<PAGE> 1
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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 SEPTEMBER 26, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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 October 27, 1999 the registrant had 36,547,484 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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<PAGE> 2
QLOGIC CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 26, 1999
and March 28, 1999.......................................... 3
Condensed Consolidated Statements of Income for the three
and six months ended September 26, 1999 and September 27,
1998........................................................ 4
Condensed Consolidated Statements of Cash Flows for the six
months ended September 26, 1999 and September 27, 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 4. Submission of Matters to a Vote of Security Holders......... 20
Item 6. Exhibits and Reports on Form 8-K............................ 21
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 26, MARCH 28,
1999 1999
------------- ---------
<S> <C> <C>
Cash and cash equivalents................................... $ 46,595 $ 43,174
Short term investments...................................... 69,035 57,613
Accounts and notes receivable, net.......................... 16,679 11,917
Inventories................................................. 12,984 10,623
Deferred income taxes....................................... 5,722 5,649
Prepaid expenses and other current assets................... 3,796 1,950
-------- --------
Total current assets.............................. 154,811 130,926
Long term investments....................................... 40,515 29,760
Property and equipment, net................................. 12,873 10,409
Other assets................................................ 1,647 1,828
-------- --------
$209,846 $172,923
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 7,022 $ 6,432
Accrued compensation........................................ 8,105 7,378
Income taxes payable........................................ 1,033 1,358
Deferred revenue............................................ 1,074 1,074
Other accrued liabilities................................... 3,312 3,997
-------- --------
Total current liabilities......................... 20,546 20,239
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 1,000,000 shares
authorized (200,000 shares designated as Series A
Junior Participating Preferred, $0.001 par value); none
issued and outstanding................................. -- --
Common stock, $0.001 par value; 150,000,000 shares
authorized; 36,518,961 and 35,922,116 shares issued and
outstanding at September 26, 1999 and March 28, 1999,
respectively........................................... 37 36
Additional paid-in capital................................ 120,495 108,773
Retained earnings......................................... 68,768 43,875
-------- --------
Total stockholders' equity........................ 189,300 152,684
-------- --------
$209,846 $172,923
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues............................... $47,492 $27,692 $90,678 $51,807
Cost of revenues........................... 14,314 10,261 27,800 19,964
------- ------- ------- -------
Gross profit.......................... 33,178 17,431 62,878 31,843
------- ------- ------- -------
Operating expenses:
Engineering and development.............. 8,351 7,001 16,227 11,942
Selling and marketing.................... 4,183 2,512 8,158 4,887
General and administrative............... 2,106 1,383 3,902 2,591
------- ------- ------- -------
Total operating expenses......... 14,640 10,896 28,287 19,420
------- ------- ------- -------
Operating income........................... 18,538 6,535 34,591 12,423
Interest income, net....................... 1,736 1,401 3,125 2,750
------- ------- ------- -------
Income before income taxes................. 20,274 7,936 37,716 15,173
Income tax provision....................... 6,893 2,698 12,823 5,160
------- ------- ------- -------
Net income................................. $13,381 $ 5,238 $24,893 $10,013
======= ======= ======= =======
Net income per share:
Basic.................................... $ 0.37 $ 0.15 $ 0.69 $ 0.29
======= ======= ======= =======
Diluted.................................. $ 0.35 $ 0.14 $ 0.65 $ 0.27
======= ======= ======= =======
Number of shares used in per share
calculations:
Basic.................................... 36,360 34,828 36,185 34,744
======= ======= ======= =======
Diluted.................................. 38,534 37,020 38,306 36,844
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 24,893 $ 10,013
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,254 1,390
Write-off of acquired in-process technology............ 871 1,220
Increase (decrease) in allowance for doubtful
accounts.............................................. (193) 193
Loss on disposal of property and equipment............. 4 82
Benefit from deferred income taxes..................... (73) (427)
Changes in assets and liabilities:
Accounts and notes receivable............................. (4,569) 1,494
Inventories............................................... (2,361) (5,651)
Prepaid expenses and other current assets................. (1,846) (235)
Other assets.............................................. (15) (440)
Accounts payable.......................................... 590 1,405
Accrued compensation...................................... 727 382
Incomes taxes payable..................................... 8,269 2,930
Other accrued liabilities................................. (92) 1,150
