<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
-----------------------
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1997
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 0-23298
QLOGIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0537669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3545 HARBOR BOULEVARD
COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices) (Zip Code)
(714) 438-2200
(Registrant's telephone number, including area code)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
As of June 29, 1997, the registrant had 5,864,070 shares of common stock
outstanding.
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QLOGIC CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- -----------------------------------------------------------------------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 29, 1997 and March 30, 1997 ............................. 3
Condensed Consolidated Statements of Income
three months ended June 29, 1997
and June 30, 1996 ............................................ 4
Condensed Consolidated Statements of Cash Flows
three months ended June 29, 1997
and June 30, 1996 ............................................ 5
Notes to Condensed Consolidated Financial Statements ......... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........... 7
PART II. OTHER INFORMATION PAGE
- ------------------------------------------------------------------------
Item 6 Exhibits and Reports on Form 8-K ....................... 14
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 29, MARCH 30,
1997 1997
------- -------
<S> <C> <C>
Cash and cash equivalents $23,135 $19,091
Accounts and notes receivable, net 4,402 5,720
Inventories 5,860 4,794
Deferred income taxes 1,834 1,149
Prepaid expenses and other current assets 467 391
------- -------
Total current assets 35,698 31,145
Property and equipment, net 4,811 5,043
Other assets 1,289 775
------- -------
$41,798 $36,963
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 29, MARCH 30,
1997 1997
-------- ---------
<S> <C> <C>
Accounts payable $ 3,966 $ 3,994
Accrued expenses 9,630 7,115
Current installments of capitalized lease obligations 218 225
------- -------
Total current liabilities 13,814 11,334
Capitalized lease obligations, excluding current installments 301 352
Other non-current liabilities 924 924
Stockholders' equity:
Preferred stock, $.10 par value; 1,000,000 shares authorized (200,000 -- --
shares designated as Series A Junior Participating Preferred,
$0.001 par value); none issued
Common stock $.10 par value; 12,500,000 shares authorized; 5,864,070
and 5,840,701 shares issued and outstanding at June 29, 1997 586 584
and March 30, 1997, respectively
Additional paid-in capital 19,161 19,001
Retained earnings 7,012 4,768
------- -------
Total stockholders' equity 26,759 24,353
------- -------
$41,798 $36,963
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
June 29, June 30,
1997 1996
---------- ----------
<S> <C> <C>
Net revenues $ 18,172 $ 15,740
Cost of sales 7,840 9,585
---------- ----------
Gross profit 10,332 6,155
Operating expenses:
Engineering and development 3,528 2,089
Selling and marketing 2,082 1,357
General and administrative 1,355 1,117
---------- ----------
Total operating expenses 6,965 4,563
---------- ----------
Operating income 3,367 1,592
Interest income, net 282 59
---------- ----------
Income before income taxes 3,649 1,651
Income tax provision 1,405 684
---------- ----------
Net income $ 2,244 $ 967
========== ==========
Net income per common and common
equivalent share $ 0.35 $ 0.16
========== ==========
Weighted average common and
common equivalent shares 6,353,000 5,894,000
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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QLOGIC CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,244 $ 967
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 595 612
Provision for doubtful accounts 196 29
Loss on disposal of property and equipment 127 368
Provision for (benefit from) deferred income taxes (685) 24
Changes in assets and liabilities:
Decrease in accounts and notes receivables 1,122 2,449
Increase in inventories (1,066) (1,066)
Increase in prepaid expenses and other current assets (76) (71)
Increase in other assets (514) (480)
Decrease in accounts payable (28) (580)
Increase (decrease) in accrued expenses 2,515 (56)
Decrease in other non-current liabilities -- (750)
-------- --------
Net cash provided by operating activities 4,430 1,446
-------- --------
Cash flows from investing activities:
Additions to property and equipment (490) (683)
-------- --------
Net cash used in investing activities (490) (683)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases (58) (69)
Proceeds from exercise of stock options 162 428
-------- --------
Net cash provided by financing activities 104 359
-------- --------
Net change in cash 4,044 1,122
-------- --------
Cash at beginning of period 19,091 8,414
-------- --------
Cash at end of period $ 23,135 $ 9,536
======== ========
Cash paid during the period for:
Interest $ 25 $ 49
======== ========
Income taxes $ -- $ 1,096
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE (1) BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the financial position as of
June 29, 1997 and March 30, 1997, the results of operations for the three months
ended June 29, 1997 and June 30, 1996 and the statements of cash flows for the
three months ended June 29, 1997 and June 30, 1996.
