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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(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 27, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-23298
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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
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(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 July 25, 1999, the registrant had 36,235,346 shares of common
stock outstanding. All references to share and per-share data for all periods
presented have been restated for the February 1999 and July 1999 two-for-one
stock splits.
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QLOGIC CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 27, 1999 and March 28, 1999................. 3
Condensed Consolidated Statements of Income for the three months ended
June 27, 1999 and June 28, 1998........................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months ended
June 27, 1999 and June 28, 1998........................................................... 5
Notes to Condensed Consolidated Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities..................................................................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
A S S E T S
<TABLE>
<CAPTION>
June 27, March 28,
1999 1999
-------- --------
<S> <C> <C>
Cash and cash equivalents ........................................................ $ 50,672 $ 43,174
Short term investments ........................................................... 62,026 57,613
Accounts and notes receivable, less allowance for doubtful accounts
of $740 as of June 27, 1999 and $940 as of March 28, 1999 .................... 16,329 11,917
Inventories ...................................................................... 10,338 10,623
Deferred income taxes ............................................................ 6,536 5,649
Prepaid expenses and other current assets ........................................ 3,335 1,950
-------- --------
Total current assets .................................................... 149,236 130,926
Long term investments ............................................................ 32,286 29,760
Property and equipment, net ...................................................... 10,442 10,409
Other assets ..................................................................... 1,708 1,828
-------- --------
$193,672 $172,923
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................................................. $ 5,951 $ 6,432
Accrued compensation ............................................................. 8,918 7,378
Income taxes payable ............................................................. 4,867 1,358
Deferred revenue ................................................................. 1,224 1,074
Other accrued liabilities ........................................................ 4,416 3,997
-------- --------
Total current liabilities ............................................... 25,376 20,239
-------- --------
Commitments and contingencies
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, $0.05 par value; 50,000,000 shares authorized; 36,146,710
and 35,922,116 shares issued and outstanding at June 27, 1999 and
March 28, 1999, respectively .............................................. 903 898
Additional paid-in capital .................................................. 112,006 107,911
Retained earnings ........................................................... 55,387 43,875
-------- --------
Total stockholders' equity ................................................ 168,296 152,684
-------- --------
$193,672 $172,923
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
June 27, June 28,
1999 1998
------- -------
<S> <C> <C>
Net revenues ................................... $43,186 $24,115
Cost of revenues ............................... 13,486 9,703
------- -------
Gross profit .............................. 29,700 14,412
------- -------
Operating expenses:
Engineering and development ............... 7,876 4,941
Selling and marketing ..................... 3,975 2,375
General and administrative ................ 1,796 1,208
------- -------
Total operating expenses ................ 13,647 8,524
------- -------
Operating income ............................... 16,053 5,888
Interest income, net ........................... 1,389 1,349
------- -------
Income before income taxes ..................... 17,442 7,237
Income tax provision ........................... 5,930 2,462
------- -------
Net income ..................................... $11,512 $ 4,775
======= =======
Net income per share:
Basic ....................................... $ 0.32 $ 0.14
------- -------
Diluted ..................................... $ 0.30 $ 0.13
------- -------
Number of shares used in per share calculations:
Basic ....................................... 36,010 34,660
------- -------
Diluted ..................................... 38,150 36,672
======= =======
</TABLE>
See accompanying notes to condensed consolidated Financial statements.
4
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QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
June 27, June 28,
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 11,512 $ 4,775
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................ 1,081 679
Decrease in allowance for doubtful accounts .............. (200) --
Loss on disposal of property and equipment ............... 4 29
Provision for (benefit from) deferred income taxes ....... (887) 136
Changes in assets and liabilities:
Accounts and notes receivable ............................ (4,212) 1,967
Inventories .............................................. 285 (5,058)
Prepaid expenses and other current assets ................ (1,385) (7)
Other assets ............................................. 25 351
Accounts payable ......................................... (481) 538
Accrued compensation ..................................... 1,540 (991)
Incomes taxes payable .................................... 6,372 2,252
Other accrued liabilities ................................ 562 122
Deferred revenue ......................................... 150 52
Other non-current liabilities ............................ -- (466)
-------- --------
Net cash provided by operating activities .............. 14,366 4,379
-------- --------
Cash flows from investing activities:
Additions to property and equipment ...................... (1,023) (2,676)
Purchases of investments ................................. (24,122) (23,883)
Maturities of investments ................................ 17,183 9,434
-------- --------
Net cash used in investing activities .................. (7,962) (17,125)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases .................. (143) (51)
Proceeds from issuance of stock under employee stock plans 1,237 257
-------- --------
Net cash provided by financing activities .............. 1,094 206
-------- --------
Net increase (decrease) in cash and cash equivalents .......... 7,498 (12,540)
Cash and cash equivalents at beginning of period .............. 43,174 64,090
-------- --------
Cash and cash equivalents at end of period .................... $ 50,672 $ 51,550
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ................................................... $ 7 $ 13
======== ========
Income taxes ............................................... $ -- $ 191
======== ========
</TABLE>
Non-cash investing and financing activities:
During the quarter ended June 27, 1999, the Company recorded a credit to
additional paid-in-capital and a debit to accrued taxes payable of $2,863
related to the tax benefit of exercises of stock options under the Company's
stock option plans. Additionally, during the quarter ended June 27, 1999, the
Company recorded an accrual of $166 in accordance with the performance
provisions of the Silicon Design Resources Asset Acquisition Agreement.
During the quarter ended June 28, 1998, the Company recorded a credit to
additional paid-in-capital and a debit to accrued taxes payable of $217 related
to the tax benefit of exercises of stock options under the Company's stock
options plans.
See accompanying notes to condensed consolidated financial statements.
5
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE (1) BASIS OF PRESENTATION
In the opinion of QLogic Corporation ("QLogic" or 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 27, 1999, the statements of income for the
three months ended June 27, 1999 and June 28, 1998 and the statements of cash
flows for the three months ended June 27, 1999 and June 28, 1998. The
accompanying financial statements should be read in conjunction with the
financial statements in the Company's Annual Report on Form 10-K for the year
ended March 28, 1999. The results of operations for the three months ended June
27, 1999 are not necessarily indicative of the results to be expected for the
entire fiscal year. Certain items previously reported in specific financial
statement captions have been reclassified to conform to the current
presentation.
NOTE (2) INVENTORIES
Components of inventories are as follows:
June 27, March 28,
1999 1999
------- -------
Raw materials ....................... $ 8,823 $ 7,716
Work in process ..................... 619 833
Finished goods 896 2,074
------- -------
$10,338 $10,623
======= =======
NOTE (3) NET INCOME PER SHARE
The Company computed basic net income per share based on the weighted
average number of common shares outstanding during the period presented. Diluted
income per share was computed based on the weighted average number of common and
dilutive potential common shares outstanding during the periods presented. The
Company has granted certain stock options which have been treated as dilutive
potential common shares.