Deferred revenue.......................................... -- (215)
Other non-current liabilities............................. -- (466)
-------- --------
Net cash provided by operating activities......... 28,459 12,825
-------- --------
Cash flows from investing activities:
Additions to property and equipment....................... (4,526) (3,725)
Purchases of investments.................................. (54,386) (50,555)
Acquisition of business, net of cash acquired............. (1,321) (1,957)
Maturities of investments................................. 32,209 17,933
-------- --------
Net cash used in investing activities............. (28,024) (38,304)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases................... (142) (102)
Proceeds from issuance of stock under employee stock
plans.................................................. 3,128 671
-------- --------
Net cash provided by financing activities......... 2,986 569
-------- --------
Net increase (decrease) in cash and cash equivalents........ 3,421 (24,910)
Cash and cash equivalents at beginning of period............ 43,174 64,090
-------- --------
Cash and cash equivalents at end of period.................. $ 46,595 $ 39,180
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 12 $ 25
======== ========
Income taxes.............................................. $ 3,825 $ 3,491
======== ========
</TABLE>
Non-cash investing and financing activities:
During the six months ended September 26, 1999, the Company recorded a credit
to additional paid-in-capital and a debit to accrued taxes payable of $8,594
related to the tax benefit of exercises of stock options under the Company's
stock option plans. Additionally, during the six months ended September 26,
1999, the Company recorded an accrual of $365 in accordance with the
performance provisions of the Silicon Design Resources Asset Acquisition
Agreement.
During the six months ended September 27, 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
<PAGE> 6
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 September 26, 1999, the statements of income for
the three and six months ended September 26, 1999 and September 27, 1998 and the
statements of cash flows for the six months ended September 26, 1999 and
September 27, 1998. The accompanying financial statements should be read in
conjunction with the consolidated 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 and six months ended September 26, 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:
<TABLE>
<CAPTION>
SEPTEMBER 26, MARCH 28,
1999 1999
------------- ---------
<S> <C> <C>
Raw materials........................................ $10,480 $ 7,716
Work in process...................................... 2,294 833
Finished goods....................................... 210 2,074
------- -------
$12,984 $10,623
======= =======
</TABLE>
NOTE (3) NET INCOME PER SHARE
The Company computed basic net income per share based on the weighted
average number of common shares outstanding during the periods presented.
Diluted net income per share was computed based on the weighted average number
of common and dilutive potential common shares outstanding during the periods
presented. The Company has granted certain stock options which have been treated
as dilutive potential common shares.
The following table sets forth the computations of basic and diluted net
income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income................................. $13,381 $5,238 $24,893 $10,013
======= ====== ======= =======
Denominator:
Denominator for basic net income per
share -- weighted average shares........ 36,360 34,828 36,185 34,744
Dilutive potential common shares, using
treasury stock method................... 2,174 2,192 2,121 2,100
------- ------ ------- -------
Denominator for diluted net income per
share................................. 38,534 37,020 38,306 36,844
======= ====== ======= =======
Basic net income per share................... $ 0.37 $ 0.15 $ 0.69 $ 0.29
======= ====== ======= =======
Diluted net income per share................. $ 0.35 $ 0.14 $ 0.65 $ 0.27
======= ====== ======= =======
</TABLE>
Options to purchase 89 shares of common stock with an exercise price that
exceeded the average market price of $13.44 during the three months ended
September 27, 1998, were excluded from the calculation of
6
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
diluted net income per share as their inclusion would have been anti-dilutive.
There were no anti-dilutive options outstanding for the three months ended
September 26, 1999.
Options to purchase 4 and 58 shares of common stock with exercise prices
that exceed the average market price of $62.75 and $11.91 during the six months
ended September 26, 1999 and September 27, 1998, respectively, were excluded
from the calculation of diluted net income per share as their inclusion would
have been anti-dilutive.
NOTE (4) CAPITALIZATION
In July 1999, the Company's Board of Directors approved a two-for-one split
of the Company's common stock effected as a stock dividend, applicable to
stockholders of record on July 22, 1999, payable on August 2, 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.
On September 28, 1999, the stockholders approved and ratified an amendment
to the Certificate of Incorporation to increase authorized common stock of the
Company from 50,000 shares to 150,000 shares, to change the par value of common
stock from $0.05 to $0.001 per share, and to change the par value of the
preferred stock from $0.10 to $0.001 per share. All references to authorized
shares and par value per share for all periods presented have been adjusted to
give effect to these changes.