NOTE (2) INVENTORIES
Components of inventories are as follows:
<TABLE>
<CAPTION>
JUNE 29, MARCH 30,
1997 1997
-------- ---------
<S> <C> <C>
Raw materials $3,899 $2,931
Work in progress 220 1,117
Finished goods 1,741 746
------ ------
$5,860 $4,794
====== ======
</TABLE>
NOTE (3) NET INCOME PER SHARE
Net income per common and common equivalent share was computed based on
the weighted average number of common and common equivalent shares outstanding
(if dilutive) during the periods presented (6,353,000 and 5,894,000 for the
three months ended June 29, 1997 and June 30, 1996, respectively). The Company
has granted certain stock options which have been treated as common share
equivalents in computing both primary and fully diluted income per share. The
primary and fully diluted income per share calculations are approximately the
same.
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ITEM 2. 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."
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, pursuant to which the Company
became a separate publicly traded corporation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income
and expense items expressed in absolute terms and as a percentage of the
Company's net revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
(000'S)
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C> <C> <C>
Net revenues....................................... $18,172 100.0% $15,740 100.0%
Cost of sales...................................... 7,840 43.1 9,585 60.9
------- ----- ------- -----
Gross profit.................................. 10,332 56.9 6,155 39.1
Operating expenses:
Engineering and development ............... 3,528 19.4 2,089 13.3
Selling and marketing....................... 2,082 11.5 1,357 8.6
General and administrative.................. 1,355 7.4 1,117 7.1
------- ----- ------- -----
Total operating expenses................... 6,965 38.3 4,563 29.0
------- ----- ------- -----
Operating income (loss)..................... $3,367 18.6% $1,592 10.1%
======= ===== ======= =====
</TABLE>
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 three months ended June 29, 1997 increased $2.4
million or 15% from the three months ended June 30, 1996 to $18.2 million. The
increase was primarily the result of an increase in sales of the Host Board and
ISP product lines of $3.9 million and $1.7 million, respectively. A partially
offsetting decline in sales of $1.9 million, $1.0 million and $170,000
occurred in the FAS product line, the TEC product line and in license fees,
respectively.
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 three months
ended June 29, 1997 was 43%, a decrease of 18% from the similar period in the
prior fiscal year. The percentage decrease was due to Computer Systems Products
accounting for a greater percentage of net revenues. Computer Systems Products
contain higher levels of integration and functionality and are generally
associated with higher average selling prices and gross margins. Additionally,
the Company experienced manufacturing efficiencies. 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 further reduce manufacturing costs. In addition, the Company
believes the cost of sales percentage will be adversely impacted by sales of
IDE-based products, which carry lower margins. As a result, the Company does not
anticipate cost of sales to decrease at a rate consistent with historic trends
and there can be no assurance that the Company will be able to maintain or
improve its gross margin in subsequent quarters.
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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 three months ended June 29,
1997, engineering and development expenditures increased by $1.4 million from
the same period in fiscal 1996, primarily due to increased salary and new
product development expenses. In particular, the Company significantly expanded
its engineering staff in the three months ended June 29, 1997, from the similar
period in the prior fiscal year. The Company expects that engineering and
development expenses will increase in absolute dollars in fiscal 1998.
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 three months ended June
29, 1997, selling and marketing expenses increased by $725,000 from the similar
period in the prior fiscal year, primarily as a result of commission and salary
expenses.
General and Administrative. General and administrative expenses consist
primarily of salaries and other expenses for corporate management, finance,
accounting and human resources. For the three months ended June 29, 1997,
general and administrative expenses increased $238,000 from the similar period
in the prior fiscal year, primarily due to bad debt expense.
INTEREST INCOME
Net interest income increased $223,000 during the three months ended
June 29, 1997 from the three months ended June 30, 1996, primarily due to
larger balances of cash and cash equivalents.
INCOME TAX PROVISION
The Company's effective tax rates were 39% and 41% for the three months
ended June 29, 1997 and June 30, 1996, respectively.
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 $4.4 million
for the three months ended June 29, 1997. Cash provided by operations was $1.4
million for the three months ended June 30, 1996. 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 $490,000 for the three months ended
June 29, 1997, reflecting expenditures for property and equipment.
Cash provided by financing activities was $104,000 for the three months
ended June 29, 1997, which reflected proceeds from the exercise of stock
options, offset in part by principal payments under capital leases.
Working capital at June 29, 1997 was $21.9 million, as compared to $19.8
million at March 30, 1997. At June 29, 1997, the Company's principal sources of
liquidity included cash and cash equivalents of $23.1 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.
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There were no borrowings under the line of credit as of June 29, 1997. The line
of credit with Silicon Valley Bank will expire July 5, 1998.
The Company believes that existing cash balances, facilities and equipment
leases, cash flows 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. See "Risk Factors -- Transactions to Obtain
Manufacturing Capacity; Future Capital Needs."
In order to increase working capital to be able to take advantage of
business opportunities, the Company is seeking additional equity financing
through a proposed public offering of 2,000,000 shares of its common stock
(plus up to an additional 300,000 shares to cover over-allotment, if any).
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 June 29, 1997 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 June 29, 1997. Interest due Emulex is payable quarterly and the Company
commenced interest payments in April 1996.
