-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DExfDQVGLlPFpAtpxK6gfFwNPWt/6ubINDlSsvjYwfbqQKZgenrhAvAAhAavYMIZ RnlfRF2ZxNGzD09BFsbh8Q== 0000892569-98-002973.txt : 19981113 0000892569-98-002973.hdr.sgml : 19981113 ACCESSION NUMBER: 0000892569-98-002973 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QLOGIC CORP CENTRAL INDEX KEY: 0000918386 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 330537669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0330 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23298 FILM NUMBER: 98743845 BUSINESS ADDRESS: STREET 1: 3545 HARBOR BLVD CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7144382200 MAIL ADDRESS: STREET 1: 3545 HARBOR BOULEVARD CITY: COSTA MESA STATE: CA ZIP: 92626 FORMER COMPANY: FORMER CONFORMED NAME: Q LOGIC CORP DATE OF NAME CHANGE: 19940201 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 9-27-98 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q -------------------- (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1998 OR (x) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ COMMISSION FILE NO. 0-23298 QLOGIC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 33-0537669 (State or other other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3545 HARBOR BOULEVARD COSTA MESA, CALIFORNIA 92626 (Address of principal executive offices) (Zip Code) (714) 438-2200 (Registrant's telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of October 25, 1998, the registrant had 8,742,481 shares of common stock outstanding. ================================================================================ 2 QLOGIC CORPORATION INDEX
PART I. FINANCIAL INFORMATION PAGE - ------------------------------------------------------------------------ Item 1. Financial Statements Condensed Consolidated Balance Sheets September 27, 1998 and March 29, 1998 ............................... 3 Condensed Consolidated Statements of Income three and six months ended September 27, 1998 and September 28, 1997 ............................................. 4 Condensed Consolidated Statements of Cash Flows six months ended September 27, 1998 and September 28, 1997 .............................................. 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 PAGE - ------------------------------------------------------------------------ Item 4. Submission of Matters to a Vote of Security Holders......... 18 Item 6. Exhibits and Reports on Form 8-K ........................... 18
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QLOGIC CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS
SEPTEMBER 27, MARCH 29, 1998 1998 ------ ---- Cash and cash equivalents .............................................. $ 39,180 $ 64,090 Short term investments ................................................. 54,612 27,746 Accounts and notes receivable, net ..................................... 6,149 7,836 Inventories ............................................................ 9,486 3,835 Deferred income taxes .................................................. 4,780 4,353 Prepaid expenses and other current assets .............................. 710 475 --------- ------- Total current assets ........................................... 114,917 108,335 Long term investments .................................................. 26,690 20,934 Property and equipment, net ............................................ 8,625 6,372 Other assets ........................................................... 1,778 601 --------- ------- $ 152,010 $ 136,242 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ....................................................... $ 5,170 $ 3,765 Accrued expenses ....................................................... 17,133 13,610 Current installments of capitalized lease obligations .................. 144 211 --------- ------- Total current liabilities ...................................... 22,447 17,586 Capitalized lease obligations, excluding current installments .......... 106 141 Other non-current liabilities .......................................... - 466 --------- ------- Total liabilities ............................................. 22,553 18,193 --------- ------- 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 $0.10 par value; 12,500,000 shares authorized; 8,718,043 and 8,650,826 shares issued and outstanding at September 27, 1998 and March 29, 1998, respectively ..................................... 872 865 Additional paid-in capital ......................................... 100,396 99,008 Retained earnings .................................................. 28,189 18,176 --------- ------- Total stockholders' equity ....................................... 129,457 118,049 --------- ------- $ 152,010 $ 136,242 ========= =======
See accompanying notes to condensed consolidated financial statements. 3 4 QLOGIC CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ---------------------------- ----------------------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1998 1997 1998 1997 ---- ---- ---- ---- Net revenues ........................ $ 27,692 $ 19,625 $ 51,807 $ 37,797 Cost of sales ....................... 10,261 8,450 19,964 16,290 --------- --------- --------- ---------- Gross profit..................... 17,431 11,175 31,843 21,507 --------- --------- --------- ---------- Operating expenses: Engineering and development .... 7,001 3,655 11,942 7,183 Selling and marketing ........... 2,512 2,176 4,887 4,258 General and administrative ...... 1,383 1,119 2,591 2,474 --------- --------- --------- ---------- Total operating expenses ...... 10,896 6,950 19,420 13,915 --------- --------- --------- ---------- Operating income ................ 6,535 4,225 12,423 7,592 Interest income, net ................ 1,401 720 2,750 1,002 --------- --------- --------- ---------- Income before income taxes ...... 7,936 4,945 15,173 8,594 Income tax provision ................ 