securities Act) of the Registration Statement. -9- 10 (f) The Company will cooperate with the Representatives to enable the Stock to be registered or qualified for offering and sale by the Underwriters and by dealers under the securities laws of such jurisdictions as the Representatives may designate and at the request of the Representatives will make such applications and furnish such consents to service of process or other documents as may be required of it as the issuer of the Stock for that purpose; provided, however, that the Company shall not be required to qualify to do business or to file a general consent (other than that arising out of the offering or sale of the Stock) to service of process in any such jurisdiction where it is not now so subject. The Company will, from time to time, prepare and file such statements and reports as are or may be required of it as the issuer of the Stock to continue such qualifications in effect for so long a period as the Representatives may reasonably request for the distribution of the Stock. The Company will advise the Representatives promptly after the Company becomes aware of the suspension of the qualifications or registration of (or any such exception relating to) the Common Stock of the Company for offering, sale or trading in any jurisdiction or of any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any orders suspending such qualifications, registration or exception, the Company will, with the cooperation of the Representatives use its best efforts to obtain the withdrawal thereof. (g) The Company will furnish to its stockholders annual reports containing financial statements certified by independent public accountants and with quarterly summary financial information in reasonable detail which may be unaudited. During the period of five (5) years from the date hereof, the Company will deliver to the Representatives and, upon request, to each of the other Underwriters, as soon as they are available, copies of each annual report of the Company and each other report furnished by the Company to its stockholders and will deliver to the Representatives, (i) as soon as they are available, copies of any other reports (financial or other) which the Company shall publish or otherwise make available to any of its stockholders as such, (ii) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange and (iii) from time to time such other information concerning the Company as you may request. So long as the Company has active subsidiaries, such financial statements will be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its stockholders generally. Separate financial statements shall be furnished for all subsidiaries whose accounts are not consolidated but which at the time are significant subsidiaries as defined in the Rules and Regulations. (h) The Company will use its best efforts to list the Stock, subject to official notice of issuance, on the Nasdaq National Market concurrently with the effectiveness of the Registration Statement. (i) The Company will maintain a transfer agent and registrar for its Common Stock. (j) For a period of one year from the date hereof, prior to filing its quarterly statements on Form 10-Q, the Company will have its independent auditors perform a limited quarterly review of its quarterly numbers. (k) The Company will not, without the prior written consent of Cowen, offer, sell, assign, transfer, encumber, contract to sell, grant an option to purchase or otherwise dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock or securities convertible into or exercisable or exchangeable for Common Stock (including, without limitation, Common Stock of the Company which may be deemed to be beneficially owned by the Company in accordance with the Rules and Regulations) during the 90 days following the date on which the price of the Common Stock to be purchased by the Underwriters is set, other than the Company's sale of Common Stock hereunder and the Company's issuance of Common Stock upon the exercise of warrants and stock options which are presently outstanding and described in the Prospectus or pursuant to the Company's stock plan described in the Prospectus or document incorporated by reference therein. -10- 11 (l) Prior to filing with the Commission any reports on Form SR or successor report thereto pursuant to Rule 463 of Rules and Regulations which reflects a material change in the use of proceeds described in the Prospectus, the Company will furnish a copy thereof to the counsel for the Underwriters and receive and consider its comments thereon, and will deliver promptly to the Representatives a signed copy of each report on Form SR filed by it with the Commission. (m) The Company will apply the net proceeds from the sale of the Stock as set forth in the description under "Use of Proceeds" in the Prospectus, which description complies in all respects with the requirements of Item 504 of Regulation S-K. (n) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Stock under the Securities Act. (o) Prior to each of the Closing Dates the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its subsidiary for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (p) Prior to each of the Closing Dates the Company will issue no press release or other communications directly or indirectly and hold no press conference with respect to the Company or its subsidiary, the financial condition, results of operations, business, prospects, assets or liabilities of any of them, or the offering of the Stock, without your prior written consent. For a period of twelve (12) months following the first Closing Date, the Company will use its best efforts to provide to you copies of each press release or other public communications with respect to the financial condition, results of operations, business, prospects, assets or liabilities of the Company as soon as practicable prior to the public issuance thereof. (q) During the period of five (5) years hereafter, the Company will furnish to the Representatives, and upon request of the Representatives, to each of the Underwriters: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report filed by the Company with the Commission, or the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its Common Stock. 