The following table sets forth the computations of basic and diluted net
income per share:
<TABLE>
<CAPTION>
June 27, June 28,
1999 1998
------- --------
<S> <C> <C>
Numerator:
Net income ........................................... $11,512 $ 4,775
======= =======
Denominator:
Denominator for basic net income per share - weighted
average shares ..................................... 36,010 34,660
Dilutive potential common shares, using treasury stock
method ............................................. 2,140 2,012
------- -------
Denominator for diluted net income per share ....... 38,150 36,672
======= =======
Basic net income per share .............................. $ 0.32 $ 0.14
------- -------
Diluted net income per share ............................ $ 0.30 $ 0.13
======= =======
</TABLE>
Options to purchase 27 and 118 shares of common stock with exercise
prices that exceed the average market price of $46.43 and $10.39 during the
three months ended June 27, 1999 and June 28, 1998, respectively, were excluded
from the calculation of diluted net income per share as their inclusion would
have been anti-dilutive.
6
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE (4) STOCK SPLITS
In July 1999, the Company's Board of Directors approved a two-for-one
split of the Company's common stock effected by a stock dividend applicable to
stockholders of record on July 22, 1999 and was payable on July 30, 1999. All
references to share and per-share data for all periods presented have been
adjusted to give effect to this split as well as the two-for-one stock split
effective February 1999.
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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 "Factors That May Affect Future Results" as well as those discussed
elsewhere in this report. All figures are in thousands except as otherwise
noted.
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
-------------------------------------------
June 27, 1999 June 28, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Net revenues .................... $43,186 100.0% $24,115 100.0%
Cost of revenues ................ 13,486 31.2 9,703 40.2
------- ----- ------- -----
Gross profit ............... 29,700 68.8 14,412 59.8
------- ----- ------- -----
Operating expenses:
Engineering and development 7,876 18.2 4,941 20.5
Selling and marketing ...... 3,975 9.2 2,375 9.9
General and administrative . 1,796 4.2 1,208 5.0
------- ----- ------- -----
Total operating expenses 13,647 31.6 8,524 35.4
------- ----- ------- -----
Operating income ....... $16,053 37.2% $ 5,888 24.4%
======= ===== ======= =====
</TABLE>
Net Revenues
The Company's net revenues are derived primarily from the sale of SCSI
and Fibre Channel based products. The Company also licenses certain designs and
receives royalty revenues and non-recurring engineering fees. Net revenues in
the three months ended June 27, 1999 increased $19.1 million or 79% from the
three months ended June 28, 1998 to $43.2 million. The increase was the result
of a $8.7 million increase in sales of SCSI products, a $6.8 million increase in
sales of Fibre Channel products, and a $3.5 million increase in IDE-based
royalties.
Export revenues in the three months ended June 27, 1999 increased $11.1
million or 86% from the three months ended June 28, 1998, to approximately $23.9
million, primarily due to increased sales to customers in Japan and to a lesser
extent, Europe.
Countries in the Pacific Rim continue to suffer from the influence of
the Asian economic crisis. This could lead to widespread financial difficulty
among the companies in this region. Export revenues (primarily to the Pacific
Rim countries) of the Company's products amounted to $23.9 million in the three
months ended June 27, 1999, and $12.8 million in the three months ended June 28,
1998. As a percentage of net revenues, export revenues accounted for 55% in the
three months ended June 27, 1999, and 53% in the three months ended June 28,
1998. Export revenues are denominated in U.S. dollars. The Company does not
expect the uncertainty in selected Pacific Rim foreign currency markets to have
a material adverse effect on the results of the Company's operations.
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 believes that its major customers continually evaluate
whether or not to purchase products from alternate or additional sources.
Additionally, customers' economic and market conditions frequently change.
Accordingly, there can also be no assurance that a major customer will not
reduce, delay or eliminate its purchases from the Company. Any such reduction,
delay or loss of purchases could have a material adverse effect on the Company's
business, financial condition and results of operations.
8
<PAGE> 9
Gross Profit
Cost of revenues consist primarily of raw materials (including wafers
and completed chips from third-party manufacturers), assembly and test labor,
overhead and warranty costs. The gross profit percentage for the three months
ended June 27, 1999 was 68.8%, an increase from 59.8% in the three months ended
June 28, 1998. The increase in gross profit percentage was largely due to the
impact of $3.5 million of IDE-based royalties received from a major customer.
The percentage increase was also impacted by the introduction of new, higher
margin products and volume-related cost reductions on mature products, combined
with improved quality resulting in reduced scrap expenses.
The Company's ability to maintain its current gross profit percentage
can be significantly affected by factors such as supply costs and, in
particular, the cost of silicon wafers, the worldwide semiconductor foundry
capacity, the mix of products shipped, competitive price pressures, the
timeliness of volume shipments of new products, the level of royalties received
and the Company's ability to achieve manufacturing cost reductions. The Company
anticipates that it will be increasingly more difficult to reduce manufacturing
costs. Also, royalty revenues may be irregular or unpredictable. As a result of
these and other factors, the Company does not anticipate gross profit percentage
to increase at a rate consistent with historic trends, and, it may decline in
future quarters.
Operating Expenses
Engineering and Development. Engineering and development expenses
consist primarily of salaries and other personnel related expenses,
development-related material, occupancy costs, and computer support. The Company
believes that continued investments in engineering and development activities
are critical to achieving its strategic objectives. The Company expects that the
dollar amount of engineering and development expenses will continue to increase
in fiscal 2000.
During the three months ended June 27,1999, engineering and development
expenses increased $3.0 million to $7.9 million from $4.9 million in the three
months ended June 28, 1998. The increase in spending was largely due to
increased levels of spending for Fibre Channel and SCSI design, as well as
enclosure management product design. As a percentage of net revenues,
engineering and development expenses decreased to 18.2% in the three months
ended June 27, 1999 from 20.5% in the similar prior year period. The decrease as
a percentage of net revenues was due to economies of scale realized from the
growth in net revenues.
Selling and Marketing. Selling and marketing expenses consist primarily
of sales and marketing salaries, sales commissions and related expenses,
promotional activities and travel for sales and marketing personnel. The Company
believes continued investments of these types of expenses are critical to the
success of its strategy of expanding relationships with its customers. As a
result, the Company expects sales and marketing expenditures will increase in
the future.
During the three months ended June 27, 1999, selling and marketing
expenses increased $1.6 million to $4.0 million from $2.4 million in the three
months ended June 28, 1998. The increase in spending was largely due to
increased sales commissions earned as a result of the increase in net revenues.
As a percentage of net revenues, sales and marketing expenses decreased to 9.2%
in the three months ended June 27, 1999 from 9.8% in the similar prior year
period. The decrease was due to economies of scale realized from the growth in
net revenues.