7
<PAGE> 8
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.
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 SIX MONTHS ENDED
---------------------------------- ----------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $47,492 100.0% $27,692 100.0% $90,678 100.0% $51,807 100.0%
Cost of revenues.................... 14,314 30.1 10,261 37.1 27,800 30.7 19,964 38.5
------- ----- ------- ----- ------- ----- ------- -----
Gross profit...................... 33,178 69.9 17,431 62.9 62,878 69.3 31,843 61.5
Operating expenses:
Engineering and development....... 8,351 17.6 7,001 25.3 16,227 17.9 11,942 23.1
Selling and marketing............. 4,183 8.8 2,512 9.0 8,158 9.0 4,887 9.4
General and administrative........ 2,106 4.4 1,383 5.0 3,902 4.3 2,591 5.0
------- ----- ------- ----- ------- ----- ------- -----
Total operating expenses... 14,640 30.8 10,896 39.3 28,287 31.2 19,420 37.5
------- ----- ------- ----- ------- ----- ------- -----
Operating income........... $18,538 39.1% $ 6,535 23.6% $34,591 38.1% $12,423 24.0%
======= ===== ======= ===== ======= ===== ======= =====
</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 September 26, 1999 increased $19.8 million or 72% from
the three months ended September 27, 1998 to $47.5 million. The increase was the
result of an $8.7 million increase in sales of SCSI products, an $8.2 million
increase in sales of Fibre Channel products, and a $2.9 million increase in
IDE-based royalties.
Net revenues for the six months ended September 26, 1999 increased $38.9
million or 75% from the six months ended September 27, 1998 to $90.7 million.
The increase was the result of a $17.4 million increase in sales of SCSI
products, a $15.0 million increase in sales of Fibre Channel products, and a
$6.4 million increase in IDE-based royalties.
Export revenues (primarily to the Pacific Rim countries) in the three
months ended September 26, 1999 increased $10.4 million or 73% from the three
months ended September 27, 1998, to approximately $24.7 million, primarily due
to increased sales to customers in Japan and to a lesser extent, Europe. It is
believed that 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 that region. As a percentage of net revenues, export
revenues accounted for 52% in the three months ended September 26, 1999 and
September 27, 1998.
Export revenues for the six months ended September 26, 1999 increased $21.7
million or 80% from the six months ended September 27, 1998, to approximately
$48.7 million, primarily due to increased sales to customers in Japan and to a
lesser extent, Europe. As a percentage of net revenues, export revenues
accounted for 54% for the six months ended September 26, 1999, and 52% for the
six months ended September 27, 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.
8
<PAGE> 9
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.
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 September 26, 1999 was 69.9%, an increase from 62.9% in the three months
ended September 27, 1998. The increase in gross profit percentage was largely
due to the impact of $2.9 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 gross profit percentage for the six months ended September 26, 1999 was
69.3%, an increase from 61.5% in the six months ended September 27, 1998. The
percentage increase resulted from the added $6.4 million of IDE-based royalties
as well as the continued 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 its gross profit percentage to
increase at a rate consistent with historic trends and 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 September 26, 1999, engineering and
development expenses increased $1.4 million to $8.4 million from $7.0 million in
the three months ended September 27, 1998. The increase in spending was largely
due to increased levels of spending for Fibre Channel and SCSI design, as well
as IDE-based product design. As a percentage of net revenues, engineering and
development expenses decreased to 17.6% in the three months ended September 26,
1999 from 25.3% in the similar prior year period. The decrease as a percentage
of net revenues was largely due to a $1.6 million in-process technology charge
related to the acquisition of Silicon Design Resources, Inc. in August 1998.
For the six months ended September 26, 1999, engineering and development
expenses increased $4.3 million to $16.2 million from $11.9 million in the six
months ended September 27, 1998. As a percentage of net revenues this amounted
to 17.9% for the six months ended September 26, 1999, and 23.1% for the six
months ended September 27, 1998. The decrease as a percentage of net revenues
was largely due to a
9
<PAGE> 10
$1.6 million in-process technology charge related to the acquisition of Silicon
Design Resources, Inc. in August 1998.
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 in 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 September 26, 1999, selling and marketing
expenses increased $1.7 million to $4.2 million from $2.5 million in the three
months ended September 27, 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 8.8%
in the three months ended September 26, 1999 from 9.0% in the similar prior year
period. The decrease was due to economies of scale realized from the growth in
net revenues.