5. Payment of Expenses. (a) The Company will pay (directly or by reimbursement) all costs, fees and expenses incurred in connection with expenses incident to the performance of its obligations under this Agreement and in connection with the transactions contemplated hereby, including but not limited to (i) all expenses and taxes incident to the issuance and delivery of the Stock to the Representatives; (ii) all expenses incident to the registration of the Stock under the Securities Act; (iii) the costs of preparing stock certificates (including printing and engraving costs); (iv) all fees and expenses of the registrar and transfer agent of the Stock; (v) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Stock to the Underwriters; (vi) fees and expenses of the Company's counsel and the Company's independent accountants; (vii) all costs and expenses incurred in connection with the preparation, printing filing, shipping and distribution of the Registration Statement, each Preeffective Prospectus and the Prospectus (including all exhibits and financial statements) and all amendments and supplements provided for herein, the "Agreement Among Underwriters" between the Representatives and the Underwriters, the Master Selected Dealers' Agreement, the Underwriters' Questionnaire and the Blue Sky memoranda (including related fees and expenses of counsel to the Underwriters) and this Agreement; (viii) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with exemptions from the qualifying or registering (or obtaining qualification or -11- 12 registration of) all or any part of the Stock for offer and sale and determination of its eligibility for investment under the Blue Sky or other securities laws of such jurisdictions as the Representatives may designate; (ix) all fees and expenses paid or incurred in connection with filings made with the NASD (including related fees and expenses of counsel to the Underwriters); and (x) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section. (b) In addition to its other obligations under Section 6(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon (i) any statement or omission or any alleged statement or omission, (ii) any act or failure to act or any alleged act or failure to act or (iii) any breach or inaccuracy in its representations and warranties, it will reimburse each Underwriter on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse each Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Underwriter shall promptly return it to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Citibank, New York, New York (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter in a timely manner as provided below shall bear interest at the Prime Rate from the due date for such reimbursement. This expense reimbursement agreement will be in addition to any other liability which the Company may otherwise have. The request for reimbursement will be sent to the Company. (c) In addition to its other obligations under Section 6(b) hereof, each Underwriter severally agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in Section 6(b) hereof which relates to information furnished to the Company pursuant to Section 2(b) hereof, it will reimburse the Company (and, to the extent applicable, each officer, director or controlling person) on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company (and, to the extent applicable, each officer, director or controlling person) for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company (and, to the extent applicable, each officer, director or controlling person) shall promptly return it to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in paragraph (b) and/or (c) of this Section 5, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Such an arbitration would be limited to the operation of the interim reimbursement provisions contained in paragraph (b) and/or (c) of this Section 5 and would not resolve the ultimate propriety or enforceability of the obligation to reimburse expenses which is created by the provisions of Section 6. 6. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of the Securities -12- 13 Act and the respective officers, directors, partners, employees, representatives and agents of each of such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each, an "Underwriter Indemnified Party"), against any losses, claims, damages, liabilities or expenses (including the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which may be based upon the Securities Act, or any other statute or at common law, (i) on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus as from time to time amended or supplemented) includes or allegedly includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by any Underwriter, directly or through the Representatives, specifically for use in the preparation thereof or (ii) for any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or expense arising out of or based upon matters covered by clause (i) above (provided that the Company shall not be liable under this clause (ii) to the extent that it is determined in a final judgment by a court of competent jurisdiction that such loss, claim, damage, or liability or expense resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, that with respect to any untrue statement or omission or alleged untrue statement or omission made in any Preeffective Prospectus, the indemnity agreement contained in this subsection (a) shall not inure to the benefit of any Underwriter Indemnified Party from whom the person asserting any such losses, claims, damages or liabilities purchased the shares of Stock concerned to the extent that any such loss, claim, damage or liability of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus excluding documents incorporated by reference therein was not sent or given to such person at or prior to the written confirmation of the sale of such shares of Stock to such person as required by the Securities Act and if the untrue statement or omission concerned has been corrected