General and Administrative. General and administrative expenses consist
primarily of salaries and related expenses for executive, finance, accounting,
human resources and information technology personnel. Non-personnel related
expenses consist of recruiting fees, professional services and corporate
expenses. The Company expects general and administrative expenses to increase in
absolute dollars as it adds personnel and incurs additional costs relating to
the growth of the business.
During the three months ended June 27, 1999, general and administrative
expenses increased $0.6 million to $1.8 million from $1.2 million in the three
months ended June 28, 1998. The increase in spending was primarily due to the
growth in administrative personnel and professional services. As a percentage of
net revenues, general and administrative expenses decreased to 4.2% in the three
months ended June 27, 1999 from 5.0% in the similar prior year period. The
decrease as a percentage of net revenues was due to economies of scale realized
from the growth in net revenues.
Included in operating expenses in the three months ended June 27, 1999
was a $2.1 million payment to the former Chairman of the Board upon his
retirement.
9
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Non-Operating Income
Interest and other income, net of interest expense, was $1.4 million for
the three months ended June 27, 1999 and $1.3 million for the three months ended
June 28, 1998. The increase was largely due to increases in interest income
related to increases in cash equivalents and investment balances.
Income Tax Provision
The Company's effective tax rates remained relatively constant at
approximately 34% for the three months ended June 27, 1999, and June 28, 1998.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It further
provides criteria for derivative instruments to be designated as fair value,
cash flow and foreign currency hedges, and establishes respective accounting
standards for reporting changes in the fair value of the instruments. The
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company has not yet determined the impact of adopting this
new standard on the consolidated financial statements.
Liquidity and Capital Resources
The Company's combined balances of cash and cash equivalents, short-term
and long-term investments have increased to $145.0 million at June 27, 1999 and
were $130.5 million at March 28, 1999. The increase was primarily attributable
to positive cash flow from operations, primarily net income growth, during the
three months ended June 27, 1999.
The Company's primary source of liquidity is derived from working
capital and a $7.5 million unsecured line of credit with Silicon Valley Bank.
Working capital increased $13.2 million to $123.9 million at June 27, 1999. The
increase in working capital in the quarter ended June 27, 1999 was largely
attributable to cash flow from operations. The $7.5 million line of credit
facility with Silicon Valley Bank allows the Company to borrow at the bank's
prime rate. The credit facility expires on July 5, 2000, and, although there can
be no assurance, the Company currently expects to renew this line of credit.
There are no borrowings under this credit facility at June 27, 1999.
The Company's cash flow provided by operations was $14.4 million in the
three months ended June 27, 1999, and $4.4 million in the three months ended
June 28, 1998. The growth in cash provided by operations was primarily due to
increases in profitability. Additionally, in the three months ended June 27,
1999, cash flow from operations was improved by increases in income taxes
payable and accrued compensation and was offset by increases in accounts and
notes receivable and prepaid expenses and other current assets.
The Company's cash flow used in investing activities was $8.0 million in
the three months ended June 27, 1999 compared to $17.1 million in the three
months ended June 28, 1998. The decrease in cash used in investing activities
for the three months ended June 27, 1999, was primarily due to decreases in
purchases of short and long-term investments, net of maturing investments.
Additionally, capital expenditures were $1.0 million in the three months ended
June 27, 1999 and $2.7 million in the three months ended June 28, 1998. During
fiscal year 2000, the Company anticipates spending between $2.5 million to $3.5
million for leasehold improvements and relocation related expenses associated
with the corporate headquarters relocation to Aliso Viejo, California. The
Company may exercise its option to purchase the Aliso Viejo facility, which
could increase the Company's potential cash expenditures by approximately $30.0
to $35.0 million.
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The Company's cash flow provided by financing activities was $1.1
million in the three months ended June 27, 1999 compared to $0.2 million in the
three months ended June 28, 1998. The increase in cash provided by financing
activities in the three months ended June 27, 1999 was primarily due to
increases in proceeds from issuance of stock under employee stock plans.
The Company believes that existing cash and cash equivalent balances,
short term investments, facilities and equipment leases, and cash flows from
operating activities will provide the Company with sufficient funds to finance
its operations for at least the next 12 months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the information
in this report constitutes forward-looking statements. When used in this report
the words "shall," "should," "forecast," "all of," "projected," "believes,"
"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 above in
"Business" or "Management's Discussion and Analysis of Financial Condition and
Results of Operations" or elsewhere in this report.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results from quarter to quarter. As a
result, the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful, and that such comparisons cannot be
relied upon as indicators of future performance. In addition, there can be no
assurance that the Company will maintain its current profitability in the
future. A significant portion of the Company's net revenues in each fiscal
quarter result from orders booked in that quarter. In the past, a significant
percentage of the Company's quarterly bookings and sales to major customers
occurred during the last month of the quarter, and there can be no assurance
that this trend will not return in the future. Orders placed by major customers
are typically based on their forecasted sales and inventory levels for the
Company's products. Changes in purchasing patterns by one or more of the
Company's major customers, customer order changes or rescheduling, gain or loss
of significant customers, customer policies pertaining to desired inventory
levels of the Company's products, negotiations of rebates and extended payment
terms, as well as changes in the ability of the Company to anticipate in advance
the mix of customer orders, could result in material fluctuations in quarterly
operating results. Certain large OEM customers may require the Company to
maintain higher levels of inventory, or field warehouses in an 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; adoption of new accounting pronouncements and/or changes in
Company policies and general economic and other conditions effecting the timing
of customer orders and capital spending. The Company's quarterly results of
operations are also influenced by competitive factors, including pricing and
availability of the Company's and its competitors' products. Although the
Company does not maintain its own wafer manufacturing facility, a large portion
of the Company's expenses is fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer or
cancel purchases of the Company's products. Order deferrals by the Company's
customers, delays in the Company's introduction of new products and longer than
11
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anticipated design-in cycles for the Company's products have in the past
adversely effected the Company's quarterly results of operations. Due to all of
the foregoing factors, as well as other unanticipated factors, it is likely that
in some future quarter or quarters the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's common stock would likely be materially and adversely
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. Some of these customers are based in the
Pacific Rim, which is subject to economic and political uncertainties. In
addition, a majority of the Company's customers order the Company's products
through written purchase orders as opposed to long-term supply contracts and,
therefore, such customers are generally not obligated to purchase products from
the Company for any extended period. Major customers also have significant
leverage over the Company and may attempt to change the terms, including
pricing, upon which the Company and such customers do business, which could
materially adversely affect the Company's business, financial condition and
results of operations. This risk is increased due to the potential for some of
these customers merging or acquiring other customers of the Company. As the
Company's OEM customers are pressured to reduce prices as a result of
competitive factors, the Company may be required to contractually commit to
price reductions for its products before it knows how, or if, cost reductions
can be obtained. If the Company is unable to achieve such cost reductions, the
Company's gross margins could decline and such decline could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company provides certain customers with price
protection in the event that the Company reduces the prices of its products.