RISK FACTORS
Except for the historical information contained herein, the discussion in
this Form 10-Q contains certain forward-looking statements. When used in this
Form 10-Q the words "forecast," "projected," "believes," "expects," and similar
expressions are intended to identify forward looking statements. In addition,
the Company may from time to time make oral forward-looking statements. The
Company wishes to caution readers that a number of important factors could cause
results to differ materially from those in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
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
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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.
DEPENDENCE ON SMALL NUMBER OF CUSTOMERS
A small number of customers account for a substantial portion of the
Company's net revenues, and the Company expects that a limited number of
customers will continue to represent a substantial portion of the Company's net
revenues for the foreseeable future. The loss of any of the Company's major
customers would have a material adverse effect on its business, financial
condition and results of operations. In addition, a majority of the Company's
customers order the Company's products through written purchase orders as
opposed to long term supply contracts and, therefore, such customers are
generally not obligated to purchase products from the Company for any 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.
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.
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 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
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use in their products. At least one large OEM customer in the past decided to
vertically integrate and therefore ceased purchases from the Company.
The Company will 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.
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 unit
prices. While the quality, yield and timeliness of wafer deliveries to date have
been acceptable, there can be no assurance that manufacturing yield problems
will not occur in the future.
The Company is using multiple sources of supply for certain of its
products, which may require the Company's customers to perform separate product
qualifications. The Company has not, however, developed alternate sources of
supply for certain other products and its newly introduced products are
typically produced initially by a single foundry until alternate sources can be
qualified. In particular, the Company's integrated single chip Fibre Channel
controller is manufactured by LSI Logic and integrates LSI Logic's transceiver
technology. In the event that LSI Logic is unable or unwilling to satisfy the
Company's requirements for this technology, the Company's 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.
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 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
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the loss of customers and other material adverse effects on the Company's
operating results, including those that may result should the Company be forced
to purchase products from higher cost foundries or pay expediting charges to
obtain additional supply.
TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS
Although the Company is currently not experiencing any difficulties in
obtaining sufficient foundry capacity due to the current abundance of worldwide
semiconductor fabrication capacity, the Company and the semiconductor industry
have in the past experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in or advances to wafer manufacturing companies in
exchange for guaranteed production capacity, or the formation of joint ventures
to own and operate or construct foundries or to develop certain products. Any of
these transactions would involve financial risk to the Company and could require
the Company to commit substantial capital or provide technology licenses in
return for guaranteed production capacity. 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.
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.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INDUSTRY STANDARDS
The markets in which the Company and its competitors compete are
characterized by rapidly changing technology, evolving industry standards and
continuing improvements in products and services. The Company's future success
depends on its ability to enhance its current products and to develop and
introduce in a timely manner new products that keep pace with technological
developments and industry standards, compete effectively on the basis of price
and performance, adequately address OEM customer and end-user customer
requirements and achieve market acceptance. The Company believes that to remain
competitive in the future it will need to continue to develop new products,
which will require the investment of significant financial resources in new
product development. In anticipation of the implementation of Fibre Channel data
transfer interface technologies, the Company has invested
12
<PAGE> 13
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 and expedite charges, in addition to lower sales and lower profits.
IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company anticipates that its future growth may depend in part on its
ability to identify and acquire complementary businesses, technologies or
product lines that are compatible to those of the Company. Acquisitions involve
numerous risks, including identifying and pursuing acquisitions, difficulties in
the assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks associated with entering markets or conducting operations with which the
Company has no or limited direct prior experience, and the potential loss of key
employees of the acquired company. Moreover, there can be no assurance that the
anticipated benefits of an acquisition will be realized. There can be no
assurance that the Company will be effective in identifying and effecting
attractive acquisitions, assimilating acquisitions or managing future growth.
Future acquisitions by the Company could result in potentially dilutive
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.
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
13
<PAGE> 14
hire additional personnel. The loss of the services of key personnel could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that the market for key personnel in
the industries in which it competes is highly competitive. In particular, the
Company has experienced difficulty in attracting and retaining qualified
engineers and other technical personnel and anticipates that competition for
such personnel will increase in the future. There can be no assurance that the
Company will be able to attract and retain key personnel with the skills and
expertise necessary to develop new products in the future, or to manage the
Company's business, both in the United States and abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to various risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. The Company's export sales are invoiced in U.S.
dollars and, accordingly, if the relative value of the U.S. dollar in comparison
to the currency of the Company's foreign customers should increase, the
resulting effective price increase of the Company's products to such foreign
customers could result in decreased sales. There can be no assurance that any of
the foregoing factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS
Although the Company has patent protection on certain aspects of its
technology, 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 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The registrant has not filed any reports on Form 8-K during the quarter for
which this report is filed.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 31, 1997
QLOGIC CORPORATION
BY: /s/ H.K. DESAI
--------------------------------
H.K. Desai
President and Chief Executive
Officer
BY: /s/ THOMAS R. ANDERSON
--------------------------------
Thomas R. Anderson
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
16
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