in the Prospectus. The Company will be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but if the Company elects to assume the defense, such defense shall be conducted by counsel chosen by it and reasonably acceptable to the Underwriters. In the event the Company elects to assume the defense of any such suit and retain such counsel, any Underwriter Indemnified Parties, defendant or defendants in the suit, may retain additional counsel but shall bear the fees and expenses of such counsel unless (i) the Company shall have specifically authorized the retaining of such counsel or (ii) the parties to such suit include any such Underwriter Indemnified Parties, and the Company and such Underwriter Indemnified Parties at law or in equity have been advised by counsel to the Underwriters that one or more legal defenses may be available to it or them which may not be available to the Company, in which case the Company shall not be entitled to assume the defense of such suit notwithstanding its obligation to bear the fees and expenses of such counsel. This indemnity agreement is not exclusive and will be in addition to any liability which the Company might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to each Underwriter Indemnified Party. (b) Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act (collectively, the "Company Indemnified Parties") against any losses, claims, damages, liabilities or expenses (including, unless the Underwriter or Underwriters elect to assume the defense, the reasonable cost of investigating and defending against any claims therefor and counsel fees incurred in connection therewith), joint or several, which arise out of or are based in whole or in part upon the Securities Act, the Exchange Act or any other federal, state, local or foreign statute or regulation, or at common law, on the ground or alleged ground that any Preeffective Prospectus, the Registration Statement or the Prospectus (or any Preeffective Prospectus, the Registration Statement or the Prospectus, as from time to time amended and supplemented) includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading, but only insofar as any such statement or omission was made in reliance upon, and in conformity with, written information furnished to the Company by such Underwriter, directly or through the Representatives, specifically for use in the preparation thereof; provided, however, that in no case is such Underwriter to be liable with respect to any claims made against any Company Indemnified Party against -13- 14 whom the action is brought unless such Company Indemnified Party shall have notified such Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Company Indemnified Party, but failure to notify such Underwriter of such claim shall not relieve it from any liability which it may have to any Company Indemnified Party otherwise than on account of its indemnity agreement contained in this paragraph. Such Underwriter shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any such liability, but, if such Underwriter elects to assume the defense, such defense shall be conducted by counsel chosen by it. In the event that any Underwriter elects to assume the defense of any such suit and retain such counsel, the Company Indemnified Parties and any other Underwriter or Underwriters or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them, respectively. The Underwriter against whom indemnity may be sought shall not be liable to indemnify any person for any settlement of any such claim effected without such Underwriter's consent. This indemnity agreement is not exclusive and will be in addition to any liability which such Underwriter might otherwise have and shall not limit any rights or remedies which may otherwise be available at law or in equity to any Company Indemnified Party. (c) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to herein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses (or actions in respect thereof) referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, defending, settling or compromising any such claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares of the Stock underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Underwriters' obligations to contribute are several in proportion to their respective underwriting obligations and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. Survival of Indemnities, Representations, Warranties, etc. The respective indemnities, covenants, agreements, representations, warranties and other statements of the Company and the several Underwriters, as set forth in this Agreement or made by them respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, the -14- 15 Company or any of its officers or directors or any controlling person, and shall survive delivery of and payment for the Stock. 8. Conditions of Underwriters' Obligations. The respective obligations of the several Underwriters hereunder shall be subject to the accuracy, at and (except as otherwise stated herein) as of the date hereof and at and as of each of the Closing Dates, of the representations and warranties made herein by the Company, to compliance at and as of each of the Closing Dates by the Company with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and to the following additional conditions: (a) The Registration Statement shall have become effective and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or the Representatives, shall be threatened by the Commission, and any request for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Representatives. Any filings of the Prospectus, or any supplement thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in the manner and within the time period required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the case may be. (b) The Representatives shall have been satisfied that there shall not have occurred any change, on a consolidated basis, prior to each of the Closing Dates in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company and its subsidiary considered as a whole, or any change in the capital stock, short-term or long- term debt of the Company and its subsidiary