While the Company maintains reserves for such price protection, there can be no
assurance that the impact of future price reductions by the Company will not
exceed the Company's reserves in any specific fiscal period. Any price
protection in excess of recorded reserves could have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION
The markets for both peripheral and host computer products are highly
competitive and are characterized by short product life cycles, price erosion,
rapidly changing technology, frequent product performance improvements and
evolving industry standards. Competition typically occurs at the design stage,
where the customer evaluates alternative design approaches. Because of shortened
product life cycles and even shorter design-in cycles, the Company's competitors
have increasingly frequent opportunities to achieve design wins in next
generation systems. A design win usually ensures a customer will purchase the
product until a higher performance standard is available or a competitor can
demonstrate a significant price/performance advantage. Most of the Company's
products compete with products available from several companies, many of which
have substantially greater research and development, long term guaranteed supply
capacity, marketing and financial resources, manufacturing capability and
customer support organizations than those of the Company. The Company believes
that its future operating results will depend, in part, upon its ability to
continue to improve product and process technologies and develop new
technologies in order to achieve or maintain the performance advantages of
products and processes relative to competitors, to adapt products and processes
to technological changes, and to identify and adopt emerging industry standards.
Because of the complexity of its products, the Company has experienced delays
from time to time in completing products on a timely basis. If the Company is
unable to design, develop and introduce competitive new products on a timely
basis, its future operating results would be materially and adversely affected.
The Company currently competes primarily with Texas Instruments,
Adaptec, Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre
Channel sector of the I/O market, the Company competes primarily with Texas
Instruments, LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the
IDE sector, the Company competes with STMicroelectronics and Cirrus Logic, Inc.
In the enclosure management sector, the Company competes primarily with the
Symbios division of LSI Logic and the Serano division of Vitesse Semiconductor
Corporation. The Company may compete with some of its larger disk drive and
computer systems customers, some of which have the capability to develop I/O
controller integrated circuits for use in their own products. At least one large
OEM customer in the past has decided to vertically integrate and has therefore
ceased purchases from the Company.
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The Company will need to continue to develop products appropriate to its
markets to remain competitive as its competitors continue to introduce products
with improved performance characteristics. While the Company continues to devote
significant resources to research and development, there can be no assurance
that such efforts will be successful or that the Company will develop and
introduce new technology and products in a timely manner. Further, several of
the Company's competitors have greater resources devoted to securing
semiconductor foundry capacity (e.g. long-term agreements regarding supply flow,
equity or financing agreements or direct ownership of a foundry). In addition,
while relatively few competitors offer a full range of SCSI and other I/O
products, additional domestic and foreign manufacturers may increase their
presence in, and resources devoted to, these markets. There can be no assurance
that the Company will compete successfully in the future.
DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS
The Company currently relies on several independent foundries to
manufacture its semiconductor products either in finished form or wafer form.
Generally, the Company conducts business with some of its foundries through
written purchase orders as opposed to long-term supply contracts and, therefore,
such foundries are generally not obligated to supply products to the Company for
any specific period, in any specific quantity or at any specified price, except
as may be provided in a particular purchase order as may be accepted by a
foundry. To the extent a foundry terminates its relationship with the Company or
should the Company's supply from a foundry be interrupted or terminated for any
other reason, the Company may not have a sufficient amount of time to replace
the supply of products manufactured by that foundry. Historically, there have
been periods when there has been a worldwide shortage of advanced process
technology foundry capacity. The manufacture of semiconductor devices is subject
to a wide variety of factors, including the availability of raw materials, the
level of contaminants in the manufacturing environment, impurities in the
materials used, and the performance of personnel and equipment. The Company is
continuously evaluating potential new sources of supply. However, the
qualification process and the production ramp-up for additional foundries has in
the past taken, and could in the future take, longer than anticipated. There can
be no assurance that new supply sources will be able or willing to satisfy the
Company's wafer requirements on a timely basis or at acceptable quality or unit
prices. While the quality, yield and timeliness of wafer deliveries to date have
been acceptable, there can be no assurance that manufacturing yield problems
will not occur in the future.
The Company is using multiple sources of supply for certain of its
products, which may require the Company's customers to perform separate product
qualifications. The Company has not, however, developed alternate sources of
supply for certain other products and its newly introduced products are
typically produced initially by a single foundry until alternate sources can be
qualified. In particular, the Company's integrated single chip Fibre Channel
controller is manufactured by LSI Logic and integrates LSI Logic's transceiver
technology. In the event that LSI Logic is unable or unwilling to satisfy the
Company's requirements for this technology, the Company's marketing efforts
related to Fibre Channel products would be delayed and, as such, its results of
operations could be materially and adversely effected. The requirement that a
customer perform separate product qualifications or a customer's inability to
obtain a sufficient supply of products from the Company may cause that customer
to satisfy its product requirements from the Company's competitors, which would
adversely 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. These risks include that the Company's
suppliers may be subject to injunctions arising from alleged violations of third
party intellectual property rights. The enforcement of such an injunction could
impede a supplier's ability to provide wafers, components or packaging services
to the Company. In addition, the Company's flexibility to move production of any
particular product from one foundry to another can be limited in that such a
move can require significant re-engineering, which may take several quarters.
These efforts also divert engineering resources which otherwise could be
dedicated to new product development, which would adversely affect new product
development schedules. Accordingly, production may be constrained even though
capacity is available at one or more foundries. In addition, the Company could
encounter supply shortages if sales grow substantially. The Company uses
domestic and offshore subcontractors for die assembly of its semiconductor
products purchased in wafer form, and for assembly of its host adapter board
products. The Company's reliance on independent subcontractors to provide these
services involves a number of risks, including the absence of guaranteed
capacity and reduced control over delivery schedules, quality assurance and
costs. The Company is also subject to the risks of shortages and increases
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<PAGE> 14
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 those that may result should the Company
be forced to purchase products from higher cost foundries or pay expediting
charges to obtain additional supply.
TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS
The Company is not currently experiencing any difficulties in obtaining
sufficient foundry capacity due to the current availability of worldwide
semiconductor fabrication capacity. However, the Company and the semiconductor
industry have, in the past, experienced shortages of available foundry capacity.
Accordingly, in order to secure an adequate supply of wafers, especially wafers
manufactured using advanced process technologies, the Company may consider
various possible transactions, including the use of "take or pay" contracts that
commit the Company to purchase specified quantities of wafers over extended
periods or equity investments in, or advances to, wafer manufacturing companies
in exchange for guaranteed production capacity, or the formation of joint
ventures to own and operate or construct foundries or to develop certain
products. Any of these transactions would involve financial risk to the Company
and could require the Company to commit substantial capital or provide
technology licenses in return for guaranteed production capacity. The need to
commit substantial capital may require the Company to seek additional equity or
debt financing. The sale or issuance of additional equity or convertible debt
securities could result in dilution to the Company's stockholders. There can be
no assurance that such additional financing, if required, will be available on
terms acceptable to the Company.
RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET
A significant portion of the Company's host adapter board products and
hard disk drive controller products are ultimately used in high-performance file
servers, workstations and other office automation products. The Company's growth
has been supported by increasing demand for sophisticated I/O solutions which
support database systems, servers, workstations, Internet/Intranet applications,
multimedia and telecommunications. Should there be a slowing in the growth of
demand for such systems, the Company's business, financial condition and results
of operations could be materially and adversely 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, 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
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technologies being developed by its competitors. The Company believes that
certain competitors, including Adaptec, Inc., have extensive development efforts
related to products based on new parallel SCSI I/O technology. There can be no
assurance that such technology will not be adopted as an industry standard and
if an alternative standard is adopted, there can be no assurance the Company
will timely develop products for such standard. Further, even if Fibre Channel
is adopted, there can be no assurance that the Company's integrated PCI to Fibre
Channel controller will be fully developed in time to be accepted for use in
Fibre Channel technology or that, if developed, will achieve market acceptance,
or be capable of being manufactured at competitive prices in sufficient volumes.
In the event that Fibre Channel is not adopted as an industry standard, or that
the Company's integrated circuit PCI to Fibre Channel controllers are not timely
developed or do not gain market acceptance, the Company's business, financial
condition and results of operations could be materially and adversely 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, Ultra2 SCSI, Ultra3 SCSI and PCI. In addition, the Company's Fibre Channel
products have been designed to conform to a standard that has yet to be
uniformly adopted. The Company's products must be designed to operate
effectively with a variety of hardware and software products supplied by other
manufacturers, including microprocessors, operating system software and
peripherals. The Company depends on significant cooperation with these
manufacturers in order to achieve its design objectives and produce products
that interoperate successfully. While the Company believes that it generally has
good relationships with leading microprocessor, systems and peripheral
suppliers, there can be no assurance that such suppliers will not from time to
time make it more difficult for the Company to design its products for
successful interoperability. If industry acceptance of these standards was to
decline or if they were replaced with new standards, and if the Company did not
anticipate these changes and develop new products, the Company's business,
financial condition and results of operations could be materially and adversely
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 effect the Company's business, financial
condition and results of operations. There can be no assurance that the Company
will respond effectively to technological changes, new product announcements by
other companies or that the Company's research and development efforts will be
successful. Furthermore, introduction of new products and moving production of
existing products to different suppliers involves substantial business risks
because of the possibility of product "bugs" or performance problems, in which
event the Company could experience significant product returns, warranty
expenses and expedite charges, in addition to lower sales and lower profits.
IDENTIFICATION AND INTEGRATION OF ACQUISITIONS
The Company anticipates that its future growth may depend in part on its
ability to identify and acquire complementary businesses, technologies or
product lines that are compatible with those of the Company. Acquisitions
involve numerous risks, including uncertainties in identifying and pursuing
acquisitions, difficulties in the assimilation of the operations, technologies
and products of the acquired companies, the diversion of management's attention
from other business concerns, risks associated with entering markets or
conducting operations with which the Company has no or limited direct prior
experience, the potential loss of current customers and/or retention of the
acquired Company's customers and the potential loss of key employees of the
acquired company. Moreover, there can be no assurance that the anticipated
benefits of an acquisition will be realized. There can be no assurance that the
Company will be effective in identifying and effecting attractive acquisitions,
assimilating acquisitions or managing future growth. Future acquisitions by the
Company could result in potentially dilutive 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 recording future business combinations the FASB has
announced it may abolish the pooling-of-interests accounting treatment as well
as the accounting treatment of acquired in-process research and development. The
proposal would affect transactions after January 1, 2001. If the FASB does
eliminate pooling-of-interests accounting treatment, the Company's ability to
consummate a business combination without incurring goodwill would be adversely
affected.
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DEPENDENCE ON KEY PERSONNEL
The Company's future success is highly dependent on the continued
services of its key engineering, sales, marketing and executive personnel,
including highly skilled semiconductor design personnel and software developers,
and its ability to identify and hire additional personnel. The loss of the
services of key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company believes
that the market for key personnel in the industries in which it competes is
highly competitive. In particular, periodically the Company has experienced
difficulty in attracting and retaining qualified engineers and other technical
personnel and anticipates that competition for such personnel will increase in
the future. There can be no assurance that the Company will be able to attract
and retain key personnel with the skills and expertise necessary to develop new
products in the future, or to manage the Company's business, both in the United
States and abroad.
RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS
The Company expects that export revenues will continue to account for a
significant percentage of the Company's net revenues for the foreseeable future.
As a result, the Company is subject to several risks, which include: a greater
difficulty of administering its business globally; compliance with multiple and
potentially conflicting regulatory requirements, such as export requirements,
tariffs and other barriers; differences in intellectual property protections;
difficulties in staffing and managing foreign operations; potentially longer
accounts receivable cycles; currency fluctuations; export control restrictions;
overlapping or differing tax structures; political and economic instability; and
general trade restrictions. A significant amount of the Company's customers and
suppliers are located in Japan. Recently, the Asian markets have suffered
property price deflation. This asset deflation has taken place especially in
countries that have had a collapse in both their currency and stock markets.
These deflationary pressures have reduced liquidity in the banking systems of
the affected countries and, when coupled with spare industrial production
capacity, could lead to widespread financial difficulty among the companies in
this region. The Company's export sales are invoiced in U.S. dollars and,
accordingly, if the relative value of the U.S. dollar in comparison to the
currency of the Company's foreign customers should increase, the resulting
effective price increase of the Company's products to such foreign customers
could result in decreased sales. There can be no assurance that any of the
foregoing factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS
Although the Company has patent protection on certain aspects of its
technology in certain jurisdictions, it relies primarily on trade secrets,
copyrights and contractual provisions to protect its proprietary rights. There
can be no assurance that these protections will be adequate to protect its
proprietary rights, that others will not independently develop or otherwise
acquire equivalent or superior technology or that the Company can maintain such
technology as trade secrets. There also can be no assurance that any patents the
Company possesses will not be invalidated, circumvented or challenged. In
addition, the laws of certain countries in which the Company's products are or
may be developed, manufactured or sold, including various countries in Asia, may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States or at all. The failure of the Company to
protect its intellectual property rights could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company has experienced intellectual property claims being made
against it in the past. There can be no assurance that patent or other
intellectual property infringement claims will not be asserted against the
Company or its suppliers in the future. Although patent and intellectual
property disputes may be settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and there can be no
assurance that necessary licenses or similar arrangements would be available to
the Company on satisfactory terms or at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling
certain of its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
should the Company decide to, or be forced to, litigate such claims, such
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.