2,698 1,904 5,160 3,309 --------- --------- --------- ---------- Net income .......................... $ 5,238 $ 3,041 $ 10,013 $ 5,285 ========= ========= ========= ========== Basic earnings per share ............ $ 0.60 $ 0.42 $ 1.15 $ 0.81 ========= ========= ========= ========== Diluted earnings per share .......... $ 0.57 $ 0.39 $ 1.09 $ 0.75 ========= ========= ========= ========== Weighted average shares used in the calculations of basic earnings per share ............................. 8,707 7,262 8,686 6,557 ========= ========= ========= ========= Shares used in the calculations of diluted earnings per share ........ 9,255 7,825 9,211 7,077 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 4 5 QLOGIC CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED --------------------------------- SEPTEMBER 27, SEPTEMBER 28, 1998 1997 ---- ---- Cash flows from operating activities: Net income ................................................ $ 10,013 $ 5,285 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 1,390 1,215 Write off of acquired in-process technology ............. 1,220 -- Provision for doubtful accounts ......................... 193 161 Loss on disposal of property and equipment .............. 82 156 Benefit from deferred income taxes ...................... (427) (1,039) Changes in assets and liabilities: Accounts and notes receivables .......................... 1,494 (1) Inventories ............................................. (5,651) 178 Prepaid expenses and other current assets ............... (235) (202) Other assets ............................................ (440) (333) Accounts payable ........................................ 1,405 144 Accrued expenses ........................................ 4,247 3,350 Other non-current liabilities ........................... (466) -- -------- -------- Net cash provided by operating activities ........... 12,825 8,914 -------- -------- Cash flows from investing activities: Additions to property and equipment ..................... (3,725) (1,646) Purchases of investments ................................ (50,555) (34,416) Acquisition of business, net of cash acquired ........... (1,957) -- Maturities and sales of investments ..................... 17,933 -- -------- -------- Net cash used in investing activities ................. (38,304) (36,062) -------- -------- Cash flows from financing activities: Principal payments under capital leases ................. (102) (116) Proceeds from exercise of stock options ................. 671 76 Proceeds from sale of common stock ...................... -- 78,107 -------- -------- Net cash provided by financing activities ............. 569 78,067 -------- -------- Net increase (decrease) in cash and cash equivalents ........ (24,910) 50,919 -------- -------- Cash and cash equivalents at beginning of period ............ 64,090 19,091 -------- -------- Cash and cash equivalents at end of period .................. $ 39,180 $ 70,010 ======== ======== Cash paid during the period for: Interest .................................................. $ 25 $ 42 ======== ======== Income taxes .............................................. $ 3,491 $ 2,775 ======== ========
Non-cash investing and financing activities: During the quarters ended June 28, 1998 and September 27, 1998, the Company recorded a credit to additional paid-in-capital and a debit to accrued taxes payable of $217 and $507, respectively, related to the tax benefit of exercises of stock options under the Company's various stock option plans. Additionally, the Company recorded a $572 accrual during the quarter ended September 27, 1998, in accordance with the performance provisions of the Company's SDR Asset Purchase Agreement. See accompanying notes to condensed consolidated financial statements. 5 6 QLOGIC CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 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 27, 1998 and March 29, 1998, the results of operations for the three and six months ended September 27, 1998 and September 28, 1997 and the statements of cash flows for the six months ended September 27, 1998 and September 28, 1997. The results of operations for the three month period ended September 27, 1998 are not necessarily indicative of the results to be expected for the entire fiscl year. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current presentation. NOTE (2) BUSINESS COMBINATION On August 20, 1998, the Company acquired the net assets of Silicon Design Resources, Inc. ("SDR") for $2,000 in cash. In addition, the Company is obligated to pay up to an additional $8,000 in cash provided that certain performance targets are achieved over the next four fiscal years. These payments will be accounted for as additional purchase price and allocated to the intangible assets acquired. The Company accounted for the transaction using the purchase method of accounting, and excluding the $1,596 write-off of the acquired in-process technology in the quarter ended September 27, 1998, the impact to the Company's financial position and results of operations from the acquisition date was not material. Additionally, the Company incurred approximately $413 in professional fees related to the acquisition. The Company allocated the purchase price to the tangible and identifiable intangible net assets as of August 20, 1998 based on the fair values of the assets, such fair values were derived from an independent third party appraisal. The fair value of the net assets acquired exceeded the initial payment, resulting in negative goodwill. This negative goodwill was allocated to the intangible assets acquired, based on their relative fair values. The allocation of the initial payment is summarized as follows: Net tangible assets $ 558 Completed technology 635 In-process technology 1,220 ------- Net assets acquired $ 2,413 ======= Acquired in-process technology includes the value of products in the development stage and not considered to have reached technological feasibility. In accordance with applicable accounting literature, the acquired in-process technology was written off to engineering and development expense during the quarter ended September 27, 1998. Acquired completed technology has been capitalized and is being amortized on a straight-line basis over a period of three years from the acquisition date. The Company accrued the portion of the fiscal year 1999 performance payment earned during the quarter ended September 27, 1998, totaling $572, which was allocated $196 to completed technology and $376 to in-process technology. NOTE (3) INVENTORIES Components of inventories are as follows: SEPTEMBER 27, MARCH 29, 1998 1998 ------ ---- Raw materials ........................ $ 7,338 $ 2,720 Work in process ..................... 881 585 Finished goods ...................... 1,267 530 --------- ------- $ 9,486 $ 3,835 ========== ======= 6 7 NOTE (4) NET INCOME PER SHARE During fiscal 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." All prior periods have been restated accordingly. Basic earnings per common share was computed based on the weighted average number of common shares outstanding during the periods presented. The weighted average number of common shares outstanding for the three months ended September 27, 1998 and September 28, 1997, were 8,707 and 7,262, respectively. For the six months ended September 27, 1998 and September 28, 1997, the weighted average number of common shares were 8,686 and 6,557, respectively. Diluted earnings 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 in computing diluted earnings per share. The weighted average number of common and dilutive potential common shares for the three months ended September 27, 1998 and September 28, 1997, were 9,255 and 7,825, respectively. For the six months ended September 27, 1998 and September 28, 1997, the weighted average number of common and dilutive potential common shares were 9,211 and 7,077, respectively. The Adoption of SFAS No. 128 did not have a material impact on the Company's financial statements. Options to purchase 276,756 and 270,919 shares of common stock with exercise prices that exceed the average market price of $53.75 and $35.69 during the three months ended September 27, 1998 and September 27, 1997, respectively, were excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive. Options to purchase 270,009 and 290,863 shares of common stock with exercise prices that exceed the average market price of $47.65 and $29.53 during the six months ended September 27, 1998 and September 27, 1997, respectively, were excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive. 7 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 "Risk Factors," 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.
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------------ ------------------------------------------ September 27, 1998 September 28, 1997 September 27, 1998 September 28, 1997 ------------------ ------------------ ------------------ ------------------ Net revenues ............... $27,692 100.0% $19,625 100.0% $51,807 100.0% $37,797 100.0% Cost of sales .............. 10,261 37.1 8,450 43.1 19,964 38.5 16,290 43.1 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit ........... 17,431 62.9 11,175 56.9 31,843 61.5 21,507 56.9 Operating expenses: Engineering and development........... 7,001 25.3 3,655 18.6 11,942 23.1 7,183 19.0 Selling and marketing .. 2,512 9.0 2,176 11.1 4,887 9.4 4,258 11.3 General and administrative ....... 1,383 5.0 1,119 5.7 2,591 5.0 2,474 6.5 ------- ----- ------- ----- ------- ----- ------- ----- Total operating expenses 10,896 39.3 6,950 35.4 19,420 37.5 13,915 36.8 ------- ----- ------- ----- ------- ----- ------- ----- Operating income ........... $ 6,535 23.6% $ 4,225 21.5% $12,423 24.0% $ 7,592 20.1% ======= ===== ======= ===== ======= ===== ======= =====
NET REVENUES The Company's net revenues are derived from the sale of fibre channel and SCSI-based I/O products. License fees also contribute to the Company's net revenues. Net revenues for three months ended September 27, 1998 increased $8.1 million or 41% from the three months ended September 28, 1997 to $27.7 million. The increase was primarily the result of an increase in sales of Host Boards, the TEC product line, and the GEM product line of $6.3 million, $1.7 million and $0.7 million, respectively. A partially offsetting decline in sales of $0.4 million and $0.3 million occurred in the FAS product line and in license fees, respectively. Net revenues for the six months ended September 27, 1998 increased $14.0 million or 37% from the six months ended September 28, 1997. The increase was primarily the result of an increase in sales of Host Boards and the TEC Product line of $9.5 million and $5.9 million, respectively. An offsetting decline in sales of $1.4 million occurred in the ISP product line. Export revenues for the three months ended September 27, 1998 increased $5.9 million or 70% from the three months ended September 28, 1997. The increase was primarily the result of a $3.2 million increase in sales to European customers, and a $2.4 million increase in sales to Japan. The Company's principal markets are in Japan, the United States, and the United Kingdom. The Company's export revenues during the three months ended September 27, 1998 were $14.3 million, or 52% of net revenues. Approximately 59% of this export revenue came from shipments to Japan. The Company's largest Japanese customers are Fujitsu Limited, Hitachi Limited and Servants International. During the three months ended September 27, 1998, sales to Japan decreased $0.7 million or 8.1% from the quarter ended June 28, 1998. Fujitsu Limited and Hitachi Limited, both with headquarters in Japan, are among the Company's largest five customers (see Risk Factors - Small Number of Customers). Servants International is an Original Equipment Manufacturer ("OEM") distributor of the Company's products. 