considered as a whole, such that (i) the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains an untrue statement of fact which, in the opinion of the Representatives, is material, or omits to state a fact which, in the opinion of the Representatives, is required to be stated therein or is necessary to make the statements therein not misleading, or (ii) it is unpracticable in the reasonable judgment of the Representatives to proceed with the public offering or purchase the Stock as contemplated hereby. (c) The Representatives shall be satisfied that no legal or governmental action, suit or proceeding affecting the Company which is material and adverse to the Company or which affects or may affect the Company's ability to perform their respective obligations under this Agreement shall have been instituted or threatened and there shall have occurred no material adverse development in any existing such action, suit or proceeding. (d) At the time of execution of this Agreement, the Representatives shall have received from KPMG Peat Marwick, LLP, independent certified public accountants, a letter, dated the date hereof, in form and substance satisfactory to the Underwriters. (e) The Representatives shall have received from KPMG Peat Marwick, LLP, independent certified public accountants, letters, dated each of the Closing Dates, to the effect that such accountants reaffirm, as of each of the Closing Dates, and as though made on each of the Closing Dates, the statements made in the letter furnished by such accountants pursuant to paragraph (d) of this Section 8. (f) The Representatives shall have received from Stradling, Yocca, Carlson & Rauth, counsel for the Company, opinions, dated each of the Closing Dates, to the effect set forth in Exhibit I hereto. (g) The Representatives shall have received from Pillsbury Madison & Sutro LLP, counsel for the Underwriters, their opinions dated each of the Closing Dates with respect to the incorporation of the Company, the validity of the Stock, the Registration Statement and the Prospectus and such other -15- 16 related matters as it may reasonably request, and the Company shall have furnished to such counsel such documents as they may request for the purpose of enabling them to pass upon such matters. (h) The Representatives shall have received certificates, dated each of the Closing Dates, of the chief executive officer or the President and the chief financial or accounting officer of the Company to the effect that: (i) No stop order suspending the effectiveness of the Registration Statement has been issued, and, to the best of the knowledge of the signers, no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act; (ii) Neither any Preeffective Prospectus, as of its date, nor the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as of the time when the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as set forth or contemplated in the Prospectus, neither the Company nor its subsidiary has incurred any material liabilities or obligations, direct or contingent, nor entered into any material transactions not in the ordinary course of business and there has not been any material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company and its subsidiary considered as a whole, or any change in the capital stock, short-term or long-term debt of the Company and its subsidiary considered as a whole; (iv) The representations and warranties of the Company in this Agreement are true and correct at and as of each of the Closing Dates, and the Company has complied with all the agreements and performed or satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Dates; and (v) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as disclosed in or contemplated by the Prospectus, (i) there has not been any material adverse change or a development involving a material adverse change in the condition (financial or otherwise), properties, business, management, prospects, net worth or results of operations of the Company and its subsidiary considered as a whole; (ii) the business and operations conducted by the Company and its subsidiary have not sustained a loss by strike, fire, flood, accident or other calamity (whether or not insured) of such a character as to interfere materially with the conduct of the business and operations of the Company and its subsidiary considered as a whole; (iii) no legal or governmental action, suit or proceeding is pending or threatened against the Company which is material to the Company, whether or not arising from transactions in the ordinary course of business, or which may materially and adversely affect the transactions contemplated by this Agreement; (iv) since such dates and except as so disclosed, the Company has not incurred any material liability or obligation, direct, contingent or indirect, made any change in its capital stock (except pursuant to its stock plans), made any material change in its short-term or funded debt or repurchased or otherwise acquired any of the Company's capital stock; and (v) the Company has not declared or paid any dividend, or made any other distribution, upon its outstanding capital stock payable to stockholders of record on a date prior to the Closing Date. (vi) The Company shall have furnished to the Representatives such additional certificates as the Representatives may have reasonably requested as to the accuracy, at and as of each of the Closing Dates, of the representations and warranties made herein by it and as to compliance at and as -16- 17 of each of the Closing Dates by it with its covenants and agreements herein contained and other provisions hereof to be satisfied at or prior to each of the Closing Dates, and as to satisfaction of the other conditions to the obligations of the Underwriters hereunder. (vii) Cowen shall have received the written agreements, substantially in the form of Exhibit II hereto, of the officers, directors and holders of Common Stock listed in Schedule B that each will not directly or indirectly, offer, sell, contract to sell, grant an option to purchase, transfer the economic risk of ownership in, make any short sale, assign, transfer, pledge, encumber