-----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, QdSFC/dfLvV/pXag43/tQV3YzdwHPaRUoGeDui8tY2U9Uk3fLerAbMVcOk5KwG0/ wizP5/B6q68gFMPMzjBJbw== 0000892569-97-003103.txt : 19971114 0000892569-97-003103.hdr.sgml : 19971114 ACCESSION NUMBER: 0000892569-97-003103 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971112 SROS: NASD 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: 97714439 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 PERIOD ENDED SEPTEMBER 28, 1997 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 28, 1997 OR ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______ to _______ COMMISSION FILE NO. 0-23298 QLOGIC CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 33-0537669 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer 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 26, 1997, the registrant had 8,583,421 shares of common stock outstanding. 2 QLOGIC CORPORATION INDEX
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Condensed Consolidated Balance Sheets September 28, 1997 and March 30, 1997 ............................................. 3 Condensed Consolidated Statements of Income three months and six months ended September 28, 1997 and September 29, 1996 ............................................................ 4 Condensed Consolidated Statements of Cash Flows six months ended September 28, 1997 and September 29, 1996 ............................................................ 5 Notes to Condensed Consolidated Financial Statements .............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 7
PART II. OTHER INFORMATION PAGE Item 6. Exhibits and Reports on Form 8-K ........................................ 15
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 28, MARCH 30, 1997 1997 -------- -------- Cash and cash equivalents $ 70,010 $ 19,091 Short term investments $ 34,416 -- Accounts and notes receivable, net 5,560 5,720 Inventories 4,616 4,794 Deferred income taxes 2,188 1,149 Prepaid expenses and other current assets 593 391 -------- -------- Total current assets 117,383 31,145 Property and equipment, net 5,318 5,043 Other assets 1,108 775 -------- -------- $123,809 $ 36,963 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 28, MARCH 30, 1997 1997 -------- -------- Accounts payable $ 4,138 $ 3,994 Accrued expenses 10,465 7,115 Current installments of capitalized lease obligations 213 225 -------- -------- Total current liabilities 14,816 11,334 Capitalized lease obligations, excluding current installments 248 352 Other non-current liabilities 924 924 Stockholders' equity: Preferred stock, $.10 par value; 1,000,000 shares authorized (200,000 -- -- shares designated as Series A Junior Participating Preferred, $.001 par value): none issued and outstanding Common stock $.10 par value; 12,500,000 shares authorized; 8,574,616 and 5,840,701 shares issued and outstanding at September 28, 1997 857 584 and March 30, 1997, respectively Additional paid-in capital 96,911 19,001 Retained earnings 10,053 4,768 -------- -------- Total stockholders' equity 107,821 24,353 -------- -------- $123,809 $ 36,963 ======== ========
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 28, September 29, September 28, September 29, ------------- ------------- ------------- ------------- 1997 1996 1997 1996 ------- ------- ------- ------- Net revenues $19,625 $16,725 $37,797 $32,465 Cost of sales 8,450 9,622 16,290 19,207 ------- ------- ------- ------- Gross profit 11,175 7,103 21,507 13,258 Operating expenses: Engineering and development 3,655 2,536 7,183 4,625 Selling and marketing 2,176 1,466 4,258 2,823 General and administrative 1,119 1,229 2,474 2,346 ------- ------- ------- ------- Total operating expenses 6,950 5,231 13,915 9,794 ------- ------- ------- ------- Operating income 4,225 1,872 7,592 3,464 Interest income, net 720 92 1,002 151 ------- ------- ------- ------- Income before income taxes 4,945 1,964 8,594 3,615 Income tax provision 1,904 786 3,309 1,470 ------- ------- ------- ------- Net income $ 3,041 $ 1,178 $ 5,285 $ 2,145 ======= ======= ======= ======= Net income per common and equivalent share $ 0.39 $ 0.20 $ 0.75 $ 0.36 ======= ======= ======= ======= Weighted average common and common equivalent shares 7,825 6,028 7,077 6,029 ======= ======= ======= =======