For the six months ended September 26, 1999 sales and marketing expenses
increased $3.3 million from the similar period in the prior fiscal year. As a
percentage of net revenues this amounted to 9.0% for the six months ended
September 26, 1999. The decrease in sales and marketing expenses as a percentage
of net revenue relates 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 September 26, 1999, general and
administrative expenses increased $0.7 million to $2.1 million from $1.4 million
in the three months ended September 27, 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 4.4% in the three months ended September 26, 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.
For the six months ended September 26, 1999 general and administrative
expenses increased $1.3 million to $3.9 million from $2.6 million for the six
months ended September 27, 1998. As a percentage of net revenues this amounted
to 4.3% for the six months ended September 26, 1999, and 5.0% for the six months
ended September 27, 1998. For the six months ended September 26, 1999, general
and administrative expenses increased in dollars due to an increase in general
and administrative personnel.
Non-Operating Income
Interest and other income, net of interest expense, was $1.7 million for
the three months ended September 26, 1999 and $1.4 million for the three months
ended September 27, 1998. The increase was largely due to increases in interest
income related to increases in cash, cash equivalents and investment balances.
For the six months ended September 26, 1999, interest and other income, net
of interest expense, was $3.1 million and $2.8 million for the six months ended
September 27, 1998. The increases in interest and other income for the six
months ended September 26, 1999 and September 27, 1998 are largely due to
increases in cash, cash equivalents and investment balances.
Income Tax Provision
The Company's effective tax rate remained relatively constant at
approximately 34% for both the three and six months ended September 26, 1999,
and September 27, 1998.
10
<PAGE> 11
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 $156.1 million at September 26, 1999
compared to $130.5 million at March 28, 1999. The increase was primarily
attributable to positive cash flow from operations, primarily net income growth,
during the six months ended September 26, 1999.
The Company's primary source of liquidity is derived from working capital,
cash from operations, and a $5.0 million unsecured line of credit with Silicon
Valley Bank. Working capital increased $23.6 million to $134.3 million from
March 28, 1999 to September 26, 1999. The increase in working capital in the
quarter ended September 26, 1999 was largely attributable to cash flow from
operations. The $5.0 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 September 26, 1999.
The Company's cash flow provided by operations was $28.5 million in the six
months ended September 26, 1999, and $12.8 million in the six months ended
September 27, 1998. The growth in cash provided by operations was primarily due
to increases in profitability. Additionally, in the six months ended September
26, 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, inventories and prepaid expenses and other current assets.
The Company's cash flow used in investing activities was $28.0 million in
the six months ended September 26, 1999 compared to $38.3 million in the six
months ended September 27, 1998. The decrease in cash used in investing
activities for the six months ended September 26, 1999, was primarily due to
increases in maturing short and long-term investments, net of investment
purchases. Additionally, capital expenditures were $4.5 million in the six
months ended September 26, 1999 and $3.7 million in the six months ended
September 27, 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.
The Company's cash flow provided by financing activities was $3.0 million
in the six months ended September 26, 1999 compared to $0.6 million in the six
months ended September 27, 1998. The increase in cash provided by financing
activities in the three months ended September 26, 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, debt facilities and cash flows from operating activities will
provide the Company with sufficient funds to finance its operations for at least
the next 12 months.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
Except for the historical information contained herein, the information in
this report constitutes forward-looking statements. When used in this report the
words "shall," "should," "forecast," "all of," "projected," "believes,"
"anticipates" "expects," and similar expressions are intended to identify
forward-looking statements. In addition, 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 "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; changes in the mix of
products having differing gross margins; variations in manufacturing capacities,
efficiencies and costs; the availability and cost of components, including
silicon wafers; warranty expenses; variations in product development and other
operating expenses; adoption of new accounting pronouncements and/or changes in
Company policies and general economic and other conditions effecting the timing
of customer orders and capital spending. The Company's quarterly results of
operations are also influenced by competitive factors, including pricing and
availability of the Company's and its competitors' products. Although the
Company does not maintain its own wafer manufacturing facility, a large portion
of the Company's expenses is fixed and difficult to reduce in a short period of
time. If net revenues do not meet the Company's expectations, the Company's
fixed expenses would exacerbate the effect on net income of such shortfall in
net revenues. Furthermore, announcements by the Company, its competitors or
others regarding new products and technologies could cause customers to defer or
cancel purchases of the Company's products. Order deferrals by the Company's
customers, delays in the Company's introduction of new products and longer than
anticipated design-in cycles for the Company's products have in the past
adversely effected the Company's quarterly results of operations. Due to all of
the foregoing factors, as well as other unanticipated factors, it is likely that
in some future quarter or quarters the Company's operating results will be below
the expectations of public market analysts or investors. In such event, the
price of the Company's common stock would likely be materially and adversely
affected.