or otherwise sell or dispose of, other than by operation of law, gifts, pledges or dispositions by estate representatives, any shares of Common Stock (including, without limitation, Common Stock which may be deemed to be beneficially owned by such officer, director or holder in accordance with the Rules and Regulations) during the 90 days following the date of the final Prospectus. The Nasdaq National Market shall have approved the stock for listing, subject only to official notice of issuance. All opinions, certificates, letters and other documents will be in compliance with the provisions hereunder only if they are satisfactory in form and substance to the Representatives. The Company will furnish to the Representatives conformed copies of such opinions, certificates, letters and other documents as the Representatives shall reasonably request. If any of the conditions hereinabove provided for in this Section shall not have been satisfied when and as required by this Agreement, this Agreement may be terminated by the Representatives by notifying the Company of such termination in writing or by telegram at or prior to each of the Closing Dates, but Cowen, on behalf of the Representatives, shall be entitled to waive any of such conditions. 9. Effective Date. This Agreement shall become effective immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other provisions, at 11:00 a.m. New York City time on the first full business day following the effectiveness of the Registration Statement or at such earlier time after the Registration Statement becomes effective as the Representatives may determine on and by notice to the Company or by release of any of the Stock for sale to the public. For the purposes of this Section 9, the Stock shall be deemed to have been so released upon the release for publication of any newspaper advertisement relating to the Stock or upon the release by you of telegrams (i) advising Underwriters that the shares of Stock are released for public offering or (ii) offering the Stock for sale to securities dealers, whichever may occur first. 10. Termination. This Agreement (except for the provisions of Section 5) may be terminated by the Company at any time before it becomes effective in accordance with Section 9 by notice to the Representatives and may be terminated by the Representatives at any time before it becomes effective in accordance with Section 9 by notice to the Company. In the event of any termination of this Agreement under this or any other provision of this Agreement, there shall be no liability of any party to this Agreement to any other party, other than as provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to the liability of defaulting Underwriters. This Agreement may be terminated after it becomes effective by the Representatives by notice to the Company (i) if at or prior to the First Closing Date trading in securities on any of the Nasdaq National Market shall have been suspended or minimum or maximum prices shall have been established on any such exchange or market, or a banking moratorium shall have been declared by New York or United States authorities; (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) if at or prior to the First Closing Date there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or (B) any change in financial markets or any calamity or crisis which, in the judgment of the Representatives, makes it impractical or inadvisable to offer or sell the Stock on the terms contemplated by the Prospectus; (iv) if there shall have been any development or prospective development involving particularly the business or properties or securities of the Company or its subsidiary or the transactions contemplated by this Agreement, which, in the judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus; (v) if there shall be any litigation or proceeding, -17- 18 pending or threatened, which, in the judgment of the Representatives, makes it impracticable or inadvisable to offer or deliver the on the terms contemplated by the Prospectus; or (vi) if there shall have occurred any of the events specified in the immediately preceding clauses (i) - (v) together with any other such event that makes it, in the judgment of the Representatives, impractical or inadvisable to offer or deliver the Stock on the terms contemplated by the Prospectus. 11. Reimbursement of Underwriters. Notwithstanding any other provisions hereof, if this Agreement shall not become effective by reason of any election of the Company pursuant to the first paragraph of Section 10 or shall be terminated by the Representatives under Section 8 or Section 10, the Company will bear and pay the expenses specified in Section 5 hereof and, in addition to its obligations pursuant to Section 6 hereof, the Company will reimburse the reasonable out-of-pocket expenses of the several Underwriters (including reasonable fees and disbursements of counsel for the Underwriters) incurred in connection with this Agreement and the proposed purchase of the Stock, and promptly upon demand the Company will pay such amounts to you as Representatives. 12. Substitution of Underwriters. If any Underwriter or Underwriters shall default in its or their obligations to purchase shares of Stock hereunder and the aggregate number of shares which such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of shares underwritten, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the shares which such defaulting Underwriter or Underwriters agreed but failed to purchase. If any Underwriter or Underwriters shall so default and the aggregate number of shares with respect to which such default or defaults occur is more than ten percent (10%) of the total number of shares underwritten and arrangements satisfactory to the Representatives and the Company for the purchase of such shares by other persons are not made within forty-eight (48) hours after such default, this Agreement shall terminate. If the remaining Underwriters or substituted Underwriters are required hereby or agree to take up all or part of the shares of Stock of a defaulting Underwriter or Underwriters as provided in this Section 12, (i) the Company shall have the right to postpone the Closing Date for a period of not more than five (5) full business days in order that the Company may effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective numbers of shares to be purchased by the remaining Underwriters or substituted Underwriters shall be taken as the basis of their underwriting obligation for all purposes of this Agreement. Nothing herein contained shall relieve any defaulting Underwriter of its liability to the Company or the other Underwriters for damages occasioned by its default hereunder. Any termination of this Agreement pursuant to this Section 12 shall be without liability on the part of any non-defaulting Underwriter or the Company, except for expenses to be paid or reimbursed pursuant to Section 5 and except for the provisions of Section 6. 