8 9 Export revenues for the six months ended September 27, 1998 increased $13.5 million or 99% from the six months ended September 28, 1997. The increase was primarily the result of a $7.5 million increase in sales to Japanese customers and a $5.5 million increase in sales to Europe. 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, such as Japan. 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 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 be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss of purchases could have a material adverse effect on the Company's business, financial condition and results of operations (see Risk Factors - Risks of Doing Business In International Markets). COST OF SALES Cost of sales consists primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The cost of sales percentage for the three months ended September 27, 1998 was 37.1 %, a decrease of 6.0 % from the similar period in the prior fiscal year. The percentage decrease was due to a combination of increased product volumes, operating efficiencies, and a shift in product mix to products that are generally associated with higher average selling prices. The Company's ability to maintain its current gross margin can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and the Company's ability to achieve manufacturing cost reductions. The Company anticipates that it will be increasingly more difficult to further reduce manufacturing costs. Because 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 (see Risk Factors - Dependence on Small Number of Customers). As a result, the Company does not anticipate cost of sales to decrease at a rate consistent with historic trends and there can be no assurance that the Company will be able to maintain or improve its gross margin in subsequent quarters. The cost of sales for the six months ended September 27, 1998 was 38.5%, a decrease of 4.6% from the similar period in the prior fiscal year. The percentage decrease was due to a combination of increased product volumes, operating efficiencies, and a shift in product mix to products that are generally associated with higher average selling prices. OPERATING EXPENSES Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development related equipment, occupancy costs and depreciation. For the three months ended September 27, 1998, engineering and development expenditures increased by $3.3 million from the three month period ended September 28, 1997, primarily due to an in-process technology charge of $1.6 million related to the acquisition of SDR, increased salary and fringe expenses of $1.0 million, and new product development expenses of $0.4 million. In particular, the Company increased its engineering staff in the three months ended September 27, 1998, from the similar period in the prior fiscal year. The Company expects that engineering and development expenses will increase in absolute dollars in fiscal 1999. For the six months ended September 27, 1998, engineering and development expenditures increased by $4.8 million from the six month period ended September 28, 1997, primarily due to an in-process technology charge of $1.6 million related to the acquisition of SDR, increased salary and fringe expenses of $2.1 million, new product development expense of $0.5 million, depreciation of $0.3 million and travel of $0.1 million. Selling and Marketing. Selling and marketing expenses consist primarily of sales commissions, salaries and other expenses for selling and marketing personnel, travel expenses and trade shows. During the three months ended September 27, 1998, selling and marketing expenses increased by $0.3 million from the three month period ended September 28, 1997, primarily as a result of commissions, salary and advertising expenses. 9 10 During the six months ended September 27, 1998 selling and marketing expenses increased by $0.6 million from the similar period in the prior fiscal year, primarily as a result of salary and travel related expenses for sales and marketing personnel. General and Administrative. General and administrative expenses consist primarily of salaries and other expenses for corporate management, finance, accounting and human resources. For the three months ended September 27, 1998, general and administrative expenses increased $0.3 million from the similar period in the prior fiscal year, primarily due to increased outside service expenses. For the six months ended September 27, 1998, general and administrative expenses increased by $0.1 million from the similar period in the prior fiscal year, primarily due to increased outside service expenses. INTEREST INCOME, NET Net interest income increased $0.7 million during the three months ended September 27, 1998 from the three months ended September 28, 1997, primarily due to larger balances of cash, cash equivalents, and investments. During the six months ended September 27, 1998 net interest income increased $1.7 million from the six months ended September 28, 1997, primarily due to larger balances of cash, cash equivalents, and investments. INCOME TAX PROVISION The Company's effective tax rates were 34% and 39% for the three months ended September 27, 1998 and September 28, 1997, respectively. The Company's effective tax rates were 34% and 39% for the six months ended September 27, 1998 and September 29, 1997, respectively. The tax rate in fiscal 1999 was reduced from the comparable period in the prior fiscal year primarily because of higher qualifying research and experimentation expenditures and because a portion of the Company's short term and long term investments were made in tax-exempt securities. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued Statement 131, "Disclosure about Segments of an Enterprise and Related Information." The new statement is effective for fiscal years beginning after December 15, 1997. Adoption of this new standard will not have a significant impact on the consolidated financial statements. In June 1998, the FASB issued Statement 133 "Accounting for Derivative Instruments and Hedging Activities." The new statement established accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect the adoption of Statement 133 to have a material impact on the Company's results of operations. LIQUIDITY AND CAPITAL RESOURCES QLogic has financed its working capital needs and capital expenditure requirements from internally generated funds, facilities and equipment leases and financing activities. Cash provided by operations was $12.8 million for the six months ended September 27, 1998, as compared to $8.9 million for the six months ended September 28, 1997. The growth in cash flow provided by operations is due to increased net income prior to the the write-off of in-process technology, a reduction in accounts and notes receivable, and an increase in accounts payable and accrued expenses, partially offset by an increase in inventory. Cash used in investing activities was $38.3 million for the six months ended September 27, 1998, reflecting expenditures for purchases of investments, property and equipment, and the acquisition of SDR, partially offset by maturities and sales of investments. Cash provided by financing activities was $0.6 million for the six months ended September 27, 1998, which reflected proceeds from the exercise of stock options, offset in part by principal payments under capital lease liabilities. 10 11 Working capital at September 27, 1998 was $92.5 million, as compared to $90.7 million at March 29, 1998. At September 27, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $39.2 million and short term investments of $54.6 million. In addition, the Company has a line of credit of up to $7.5 million with Silicon Valley Bank. The line of credit allows the Company to borrow at the bank's prime rate. There were no borrowings under the Company's line of credit as of September 27, 1998. The line of credit expires July 5, 1999, and, although there can be no assurance, the Company expects to renew this line of credit. 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. YEAR 2000 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 (such as general ledger, accounts payable, and payroll modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company has initially assessed how it may be impacted by Year 2000 and has commenced a comprehensive plan to address the following aspects of the Year 2000 problem: information systems, non-information systems, products, suppliers and customers. The plan, as it relates to information systems, involves a combination of software modification, upgrades and replacement. The Company has completed remediation of its critical information systems and will continue to monitor them to ensure they remain Year 2000 compliant. The target date for remediation of the remainder of its information systems is March 31, 1999. The Company has completed the assessment and development of remediation plans with respect to substantially all of the Company's non-information systems and expects remediation to be complete by June 30, 1999. The Company has completed an assessment of its products and has determined its products do not contain specific calendar year functions. However, there can be no assurance that unforeseen problems will not be encountered when the Company's components are used in conjunction with a system containing non-compliant, non-QLogic components. The Company is currently assessing Year 2000 issues with respect to major suppliers and customers and expects this process to be completed by June 30, 1999; however, the Company can provide no assurance that Year 2000 compliance plans will be successfully completed by suppliers and customers in a timely manner. The Company currently estimates that the costs associated with the Year 2000 issue, will 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 and remediation have not been material to the results of operations. If the Company is not successful in implementing its Year 2000 compliance plan, there may be a material adverse impact on the Company's results of operations and financial condition. The Company believes its greatest risks related to the Year 2000 issue involve interrupted product flow from suppliers and a possible redirection or interruption of purchasing activities from key customers due to their potential failure to fully address their own Year 2000 issues. Due to of the importance of addressing these risks, and the need for the Company to focus attention to remediation efforts, the Company expects to develop contingency plans to address those Year 2000 problems which may not be corrected by implementation of the Company's Year 2000 compliance plan. Contingency plans are expected to be complete by June 30, 1999. RISK FACTORS Except for the historical information contained herein, the information in this report includes 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 11 12 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 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 as such customers attempt to minimize their own inventories. In addition, the Company must order its products and build inventory substantially in advance of product shipments, and because the markets for the Company's products are subject to rapid technological and price changes, there is a risk the Company will forecast incorrectly and produce excess or insufficient inventory of particular products. To the extent the Company produces excess or insufficient inventory or is required to hold excess inventory, the Company's operating results could be adversely affected. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: the time, availability and sale of new products; seasonal OEM customer demand, such as the decline experienced in the fiscal quarter ended June 30, 1996; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components, including silicon wafers; warranty expenses; variations in product development and other operating expenses; and general economic and other conditions affecting the timing of customer orders and capital spending. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and its competitors' products. Although the Company does not maintain its own wafer manufacturing facility, a large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect on net income of such shortfall in net revenues. Furthermore, announcements by the Company, its competitors or others regarding new products and technologies could cause customers to defer 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 affected the Company's quarterly results of operations. Due to all of the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's common stock would likely be materially and adversely affected. DEPENDENCE ON SMALL NUMBER OF CUSTOMERS A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The loss of any of the Company's major customers would have a material adverse effect on its business, financial condition and results of operations. In addition, a majority of the Company's customers order the Company's products through written purchase orders as opposed to long term supply contracts and, therefore, such customers are generally not obligated to purchase products from the Company for any 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. As the Company's OEM 12 13 customers are pressured to reduce prices as a result of competitive factors, the Company may be required to commit to price reductions for its products before it knows how, or if, cost reductions can be obtained. If the Company is unable to achieve such cost reductions, the Company's gross margins could decline and such decline could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company provides its major distributors and certain volume purchasers with price protection in the event that the Company reduces the prices of its products. While the Company maintains reserves for such price protection, there can be no assurance that the impact of future price reductions by the Company will not exceed the Company's reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for both peripheral and host computer products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of shortened product life cycles and even shorter design-in cycles, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. A design win usually ensures a customer will purchase the product until a higher performance standard is available or a competitor can demonstrate a significant price/performance advantage. All of the Company's products compete with products available from several companies, many of which have substantially greater research and development resources, 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, it would have material adverse affect on future operating results. The Company currently competes primarily with Adaptec, Inc. and LSI Logic, Corporation ("LSI Logic), in the SCSI sector of the I/O market. In the Fibre Channel sector of the I/O market, the Company is competing primarily with Adaptec, Inc., LSI Logic, Emulex Corporation and Hewlett-Packard Company. Symbios Logic, Inc. was a competitor of the Company, however, LSI Logic acquired Symbios Logic, Inc. on August 6, 1998. The Company may compete with some of its larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their products. At least one large OEM customer in the past decided to vertically integrate and therefore ceased purchasing from the Company. 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. In addition, while relatively few competitors offer a full range of SCSI and other I/O products, additional domestic and foreign manufacturers may increase their presence in, and resources devoted to, these markets. There can be no assurance that the Company will compete successfully in the future. DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS The Company currently relies on several independent foundries to manufacture its semiconductor products either in finished form or wafer form. The Company conducts business with its foundries through written purchase orders as opposed to long term supply contracts and, therefore, such foundries are generally not obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order 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. Until recently, there has been a worldwide shortage of advanced process technology foundry capacity. The manufacture of semiconductor devices is subject to a wide variety of factors, including the availability 13 14 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. LSI Logic also competes with the Company with their own Fibre Channel products. 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 affected. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. The Company's ability to obtain satisfactory wafer and other supplies is subject to a number of other risks. These risks include, without limitation, 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 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. The Company utilizes foundries in Korea for supply of its semiconductor products. This region of the world is subject to geological instability as well as political instability which could result in the interruption of product supply to the Company. 