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 28, September 29, 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 5,285 $ 2,145 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,215 1,266 Provision for doubtful accounts 161 128 Loss on disposal of property and equipment 156 1,235 Provision for (benefit from) deferred income taxes (1,039) (146) Changes in assets and liabilities: Accounts and notes receivables (1) (1,416) Inventories 178 451 Prepaid expenses and other current assets (202) (81) Other assets (333) (630) Accounts payable 144 (1,650) Accrued expenses 3,350 1,877 Other non-current liabilities -- (1,092) -------- -------- Net cash provided by operating activities 8,914 2,091 -------- -------- Cash flows from investing activities: Additions to property and equipment (1,646) (1,508) Purchases of short term investments (34,416) -- -------- -------- Net cash used in investing activities (36,062) (1,508) -------- -------- Cash flows from financing activities: Principal payments under capital leases (116) (150) Proceeds from exercise of stock options 76 747 Proceeds from sale of common stock 78,107 -- -------- -------- Net cash provided by financing activities 78,067 597 -------- -------- Net change in cash 50,919 1,180 -------- -------- Cash at beginning of period 19,091 8,414 -------- -------- Cash at end of period $ 70,010 $ 9,594 ======== ======== Cash paid during the period for: Interest $ 42 $ 87 ======== ======== Income taxes $ 2,775 $ 1,331 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 QLOGIC CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share data) NOTE (1) BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the financial position as of September 28, 1997 and March 30, 1997, the results of operations for the three months and six months ended September 28, 1997 and September 29, 1996 and the statements of cash flows for the six months ended September 28, 1997 and September 29, 1996. NOTE (2) INVENTORIES Components of inventories are as follows:
SEPTEMBER 28, MARCH 30, 1997 1997 ---- ---- Raw materials $2,556 $2,931 Work in progress 127 1,117 Finished goods 1,933 746 ------ ------ $4,616 $4,794 ====== ======
NOTE (3) NET INCOME PER SHARE Net income per common and equivalent share was computed based on the weighted average number of common and equivalent shares outstanding (if dilutive) during the periods presented (7,825 and 6,028 for the three months ended September 28, 1997 and September 29, 1996, respectively; and 7,077 and 6,029 for the six months ended September 28, 1997 and September 29, 1996, respectively). The Company has granted certain stock options which have been treated as common share equivalents in computing both primary and fully diluted income per share. The primary and fully diluted income per share calculations are approximately the same. NOTE (4) SHORT TERM INVESTMENTS Short term investments are comprised primarily of bonds and commercial paper. 6 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed hereunder, in "Risk Factors." The Company is the successor to the Emulex Micro Devices division of Emulex Corporation ("Emulex"). On February 24, 1994, Emulex declared a special dividend consisting of the distribution to its stockholders of all outstanding shares of common stock of QLogic, pursuant to which the Company became a separate publicly held corporation. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed in absolute terms and as a percentage of the Company's net revenues.
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- (000'S) (000'S) SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997 SEPTEMBER 29, 1996 ------------------ ------------------ ------------------ ------------------ Net revenues .......................... $19,625 100.0% $16,725 100.0% $37,797 100.0% $32,465 100.0% Cost of sales ......................... 8,450 43.1 9,622 57.5 16,290 43.1 19,207 59.2 ------- ----- ------- ----- ------- ----- ------- ----- Gross profit .................. 11,175 56.9 7,103 42.5 21,507 56.9 13,258 40.8 Operating expenses: Engineering and development ... 3,655 18.6 2,536 15.2 7,183 19.0 4,625 14.2 Selling and marketing ......... 2,176 11.1 1,466 8.8 4,258 11.3 2,823 8.7 General and administrative .... 1,119 5.7 1,229 7.3 2,474 6.5 2,346 7.2 ------- ----- ------- ----- ------- ----- ------- ----- Total operating expenses ...... 6,950 35.4 5,231 31.3 13,915 36.8 9,794 30.1 ------- ----- ------- ----- ------- ----- ------- ----- Operating income .............. $ 4,225 21.5% $ 1,872 11.2% $ 7,592 20.1% $ 3,464 10.7% ======= ===== ======= ===== ======= ===== ======= =====
NET REVENUES The Company's net revenues are derived primarily from the sale of SCSI-based I/O (Input/Output) products. License fees also contribute to the Company's net revenues. Net revenues for the three months ended September 28, 1997 increased $2.9 million or 17% from the three months ended September 29, 1996 to $19.6 million. The increase was primarily the result of an increase in sales of the FAS, Host Board, and ISP product lines of $2.8 million, $1.5 million and $1.3 million, respectively. A partially offsetting decline in sales of $2.2 million and $0.5 million occurred in the TEC product line and license fees. Net revenue for the six months ended September 28, 1997 increased $5.3 million or 16% from the six months ended September 29, 1996. The increase was primarily the result of an increase in sales of the Host Board and ISP product lines of $5.4 million and $3.0 million respectively. A partially offsetting decline in sales of $3.2 million occurred in the TEC product line. 