13. Notices. All communications hereunder shall be in writing and, if sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed to you, as their Representatives c/o Cowen & Company at Financial Square, New York, New York 10005 with a copy to Pillsbury Madison & Sutro LLP 2700 Sand Hill Road, Menlo Park, CA 94025 attention: Jorge del Calvo except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address furnished by the Representatives or, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed c/o QLogic Corporation at 3545 Harbor Boulevard, Costa Mesa, California 92626 with a copy to Stradling, Yocca, Carlson & Rauth, 660 Newport Center Drive, Suite 1600, Newport Beach, CA 92660 attention: Nick Yocca. 14. Successors. This Agreement shall inure to the benefit of and be binding upon the several Underwriters, the Company and their respective successors and legal representatives. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person other than the persons mentioned in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person; except that the representations, warranties, covenants, agreements and indemnities of the Company contained in this Agreement -18- 19 shall also be for the benefit of the person or persons, if any, who control any Underwriter or Underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and the indemnities of the several Underwriters shall also be for the benefit of each director of the Company, each of its officers who has signed the Registration Statement and the person or persons, if any, who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act. 15. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 16. Authority of the Representatives. In connection with this Agreement, you will act for and on behalf of the several Underwriters, and any action taken under this Agreement by Cowen, as Representative, will be binding on all the Underwriters. 17. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. 18. General. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. In this Agreement, the masculine, feminine and neuter genders and the singular and the plural include one another. The section headings in this Agreement are for the convenience of the parties only and will not affect the construction or interpretation of this Agreement. This Agreement may be amended or modified, and the observance of any term of this Agreement may be waived, only by a writing signed by the Company and the Representatives. 19. Counterparts. This Agreement may be signed in two (2) or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -19- 20 If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter and your acceptance shall constitute a binding agreement between us. Very truly yours, QLOGIC CORPORATION By:____________________________________ H. K. Desai President and Chief Executive Officer Accepted and delivered in __________________ as of the date first above written. COWEN & COMPANY PRUDENTIAL SECURITIES INCORPORATED MORGAN KEEGAN & COMPANY, INC. Acting on their own behalf and as Representatives of several Underwriters referred to in the foregoing Agreement. By: COWEN & COMPANY By: Cowen Incorporated, its general partner By: _______________________________________ John P. Dunphy Managing Director - Syndicate -20- 21 SCHEDULE A
Number Number of of Firm Optional Shares Shares to be to be Name Purchased Purchased ---- --------- --------- Cowen & Company ......................................... Prudential Securities Incorporated ...................... Morgan Keegan & Company, Inc. ........................... Total................................................... 2,000,000 300,000 ========= =======
22 SCHEDULE B 23 [Form of Opinion of Issuer's Counsel] Exhibit I [Date] Cowen & Company Prudential Securities Incorporated Morgan Keegan & Company, Inc. As representatives of the several Underwriters named in Schedule A c/o Cowen & Company Financial Square New York, New York 10005 Re: QLogic Corporation _______ Shares of Common Stock Dear Sirs: We have acted as counsel for QLogic Corporation, a Delaware corporation (the "Company"), in connection with the sale by the Company and purchase of ____ shares of Common Stock, par value $.10 per share, of the Company (the "Shares") by the several Underwriters listed in Schedule A to the Underwriting Agreement, dated ____, among the Company, Cowen & Company, Prudential Securities Incorporated and Morgan Keegan & Company, Inc., as representatives of the several Underwriters named therein (the "Underwriting Agreement"). This opinion is being furnished pursuant to Section 8(f) of the Underwriting Agreement. All defined terms not defined herein shall have the meanings ascribed to them in the Underwriting Agreement. [final opinion to include customary assumptions and qualifications] We are of the opinion that: 1. The Company and each of its subsidiaries have been duly incorporated and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, except to the extent that the failure to so qualify would not have a material adverse effect on the Company and its subsidiaries taken as a whole, and have all corporate power and authority necessary to own or hold their respective properties and conduct the businesses in which they are engaged; 2. The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and all of the Shares