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 Although the Company is currently not experiencing any difficulties in obtaining sufficient foundry capacity due to the current abundance of worldwide semiconductor fabrication capacity, the Company and the semiconductor industry have in the past experienced shortages of available foundry capacity. Accordingly, in order to secure an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company may consider various possible transactions, including the use of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods or equity investments in or advances to wafer manufacturing companies in exchange for guaranteed production capacity, or the formation of joint ventures to own and operate or construct foundries or to develop certain products. Any of these transactions would involve financial 14 15 risk to the Company and could require the Company to commit substantial capital or provide technology licenses in return for guaranteed production capacity. RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET A significant portion of the Company's host adapter board products are currently used in high-performance file servers, workstations and other office automation products. The Company's growth has been supported by increasing demand for sophisticated I/O solutions which support database systems, servers, workstations, Internet/intranet applications, multimedia and telecommunications. Should there be a slowing in the growth of demand for such systems, the Company's business, financial condition and results of operations could be materially and adversely affected. As a supplier of controller products to manufacturers of computer peripherals such as disk drives and other data storage devices, a portion of the Company's business is dependent on the overall market for computer peripherals. This market, which itself is dependent on the market for computers, has historically been characterized by periods of rapid growth followed by periods of oversupply and contraction. As a result, suppliers to the computer peripherals industry from time to time experience large and sudden fluctuations in demand for their products as their customers adjust to changing conditions in their markets. If these fluctuations are not accurately anticipated, such suppliers, including the Company, could produce excessive or insufficient inventories of various components which could have a material adverse effect on the Company's business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW PRODUCTS, INDUSTRY STANDARDS The markets in which the Company and its competitors compete are characterized by rapidly changing technology, evolving industry standards and continuing improvements in products and services. The Company's future success depends on its ability to enhance its current products and to develop and introduce in a timely manner new products that keep pace with technological developments and industry standards, compete effectively on the basis of price and performance, adequately address OEM customer and end-user customer requirements and achieve market acceptance. The Company believes that to remain competitive in the future it will need to continue to develop new products, which will require the investment of significant financial resources in new product development. In anticipation of the implementation of Fibre Channel data transfer interface technologies, the Company has invested 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 LSI Logic, Inc., have extensive development efforts related to products based on the Low Voltage Differential ("LVD") technology. There can be no assurance that such technology will not be adopted as an industry standard and if an alternative standard is adopted, there can be no assurance that the Company will timely develop products for such standard. Further, even if Fibre Channel is adopted, there can be no assurance that the Company's integrated PCI to Fibre Channel controller will be fully developed in time to be accepted for use in Fibre Channel technology or that, if developed, will achieve market acceptance, or be capable of being manufactured at competitive prices in sufficient volumes. In the event that Fibre Channel is not adopted as an industry standard, or that the Company's integrated circuit PCI to Fibre Channel controllers are not timely developed or do not gain market acceptance, the Company's business, financial condition and results of operations could be materially and adversely affected. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as IDE, SCSI, Ultra SCSI and PCI. In addition, the Company's Fibre Channel products have been designed to conform 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 15 16 replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business, financial condition and results of operations could be materially and adversely affected. The Company could experience delays in product development that are common in the computer and semiconductor industry. Significant delays in product development and release would adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will respond effectively to technological changes or new product announcements by other companies or that the Company's research and development efforts will be successful. Furthermore, introduction of new products and moving production of existing products to different suppliers involves substantial business risks because of the possibility of product "bugs" or performance problems, in which event the Company could experience significant product returns, warranty expenses and expedite charges, in addition to lower sales and lower profits. IDENTIFICATION AND INTEGRATION OF ACQUISITIONS The Company anticipates that its future growth may depend in part on its ability to identify and acquire complementary businesses, technologies or product lines that are compatible with those of the Company. Acquisitions involve numerous risks, including identifying and pursuing acquisitions, difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that the anticipated benefits of an acquisition will be realized. There can be no assurance that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. Future acquisitions by the Company could result in potentially dilutive issuance's of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, and other material write-offs, all of which could materially adversely affect the Company's business, financial condition, results of operations or stock price. With respect to the possible amortization of goodwill, the Financial Accounting Standards Board ("FASB") could abolish pooling of interest accounting altogether. If the FASB does limit or eliminate pooling of interests accounting treatment, the Company's ability to consummate