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YEAR 2000
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
Many existing computer systems and applications, and other control
devices, use only two digits to identify a year in the date field, without
considering the impact of the upcoming change in the century. As a result, such
systems and applications could fail or create erroneous results unless corrected
so that they can process data related to the year 2000 and beyond. The Company
relies on its systems, applications and devices in operating and monitoring all
major aspects of its business, including financial systems, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. The Company has initially assessed how it may be
impacted by Year 2000 and has formulated and commenced implementation of a
comprehensive plan to address certain aspects of the Year 2000 problem. The
potential impacts to the Company identified by the plan include internal
information technology ("IT") systems, internal non-IT systems, including
embedded technology, the Company's products, and the readiness of significant
third parties with whom the Company has material relationships.
Internal IT Systems. The Company has formed a Year 2000 committee that
oversees the Company's Year 2000 readiness activities. The Year 2000 committee
has executive sponsorship and periodically reports status to the Audit Committee
of the Board of Directors. The Year 2000 committee is charged with raising
awareness throughout the company, developing tools and methodologies for
internally addressing the Year 2000 issue, developing and monitoring plans to
bring non-compliant applications and infrastructure into compliance and
identifying and resolving high-risk Year 2000 issues.
The Company is addressing Year 2000 issues in a phased approach
consisting of the following phases: (1) assessment, (2) planning, (3)
preparation and (4) implementation. The assessment phase consists of taking an
inventory of the Company's internal IT and non-IT systems and assessing risk,
identifying potential solutions and estimating repair or remediation costs. The
planning phase consists of identifying tasks to ensure Year 2000 readiness,
identifying mission-critical applications and infrastructure, and coordinating
testing dates and remediation timing. The third phase, preparation, includes
coordinating the remediation process; and the implementation phase involves
testing, repair and/or replacement of non-compliant application and
infrastructure. The implementation phase will be concluded with establishing
contingency plans for the Company's mission-critical systems and infrastructure.
The Company has completed testing and remediation efforts for its critical and
non-critical information systems and will continue to monitor them to ensure
they are Year 2000 compliant.
Internal Non-IT Systems. The Company's non-IT systems include, but are
not limited to, those systems that are not commonly thought of as IT systems,
such as telephone and voice mail systems, building access and security systems,
facility environmental systems and other equipment with embedded technology. The
Company has completed remediation efforts for its critical internal non-IT
systems and will continue to monitor them to ensure they are Year 2000
compliant. The remaining non-critical non-IT systems are in the implementation
phase and remediation is expected to be completed by September 30, 1999.
Products. The Company's products include I/O and enclosure management
semiconductors as well as I/O host bus adapter products. The Company has
completed an assessment of its products and has determined they do not contain
specific date functions that would be impacted by the change in the century.
Material Third-Party Relationships. The Company's material third-party
suppliers include key suppliers, contract manufacturers, vendors and business
partners. The process for evaluating third-party risk includes the following
steps: (1) distribution of an initial readiness assessment, (2) if necessary, a
comprehensive risk assessment combined with telephone or on site interviews, and
(3) preparing contingency plans based on the assessed risk for each third party
relationship. The Company has received responses from its initial readiness
assessment and is collecting secondary assessments and conducting necessary
interviews. The assessment and interview phase is expected to be completed by
August 31, 1999, and contingency plans finalized by September 30, 1999.
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The Company currently estimates that the costs associated with the Year
2000 should not have a material adverse effect on the results of operations or
financial position of the Company in any given year. Historical amounts spent on
assessment, planning, preparation and implementation have not been material to
the results of operations.
The Company believes its greatest risks related to the Year 2000 issue
involve its relationships with its critical third party suppliers and service
providers. Potential impacts to the Company include an interrupted product flow
from critical suppliers due to their Year 2000 interruptions, supplier
allocation or limiting products and/or sub-assemblies due to unforeseen product
shortages, a decline in customer orders after December 31, 1999 due to customers
building up inventory levels prior to that date, potential infrastructure
collapse such as interruptions in public utilities, electricity or
telecommunications. Any of the foregoing risks, as well as the fruition of a
combination of lesser risks, could adversely impact the Company's financial
condition and results of operations. Contingency plans to mitigate or reduce
these risks are being formulated to address each area of the Company's Year 2000
compliance plan, and are expected to be completed by September 30, 1999.
However, as many of the third party service providers such as the public
utilities are outside of the Company's control, and the Company does not have
the ability to independently verify the Year 2000 readiness statements of third
parties, there can be no assurance that a material adverse impact to the
Company's financial condition or results of operations would not occur.
VOLATILITY OF STOCK PRICE
The market price of the common stock has fluctuated substantially, and
there can be no assurance that such volatility will not continue. Future
announcements concerning the Company or its competitors or customers, quarterly
variations in operating results, the introduction of new products or changes in
product pricing policies by the Company or its competitors, conditions in the
semiconductor industry, changes in earnings estimates by analysts, market
conditions for high technology stocks in general, and the potential for a
shareholder lawsuit, or changes in accounting policies, among other factors,
could cause the market price of the common stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years and stock prices of technology companies have been especially
volatile. This volatility has had a substantial effect on the market prices of
securities of many smaller public companies for reasons frequently unrelated to
the operating performance of the specific companies. These broad market
fluctuations could adversely affect the market price of the Company's common
stock.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Restated Certificate of Incorporation, as
amended, the Board of Directors is authorized to approve the issuance of shares
of currently undesignated preferred stock, to determine the price, powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed on any unissued series of the preferred stock, and to fix
the number of shares constituting any such series and the designation of such
series, without any vote or future action by the stockholders. Pursuant to this
authority, the Board of Directors adopted a Shareholder Rights Plan and declared
a dividend of one preferred stock purchase right for each outstanding share of
the Company's common stock. Concurrently with the February 1999 two-for-one
stock split, each "post-split" share was adjusted to carry one-half-right per
share of common stock. Concurrently with the July 1999 two-for-one stock split,
each "post-split" share was adjusted to carry one-quarter-right per share of
common stock. The Shareholder Rights Plan, the undesignated preferred stock and
certain provisions of the Delaware law may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Company's common stock at a premium over the market price of the common
stock and may adversely affect the market price of the common stock.
FACILITIES
The Company currently occupies an 97,000 square foot facility in Costa
Mesa, California containing its corporate, principle product development, and
sales personnel, as well as its operational facilities. QLogic has entered into
a ten-year lease agreement to expand and relocate its Costa Mesa operations to a
165,000 square foot facility in Aliso Viejo, California. The lease commences
upon completion of the construction of the facility, expected in November 1999
to February 2000. There can be no assurance the Company will continue to grow
and fully utilize its expanded facility. As a result, the Company may incur
additional costs associated with carrying facility expansion capabilities, which
could adversely impact future earnings. Additionally, the Company will
experience additional costs associated with the relocation, which may adversely
impact future earnings. The Company may experience an adverse impact to future
earnings due to loss of management focus or business interruption related to
issues surrounding the relocation of operations.