to be issued and sold by the Company to the Underwriters pursuant to the Underwriting Agreement have been duly and validly authorized and, when issued and delivered against payment therefor as provided for in the Underwriting Agreement, shall be duly and validly issued, fully paid and non-assessable; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued and are fully paid, non- assessable and are owned directly or indirectly by the Company; 3. There are no preemptive or other rights to subscribe for or to purchase, nor any restriction upon the voting or transfer of, any of the Shares pursuant to the Company's Certificate of Incorporation or By-Laws or, to the best of our knowledge, any agreement or other instrument; 4. To the best of our knowledge, there are no legal or governmental proceedings pending to which the Company or any of its subsidiaries is a party or of which any property or assets of the Company or any of its Subsidiaries is the subject which, if determined adversely to the Company or any of its subsidiaries, could have 24 a material adverse effect on the Company and its subsidiaries; and, to the best of our knowledge, no such proceedings are threatened or contemplated by governmental authorities or other third parties; 5. The Company has full corporate power and authority to enter into the Underwriting Agreement and to perform its obligations thereunder (including to issue, sell and deliver the Shares), and the Underwriting Agreement has been duly and validly authorized, executed and delivered by the Company and is a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that rights to indemnification and contribution thereunder may be limited by federal or state securities laws or the public policy underlying such laws, and except as enforcement may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other laws relating to or affecting creditors' rights generally or by general principles of equity and limitations on availability of equitable remedies.; 6. The execution, delivery and performance of the Underwriting Agreement and the consummation of the transactions therein contemplated will not result in a breach or violation of any of the terms or provisions of or constitute a default under any material indenture, mortgage, deed of trust, note agreement or other agreement or instrument known to us to which the Company or any of its subsidiaries is a party or by which any of them or any of their properties is or may be bound, the Certificate of Incorporation, By-laws or other organizational documents of the Company or any of its subsidiaries, or, to the best of our knowledge, any law, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or result in the creation of a lien; 7. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated by the Underwriting Agreement, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act or the securities or "Blue Sky" laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters; 8. The Registration Statement was declared effective under the Securities Act as of __________, 1997, the Prospectus was filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations on __________, 1997 and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose is pending or threatened by the Commission; 9. The Registration Statement and the Prospectus and any amendments or supplements thereto comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations and the documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations; and any amendment or supplement to any such incorporated document, when they became effective or were filed with the Commission, as the case may be, complied as to form in all respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the Rules and Regulations; 10. To the best of our knowledge, there are no contracts or other documents which are required by the Securities Act or by the Rules and Regulations to be described in the Prospectus or filed as exhibits to the Registration Statement which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations; 11. To the best of our knowledge, there are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to this Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act; 12. The descriptions in the Registration Statement and Prospectus of statutes, rules, regulations, legal or governmental proceedings, contracts and other documents are accurate and such descriptions fairly present the 25 information required to be disclosed; and to the best of our knowledge, there are no legal or governmental proceedings, statutes, ruler or regulations, or any contracts or documents of a character required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement which are not described and filed as required; 13. The statements under the captions "Risk Factors"; and "Business-Government Regulation", to the extent they reflect matters of federal law arising under the laws of the United States or legal conclusions relating to such law, accurately summarize and fairly present the legal and regulatory matters described therein; and 14. The Company and each of its subsidiaries are not, nor will they be immediately after receiving the proceeds from the sale of the Shares, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended. The foregoing opinion is limited to matters governed by the Federal laws of the United States of America, the general corporate law of the State of Delaware and the laws of the State of California. In connection with our participation in the preparation and filing of the Registration Statement and the Prospectus, we have not independently verified the accuracy, completeness or fairness of the statements contained therein (except with respect to the descriptions of the Company's capital stock), and the limitations inherent in the examination made by us and the knowledge available to us are such that we are unable to assume, and we do not assume, any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except with respect to the descriptions of the Company's capital stock). However, on the basis of our examination and our participation in conferences with certain officers of the Company, its