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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 effect 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, JNI, 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.
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The Company's reliance on independent subcontractors to provide these services
involves a number of risks, including the absence of guaranteed capacity and
reduced control over delivery schedules, quality assurance and costs. The
Company is also subject to the risks of shortages and increases in the cost of
raw materials used in the manufacture or assembly of the Company's products. In
addition, the Company may receive orders for large volumes of products to be
shipped within short periods, and the Company may not have sufficient testing
capacity to fill such orders. Constraints or delays in the supply of the
Company's products, whether because of capacity constraints, unexpected
disruptions at the Company's foundries or subcontractors, delays in obtaining
additional production at the existing foundries or in obtaining production from
new foundries, shortages of raw materials or other reasons, could result in the
loss of customers and other material adverse effects on the Company's operating
results, including 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
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requirements and achieve market acceptance. The Company believes that to remain
competitive in the future it will need to continue to develop new products,
which will require the investment of significant financial resources in new
product development. In anticipation of the implementation of Fibre Channel data
transfer interface technologies, the Company has invested, and will continue to
invest, significant resources in developing its integrated circuit single chip
PCI to Fibre Channel controllers. There can be no assurance that Fibre Channel
will be adopted as a predominant industry standard. The Company is aware of
products for alternative I/O standards and enabling technologies being developed
by its competitors. The Company believes that certain competitors, including
Adaptec, Inc., have extensive development efforts related to 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
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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 modify the accounting treatment of acquired in-process research and
development. The standard, as currently proposed 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.
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.
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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.
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 applications 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
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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 November 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
date-specific 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 has collected secondary assessments and conducted necessary
interviews. The assessment and interview phase is complete, and contingency
plans have been finalized.
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 have been formulated to address each area of the Company's Year 2000
compliance plan. 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 will 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
19
<PAGE> 20
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, or if construction of the
facility is not completed in a timely manner.
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The registrant's Annual Meeting of Stockholders was held on September
28, 1999.
(b) The Annual Meeting of Stockholders was held on September 28, 1999, the
stockholders of the registrant voted as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST WITHHELD ABSTAIN NON-VOTE
---------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
(i) Election of Directors:
H.K. Desai............................... 30,976,271 -- 123,197 -- --
Carol L. Miltner......................... 30,976,590 -- 122,878 -- --
George D. Wells.......................... 30,960,590 -- 138,878 -- --
Larry R. Carter.......................... 30,923,205 -- 176,263 -- --
(ii) Approval and ratification of amendment to
certificate of incorporation............. 28,505,065 2,400,579 -- 33,662 --
(iii) Approval and ratification of amendment to
the QLogic Corporation Stock Awards
Plan..................................... 18,975,518 7,186,427 -- 43,977 --
(iv) Approval and ratification of amendment to
the QLogic Corporation Non-Employee
Director Stock Option Plan............... 28,804,250 2,223,374 -- 71,844 --
(v) Ratification of appointment of KPMG LLP
as auditors for fiscal 2000.............. 31,055,931 19,891 -- 23,646 --
</TABLE>
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM CAPTION
----------- ------------
<S> <C>
2.1 Distribution Agreement dated as of January 24, 1994 among
Emulex Corporation, A Delaware Corporation, Emulex
Corporation, a California Corporation and QLogic
Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21,
1993, among Emulex Corporation, a California corporation,
Emulex Corporation, a Delaware corporation and QLogic
Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January
24, 1994, among Emulex Corporation, a Delaware corporation,
Emulex Corporation, a California corporation, and QLogic
Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among
Emulex Corporation, a California corporation, QLogic
Corporation and C.J. Segerstrom & Sons, a general
partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM CAPTION
----------- ------------
<S> <C>
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.
</TABLE>
- ---------------
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(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 and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 27, 1999, and incorporated herein by reference.