The Company's current headquarters in Costa Mesa, California and the
future site in Aliso Viejo, California are located near major earthquake faults.
The Company is not specifically insured for earthquakes, or other such natural
disasters. Any personal injury or damage to the facilities as a result of such
occurrences could have a material adverse effect on the Company's business,
results of operations and financial condition.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Effective July 30, 1999, the Registrant's Common Stock was split in a
2-for-1 stock split effected by a stock dividend with a record date of
July 22, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Item Caption
- ----------- ------------
2.1 Distribution Agreement dated as of January 24, 1994 among Emulex
Corporation, A Delaware Corporation, Emulex Corporation, a
California Corporation and Qlogic Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices Corporation,
dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation, dated May
26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of Qlogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation, dated
February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock Option
Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan,
as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware
corporation, Emulex Corporation, a California corporation, and
QLogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21, 1993,
among Emulex Corporation, a California corporation, Emulex
Corporation, a Delaware corporation and QLogic Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January 24,
1994, among Emulex Corporation, a Delaware corporation, Emulex
Corporation, a California corporation, and QLogic Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex
Corporation, a California corporation, QLogic Corporation and C.J.
Segerstrom & Sons, a general partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement, dated as
of January 24, 1994, between Emulex Corporation, a California
Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation and
Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between
QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(9)
10.16 Loan and Security Agreement with Silicon Valley Bank.(10)
10.17 Press release related to July 30, 1999 stock split.(10)
21.1 Subsidiaries of the registrant.(10)
27 Financial Data Schedule.(10)
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(b) Reports on Form 8-K
The Registrant filed Form 8-K on May 23, 1999, with respect to the retirement of
the Company's Chairman of the Board, Gary E. Liebl, reported under Item 5.
(1) Previously filed as an exhibit to Registrant's Registration Statement
on Form 10 filed January 28, 1994 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended April3, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended April 2, 1995 and incorporated herein by
reference.
(4) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended March 31, 1996 and incorporated herein by
reference.
(5) Previously filed as an exhibit to Registrant's Registration Statement
on Form 8-A filed June 19, 1996, and incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement
on Form 8-A/A filed November 25, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for
the quarter ended June 28, 1998, and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for
the quarter ended December 27,1998, and incorporated herein by
reference.
(9) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended March 28, 1999 an incorporated herein by
reference.
(10) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
20
<PAGE> 21
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.
QLOGIC CORPORATION
Date: August 11, 1999 By: /s/ H. K. DESAI
---------------------------------
H.K. Desai
Chairman, Chief Executive Officer
and President
By: /s/ THOMAS R. ANDERSON
---------------------------------
Thomas R. Anderson
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Item Caption
- ----------- ------------
2.1 Distribution Agreement dated as of January 24, 1994 among Emulex
Corporation, A Delaware Corporation, Emulex Corporation, a
California Corporation and Qlogic Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices Corporation,
dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation, dated
May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation, dated
February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock Option
Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock Option
Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware
corporation, Emulex Corporation, a California corporation, and
Qlogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21, 1993,
among Emulex Corporation, a California corporation, Emulex
Corporation, a Delaware corporation and QLogic Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January 24,
1994, among Emulex Corporation, a Delaware corporation, Emulex
Corporation, a California corporation, and QLogic Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex
Corporation, a California corporation, QLogic Corporation and C.J.
Segerstrom & Sons, a general partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement, dated as
of January 24, 1994, between Emulex Corporation, a California
Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation and
Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between
QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as lessee, and
AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(9)
10.16 Loan and Security Agreement with Silicon Valley Bank.(10)
10.17 Press release related to July 30, 1999 stock split.(10)
21.1 Subsidiaries of the registrant.(10)
27 Financial Data Schedule.(10)
<PAGE> 23
EXHIBIT INDEX (Continued)
(1) Previously filed as an exhibit to Registrant's Registration Statement
on Form 10 filed January 28, 1994 and incorporated herein by reference.
(2) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended April 3, 1994 and incorporated herein by
reference.
(3) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended April 2, 1995 and incorporated herein by
reference.
(4) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended March 31, 1996 and incorporated herein by
reference.
(5) Previously filed as an exhibit to Registrant's Registration Statement
on Form 8-A filed June 19, 1996, and incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement
on Form 8-A/A filed November 25, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for
the quarter ended June 28, 1998, and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for
the quarter ended December 27,1998, and incorporated herein by
reference.
(9) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended March 28, 1999 an incorporated herein by
reference.
(10) New exhibit filed with this report.
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(b) Reports on Form 8-K
The Registrant filed Form 8-K on May 23, 1999, with respect to the
retirement of the Company's Chairman of the Board, Gary E. Liebl, reported
under Item 5.
<PAGE> 1
EXHIBIT 10.16
SILICON VALLEY BANK
AMENDMENT TO LOAN AGREEMENT
Borrower: QLogic Corporation
Address: 3545 Harbor Boulevard, P.O. Box 5001
Costa Mesa, California 92628
Dated as of: July 6, 1999
THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY
BANK ("Silicon") and the borrower named above (the "Borrower").
The parties agree to amend the Loan and Security Agreement between
them, dated March 31, 1994, as amended by that Amendment to Loan and Security
Agreement dated July 10, 1995, as amended by that Amendment to Loan and Security
Agreement dated July 5, 1996 and as amended by that Amendment to Loan Agreement
dated as of July 6, 1998 (as so amended and as otherwise amended from time to
time, the "Loan Agreement"), as follows, effective as of the date hereof.
(Capitalized terms used but not defined in this Amendment, shall have the
meanings set forth in the Loan Agreement.)
1. AMENDED CREDIT LIMIT. The section of the Schedule to the Loan
Agreement entitled "Credit Limit (Section 1.1)" is amended effective on the date
hereof, to read as follows:
"CREDIT LIMIT
(Section 1.1): An amount not to exceed $5,000,000; Provided, however, that
the minimum amount of a Loan shall be $100,000;
Letters of Credit Silicon, in its reasonable discretion, will from time to
time during the term of this Agreement issue letters of
credit for the account of the Borrower ("Letters of
Credit"), in an aggregate amount at any one time outstanding
not to exceed $3,000,000, upon the request of the Borrower,
provided that, on the date the Letters of Credit are to be
issued, Borrower has available to it Loans in an amount
equal to or greater than the face amount of the Letters of
Credit to be issued. Prior to the issuance of any Letters of
Credit, Borrower shall execute and deliver to Silicon
Applications for Letters of Credit and such other
documentation as Silicon shall specify (the "Letter of
Credit Documentation"). Fees for the Letters of Credit shall
be as provided in the Letter of Credit Documentation.