independent public accountants and representatives of the Underwriters and the Underwriters' counsel in connection with the preparation of the Registration Statement and the Prospectus, we can advise you supplementally as a matter of fact and not as an opinion that we have no current actual knowledge that the Registration Statement or any amendment thereto, as of the Effective Date (other than the consolidated financial statements and the notes thereto or the schedules or other financial and numerical data derived therefrom, as to which we express no belief), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, not misleading or that the Prospectus, as of the date of the Prospectus or the date hereof (other than the consolidated financial statements and the notes thereto or the schedules or other financial and numerical data derived therefrom, as to which we express no belief), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Very truly yours, 26 SCHEDULE A Cowen & Company Prudential Securities Incorporated Morgan Keegan & Company, Inc. 27 [Form of Lock-Up Agreement] Exhibit II April __, 1997 Cowen & Company Prudential Securities Incorporated Morgan Keegan & Company, Inc. As representatives of the several Underwriters c/o Cowen & Company Four Embarcadero Center Suite 1200 San Francisco, California 94111 Re: QLogic Corporation Ladies and Gentlemen: In order to induce Cowen & Company ("Cowen"), Prudential Securities Incorporated and Morgan Keegan & Company, Inc. (together with Cowen, the "Representatives") to enter into a certain underwriting agreement with QLogic Corporation, a Delaware corporation (the "Company"), with respect to the public offering (the "Public Offering") of shares of the Company's common stock, par value $0.10 per share ("Common Stock"), the undersigned hereby agrees that for a period commencing from the date hereof through 90 days from the date of the final prospectus, filed by the Company with the Securities and Exchange Commission in connection with such Public Offering, the undersigned will not, without the prior written consent of Cowen, directly or indirectly, offer, sell, contract to sell, grant an option to purchase, transfer the economic risk of ownership in, make any short sale, assign, transfer, pledge, encumber or otherwise sell or dispose of (i) any shares of Common Stock, or (ii) any securities convertible into or exchangeable for shares of Common Stock held by the undersigned or over which the undersigned has the power of disposition during such period or which may be deemed to be beneficially owned, whether directly or indirectly, by the undersigned or issuable upon exercise of options, warrants or rights to purchase or acquire held by the undersigned during such period. Notwithstanding the foregoing, if the undersigned is an individual, he or she may transfer any or all of his or her shares either during his or her lifetime by gift or on death by will or intestacy; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the shares subject to the provisions of this Lock-Up Agreement. In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Common Stock with respect to such shares. The undersigned understands that the Company, the Underwriters and the Representatives will proceed with the Public Offering in reliance upon this Lock-Up Agreement. The undersigned hereby agrees that this Lock-Up Agreement is valid and binding notwithstanding any prior agreements relating to this matter and further represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any obligations of the undersigned shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Notwithstanding anything to the contrary herein, if the closing of the Public Offering has not occurred prior to September 30, 1997, this Lock-Up Agreement shall be of no further force and effect. 28 Very truly yours, ______________________________________________ Signature ______________________________________________ Printed Name ______________________________________________ Title, if applicable ______________________________________________ Additional signature(s), if stock jointly held EX-5.1 3 OPINION OF STRADLING, YOCCA, CARLSON & RAUTH 1 EXHIBIT 5.1 [STRADLING, YOCCA, CARLSON & RAUTH LETTERHEAD] April 25, 1997 QLogic Corporation 3545 Harbor Boulevard Costa Mesa, California 92626 RE: Registration Statement on Form S-3 Ladies and Gentlemen: At your request, we have examined Registration Statement on Form S-3, filed by QLogic Corporation, a Delaware corporation (the "Company"), with the Securities and Exchange Commission on April 25, 1997 (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 2,300,000 shares of Common Stock, $.10 par value per share, of the Company (the "Common Stock"). Said shares of Common Stock, which include 300,000 shares which will be subject to an over-allotment option to be granted to the underwriters by the selling stockholders named in the Registration Statement, are to be sold to the underwriters as described in the Registration Statement for sale to the public. As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the authorization, issuance and sale of the shares of the Common Stock. Based on the foregoing, and subject to compliance with applicable state securities laws, it is our opinion that the 2,300,000 shares of Common Stock, when issued and sold in the manner described in the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Prospectus which is a part of the Registration Statement. Very truly yours, STRADLING, YOCCA, CARLSON & RAUTH EX-23.2 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors QLogic Corporation: The audits referred to in our report dated May 17, 1996 included the related financial statement schedule as of March 31, 1996 and for each of the years in the three-year period ended March 31, 1996 incorporated by reference in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such 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. We consent to the use of our reports included herein or incorporated herein by reference and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Orange County, California April 24, 1997 -----END PRIVACY-ENHANCED MESSAGE-----