(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.
22
<PAGE> 23
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
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)
Date: November 9, 1999
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM CAPTION
- ----------- ------------
<S> <C>
2.1 Distribution Agreement dated as of January 24, 1994 among
Emulex Corporation, A Delaware Corporation, Emulex
Corporation, a California Corporation and QLogic
Corporation.(1)
3.1 Certificate of Incorporation of Emulex Micro Devices
Corporation, dated November 13, 1992.(1)
3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1)
3.3 Certificate of Amendment of Certificate of Incorporation,
dated May 26, 1993.(1)
3.4 By-Laws of QLogic Corporation.(1)
3.5 Amendments to By-Laws of QLogic Corporation.(4)
3.6 Certificate of Amendment of Certification of Incorporation,
dated February 15, 1999.(9)
10.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan.*(1)
10.1.1 Form of QLogic Corporation Non-Employee Director Stock
Option Plan, as amended.*(9)
10.2 Form of QLogic Corporation Stocks Awards Plan.*(1)
10.2.1 Form of QLogic Corporation Stocks Awards Plan, as
amended.*(9)
10.3 Form of Tax Sharing Agreement among Emulex Corporation, a
Delaware corporation, Emulex Corporation, a California
corporation, and QLogic Corporation.(1)
10.4 Administrative Services Agreement, dated as of February 21,
1993, among Emulex Corporation, a California corporation,
Emulex Corporation, a Delaware corporation and QLogic
Corporation.(1)
10.5 Employee Benefits Allocation Agreement, dated as of January
24, 1994, among Emulex Corporation, a Delaware corporation,
Emulex Corporation, a California corporation, and QLogic
Corporation.(1)
10.6 Form of Assignment, Assumption and Consent Re: Lease among
Emulex Corporation, a California corporation, QLogic
Corporation and C.J. Segerstrom & Sons, a general
partnership.(1)
10.7 Intellectual Property Assignment and Licensing Agreement,
dated as of January 24, 1994, between Emulex Corporation, a
California Corporation, and QLogic Corporation.(1)
10.8 Form of QLogic Corporation Savings Plan.*(1)
10.9 Form of QLogic Corporation Savings Plan Trust.*(1)
10.10 Loan and Security Agreement with Silicon Valley Bank.(7)
10.11 Form of Indemnification Agreement between QLogic Corporation
and Directors.(3)
10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995,
between QLogic Corporation and Emulex Corporation.(3)
10.13 Industrial Lease Agreement between the Registrant, as
lessee, and AEW/Parker South, LLC, as lessor.(8)
10.14 Press release related to February 15, 1999 stock split.(8)
10.15 Form QLogic Corporation 1998 Employee Stock Purchase
Plan.(9)
10.16 Loan and Security Agreement with Silicon Valley Bank.(10)
</TABLE>
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. ITEM CAPTION
- ----------- ------------
<S> <C>
10.17 Press release related to July 30, 1999 stock split.(10)
21.1 Subsidiaries of the Registrant.(10)
27 Financial Data Schedule.
</TABLE>
- ---------------
* Compensation plan, contract or arrangement required to be filed as an
exhibit pursuant to applicable rules of the Securities and Exchange
Commission.
(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 and incorporated herein by reference.
(10) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the
quarter ended June 27, 1999, and incorporated herein by reference.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-02-2000
<PERIOD-START> MAR-29-1999
<PERIOD-END> SEP-26-1999
<CASH> 46,595
<SECURITIES> 109,550
<RECEIVABLES> 17,426
<ALLOWANCES> 747
<INVENTORY> 12,984
<CURRENT-ASSETS> 154,811
<PP&E> 29,700
<DEPRECIATION> 16,828
<TOTAL-ASSETS> 209,846
<CURRENT-LIABILITIES> 20,546
<BONDS> 0
0
0
<COMMON> 37
<OTHER-SE> 189,263
<TOTAL-LIABILITY-AND-EQUITY> 209,846
<SALES> 47,492
<TOTAL-REVENUES> 47,492
<CGS> 14,314
<TOTAL-COSTS> 14,314
<OTHER-EXPENSES> 14,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,736)
<INCOME-PRETAX> 20,274
<INCOME-TAX> 6,893
<INCOME-CONTINUING> 13,381
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,381
<EPS-BASIC> 0.37
<EPS-DILUTED> 0.35
</TABLE>