The Loans available under this Agreement at any time shall
be reduced by the face amount of Letters of Credit from time
to time outstanding."
-1-
<PAGE> 2
2. AMENDED MATURITY DATE. The section of the Schedule to the Loan
Agreement entitled "Maturity Date (Section 5.1)" is amended effective on the
date hereof, to read as follows:
"MATURITY DATE
(Section 5.1): JULY 5, 2000.
3. AMENDED FINANCIAL COVENANTS. The section of the Schedule to the Loan
Agreement entitled "Financial Covenants (Section 4.1)" is amended effective on
the date hereof, to read as follows:
"FINANCIAL COVENANTS
(Section 4.1): Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the end of
each quarter, except as otherwise specifically provided
below:
QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to
current liabilities of not less than 2.50 to 1.
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less
than $100,000,000.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to
tangible net worth of not more than 1.00 to 1.
PROFITABILITY Borrower shall not incur a loss (after taxes) for any
fiscal quarter during the term hereof, other than for a
loss (after taxes) in a single fiscal quarter;
notwithstanding the foregoing permitted loss, Borrower
shall not incur a loss (after taxes) for any fiscal year.
DEFINITIONS: "Current assets," and "current liabilities" shall have the
meanings ascribed to them in accordance with generally
accepted accounting principles.
"Tangible net worth" means the excess of total assets over
total liabilities, determined in accordance with generally
accepted accounting principles, excluding however all
assets which would be classified as intangible assets
under generally accepted accounting principles, including
without limitation goodwill, licenses, patents,
trademarks, trade names, copyrights, capitalized software
and organizational costs, licenses and franchises.
"Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-1" by
Standard & Poor's Corporation (or a similar rating by a
similar rating organization), certificates of deposit and
banker's acceptances, and accounts receivable (net of
allowance for doubtful accounts).
DEFERRED REVENUES: For purposes of the above quick asset ratio deferred
revenues shall not be counted as current liabilities. For
purposes of the above debt to tangible net worth ratio,
deferred revenues shall not be counted in determining
total liabilities but shall be counted in determining
tangible net worth for purposes of such ratio. For all
other purposes deferred revenues shall be counted as
liabilities in accordance with generally accepted
accounting principles.
-2-
<PAGE> 3
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not
include indebtedness which is subordinated to the
indebtedness to Silicon under a subordination agreement in
form specified by Silicon or by language in the instrument
evidencing the indebtedness which is acceptable to Silicon."
4. FACILITY FEE. Borrower shall pay to Silicon concurrently herewith a
facility fee of $25,000, which shall be in addition to all interest and all
other fees payable to Silicon and shall be non-refundable.
5. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon
that all representations and warranties set forth in the Loan Agreement, as
amended hereby, are true and correct.
6. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior
written amendments to the Loan Agreement signed by Silicon and the Borrower, and
the other written documents and agreements between Silicon and the Borrower set
forth in full all of the representations and agreements of the parties with
respect to the subject matter hereof and supersede all prior discussions,
representations, agreements and understandings between the parties with respect
to the subject hereof. Except as herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other documents and agreements between
Silicon and the Borrower shall continue in full force and effect and the same
are hereby ratified and confirmed.
BORROWER: SILICON:
QLOGIC CORPORATION SILICON VALLEY BANK
BY BY
----------------------------------- ------------------------------
PRESIDENT OR VICE PRESIDENT TITLE
----------------------------
BY
-----------------------------------
SECRETARY OR ASS'T SECRETARY
-3-
<PAGE> 1
EXHIBIT 10.17
FOR IMMEDIATE RELEASE
EDITOR'S CONTACT:
Thomas R. Anderson Michael R. Manning
Vice President, CFO Secretary & Treasurer
QLogic Corporation QLogic Corporation
Phone: 714/668-5092 Phone: 714/668-5344
Fax: 714/668-5090 Fax: 714/668-5090
QLOGIC CORPORATION ANNOUNCES 2-FOR-1 STOCK SPLIT
Costa Mesa, Calif., July 14, 1999 - QLogic Corporation (Nasdaq:QLGC), a
leader in the I/O industry, announced today that its Board of Directors approved
a two-for-one stock split of the Company's issued and outstanding common stock
to be effected by way of a stock dividend. On the ex-dividend date of July 30,
1999, stockholders will be entitled to receive one additional share for every
share they own on the record date of July 22, 1999. Following the effective date
of the split, QLogic will have approximately 36 million shares outstanding.
QLogic Corporation is a leading designer and supplier of semiconductor
and board-level I/O (input/output) and enclosure management products. The
Company's products provide high-performance interface connections between
computer systems and their attached data storage peripherals, such as hard disk
drives, tape drives and RAID subsystems. In addition, QLogic provides enclosure
management products that monitor and communicate management information related
to components that are critical to computer system and storage subsystem
reliability and availability. QLogic's highly integrated, fully featured
solutions are targeted at the computer system, storage device and storage
subsystem marketplaces. The Company believes that its I/O and enclosure
management solutions encompass one of the industry's broadest ranges of Fibre
Channel and SCSI technologies, and offer OEM customers a simple, low risk
migration path between technologies.
With the exception of historical information, the statements set forth
above constitute forward-looking statements that involve risks and
uncertainties. The Company wishes to advise readers that a number of important
factors could cause actual results to differ materially from those in the
forward-looking statements. Those factors include new and changing technologies
and customer acceptance of those technologies; a change in semiconductor foundry
capacity or conditions; fluctuations in the growth of I/O markets; fluctuations
or cancellations in orders from OEM customers; factors relating to Year 2000
problems or compliance programs; the Company's ability to compete effectively
with other companies; cancellation of OEM products associated with design wins;
and increased costs of operations due to facility relocation. Historic royalty
revenues are not indicative of royalty revenues to be received in the future.
Furthermore, royalty revenue streams may fluctuate significantly over time and
are subject to sudden reduction when alternative designs are implemented. The
Company undertakes no obligation to update the information herein. These or
other factors which could cause results to differ materially from those in the
forward looking statements are mentioned in the Company's Form 10-K or Form 10-Q
filings with the Securities and Exchange Commission.
More information on QLogic is available from the Company's SEC filings.
Contact QLogic Corporation, 3545 Harbor Blvd., Costa Mesa, CA 92626. Sales
800/662-4471. Corporate 714/438-2200. World Wide Web http://www.qlc.com.
(1)
<PAGE> 1
EXHIBIT 21.1
QLOGIC CORPORATION
Subsidiaries of Registrant
QLogic Foreign Sales Corporation,
A U.S. Virgin Islands Corporation
QLogic Enclosure
Management Products, Inc.
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<PERIOD-START> MAR-29-1999
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<SECURITIES> 94,312
<RECEIVABLES> 16,979
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<INVENTORY> 10,338
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<SALES> 43,186
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