merger transactions without incurring goodwill could be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's future success is highly dependent on the continued services of its key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers, and its ability to identify and hire additional personnel. The loss of the services of key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the market for key personnel in the industries in which it competes is highly competitive. In particular, the Company has experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipates that competition for such personnel will increase in the future. There can be no assurance that the Company will be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future, or to manage the Company's business, both in the United States and abroad. RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS The Company expects that export revenues will continue to account for a significant percentage of the Company's net revenues for the foreseeable future. As a result, the Company is subject to various risks, which include: a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements such as export requirements, tariffs and other barriers; differences in intellectual property protections; difficulties in staffing and managing foreign operations; potentially longer accounts receivable cycles; currency fluctuations; export control restrictions; overlapping or differing tax structures; political and economic instability; and general trade restrictions. 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, such as Japan. 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 16 17 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 or the currency and economic disruptions in the Asian markets 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 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 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 (such as general ledger, accounts payable, and payroll modules), customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and end products. The Company has initially assessed how it may be impacted by Year 2000 and has commenced a comprehensive plan to address the following aspects of the Year 2000 problem: information systems, non-information systems, products, suppliers and customers. The plan, as it relates to information systems, involves a combination of software modification, upgrades and replacement. The Company has completed remediation of its critical information systems and will continue to monitor them to ensure they remain Year 2000 compliant. The target date for remediation of the remainder of its information systems is March 31, 1999. The Company has completed the assessment and development of remediation plans with respect to substantially all of the Company's non-information systems and expects remediation to be complete by June 30, 1999. The Company has completed an assessment of its products and has determined its products do not contain specific calendar year functions. However, there can be no assurance that unforeseen problems will not be encountered when the Company's components are used in conjunction with a system containing non-compliant, non-QLogic components. The Company is currently assessing Year 2000 issues with respect to major suppliers and customers and expects this process to be completed by June 30, 1999; however, the Company can provide no assurance that Year 2000 compliance plans will be successfully completed by suppliers and customers in a timely manner. 17 18 The Company currently estimates that the costs associated with the Year 2000 issue, will 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 and remediation have not been material to the results of operations. If the Company is not successful in implementing its Year 2000 compliance plan, there may be a material adverse impact on the Company's results of operations and financial condition. The Company believes its greatest risks related to the Year 2000 issue involve interrupted product flow from suppliers and a possible redirection or interruption of purchasing activities from key customers due to their potential failure to fully address their own Year 2000 issues. Due to of the importance of addressing these risks, and the need for the Company to focus attention to remediation efforts, the Company expects to develop contingency plans to address those Year 2000 problems which may not be corrected by implementation of the Company's Year 2000 compliance plan. Contingency plans are expected to be complete by June 30, 1999. 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 August 27, 1998. (c) The Annual Meeting of Stockholders was held on August 27, 1998, the stockholders of the registrant voted as follows:
BROKER FOR AGAINST WITHHELD ABSTAIN NON-VOTE --- ------- -------- ------- -------- (i) Election of Directors: Gary E. Liebl 7,920,444 - 143,924 - - H.K.Desai 8,060,446 - 3,922 - - James H. Bixby 7,931,346 - 133,022 - - Carol L. Miltner 7,921,344 - 143,024 - - George D. Wells 7,925,946 - 138,422 - - (ii) Approval of Employee Stock Purchase 7,937,198 118,593 - 8,577 0 Plan (iii) Ratification of appointment of 8,053,528 8,305 - 2,535 - KPMG Peat Marwick LLP as auditors for fiscal 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K The registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 19, 1998 QLOGIC CORPORATION By: /s/ H.K. Desai ------------------------ H.K. Desai President and Chief Executive Officer By: /s/ Thomas R. Anderson ------------------------ Thomas R. Anderson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 19 20 EXHIBIT INDEX EXHIBIT NO 27 Financial Data Schedule EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-28-1999 MAR-30-1998 SEP-27-1998 39,180 81,302 7,087 939 9,486 114,917 21,670 13,046 152,010 22,447 0 0 0 872 128,585 152,010 27,692 27,692 10,261 10,261 10,896 0 (1,401) 7,936 2,698 5,238 0 0 0 5,238 0.60 0.57
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