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 28, 1997 was 43%, a decrease of 14% from the similar period in the prior fiscal year. The percentage decrease was due to products containing higher levels of integration and functionality that are generally associated with higher average selling prices and gross margins accounting for a greater percentage of net revenues. Additionally, the Company experienced manufacturing efficiencies. The Company's ability to maintain its current gross margin can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and the Company's ability to achieve manufacturing cost reductions. The Company anticipates that it will be increasingly difficult to reduce manufacturing costs. In addition, the Company believes the cost of sales percentage will be adversely impacted by sales of IDE-based products, which carry lower margins. As a result, the Company does not anticipate cost of sales to decrease at a rate consistent with historic trends or at all. 7 8 The cost of sales percentage for the six months ended September 28, 1997 was 43%, a decrease of 16% from the similar period in the prior fiscal year. The percentage decrease was due to products containing higher levels of integration and functionality that are generally associated with higher average selling prices and gross margins accounting for a greater percentage of net revenues. Additionally, the Company experienced manufacturing efficiencies. The Company's ability to maintain its current gross margin can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products and the Company's ability to achieve manufacturing cost reductions. The Company anticipates that it will be increasingly more difficult to reduce manufacturing costs. In addition, the Company believes the cost of sales percentage will be adversely impacted by sales of IDE-based products, which carry lower margins. As a result, the Company does not anticipate cost of sales to decrease at a rate consistent with historic trends or at all. 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 28, 1997, engineering and development expenditures increased by $1.1 million from the same period in fiscal 1996, primarily due to increased salary and new product development expenses. In particular, the Company significantly expanded its engineering staff in the three months ended September 28, 1997, from the similar period in the prior fiscal year. The Company expects that engineering and development expenses will increase in absolute dollars in fiscal 1998. For the six months ended September 28, 1997, engineering and development expenditures increased by $2.6 million from the same period in fiscal 1996, primarily due to increased salary and new product development expenses. 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 28, 1997, selling and marketing expenses increased by $0.7 million from the similar period in the prior fiscal year, primarily as a result of commission and salary expenses. During the six months ended September 28, 1997, selling and marketing expenses increased by $1.4 million from the similar period in the prior fiscal year, primarily as a result of increased sales commission and salary expense 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 28, 1997, general and administrative expenses decreased $0.1 million from the similiar period in the prior year period, primarily due to reduced bad debt expense. For the six months ended September 28, 1997, general and administrative expenses increased by $0.1 million from the prior year period, primarily due to increases in salary expense and legal expense, partially offset by reductions in consulting and other expenses. INTEREST INCOME Interest income, net, increased $0.6 million during the three months ended September 28, 1997 from the three months ended September 29, 1996, primarily due to larger balances of cash, cash equivalents and short term investments. Interest income, net, increased $0.9 million during the six months ended September 28, 1997 from the six months ended September 29, 1996, primarily due to larger balances of cash, cash equivalents and short term investments. INCOME TAX PROVISION The Company's effective tax rates were 39% and 40% for the three months ended September 28, 1997 and September 29, 1996. The Company's effective tax rates were 39% and 41% for the six months ended September 28, 1997 and September 29, 1996. 8 9 NEW ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. ("Statement") 128, "Earnings Per Share", Statement 128 specifies new standards designed to improve the earnings per share ("EPS") information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principle difference being that the common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision, and (c) revising the contingent share provisions and the supplemental EPS data requirements. Statement 128 also makes a number of changes to existing disclosure requirements. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Management believes the adoption of Statement 128 will not have a material impact on the Company's financial position or result of operations. In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income". The new statement is effective for both interim and annual periods beginning after December 15, 1997. The Company has not yet determined the impact of adopting this new standard on the consolidated financial statements. 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. The Company has not yet determined the impact of adopting this new standard on the consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES QLogic has financed its recent working capital needs and capital expenditure requirements primarily from internally generated funds and facilities and equipment leases. Cash provided by operations was approximately $8.9 million for the six months ended September 28, 1997. Cash provided by operations was approximately $2.1 million for the six months ended September 29, 1996. The growth in cash provided by operations is primarily attributable to improved profitability and increased accrued expenses. Cash used in investing activities was approximately $36.1 million for the six months ended September 28, 1997, primarily reflecting the purchase of short term investments using a portion of the proceeds received in August 1997 from the stock offering, and $1.6 million for purchase of property and equipment. Cash used in investing activities was approximately $1.5 million for the six months ended September 29, 1996, reflecting expenditures for property and equipment. Cash provided by financing activities was approximately $78.1 for the six months ended September 28, 1997, which primarily reflected net proceeds from the sale of common stock. Cash provided by financing activities was approximately $0.6 million for the six months ended September 29, 1996, which reflected proceeds from the exercise of stock options, offset in part by principal payments under capital leases. Working capital at September 28, 1997 was $102.6 million, as compared to $19.8 million at March 30, 1997. At September 28, 1997, the Company's principal sources of liquidity included cash and cash equivalents of $70.0 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 line of credit as of September 28, 1997. The line of credit with Silicon Valley Bank will expire July 5, 1998, and, although there can be no assurances, the Company currently expects to renew this line of credit. The Company believes that existing cash balances, facilities and equipment leases, cash flows from operating activities, short-term investments and the available line of credit will provide the Company with sufficient funds to finance its operations for at least the next 12 months. Prior to the Distribution, QLogic and Emulex entered into a Tax Sharing Agreement (the "Tax Sharing Agreement") for purposes of allocating pre-Distribution tax liabilities between QLogic and Emulex and to implement the Distribution as a tax free distribution. The total amount due Emulex pursuant to the Tax Sharing Agreement at September 28, 1997 was $0.5 million, which was included in other noncurrent liabilities. Amounts due Emulex under the Tax Sharing Agreement are payable on December 30, 1999, and commenced bearing interest on January 1, 1996, at the rate applicable to underpayments of Federal income taxes, which was 9% at September 28, 1997. Interest due Emulex is payable quarterly and the Company commenced interest payments in April 1996. In accordance with the terms of the Tax Sharing Agreement, QLogic is required to accelerate payment to Emulex upon the occurrence of specific events, for the actual tax benefit received from the Company's utilization of pre-Distribution tax attributes. 9 10 The occurrence of such events, which includes commencement of public offerings, requires the Company to pay Emulex no later than 90 days subsequent to the commencement of such an event. Consequently, due to the commencement of the Company's public offering on August 7, 1997, QLogic paid Emulex $0.3 million on October 31, 1997; the payment representing the actual unpaid tax benefits realized to date, on filed tax returns, by the Company from utilization of pre-Distribution tax attributes, plus accrued interest. RISK FACTORS Except for the historical information contained herein, the discussion in this Form 10-Q constitute forward-looking statements. When used in this Form 10-Q the words "shall," "should," "forecast," "all of," "projected," "believes," "expects," and similar expressions are intended to identify forward looking statements. In addition, the Company may from time to time make oral forward-looking statements. The Company wishes to caution readers that a number of important factors could cause results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above or elsewhere in this Form 10-Q. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period to period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant portion of the Company's net revenues in each fiscal quarter results from orders booked in that quarter. In the past, a significant percentage of the Company's quarterly bookings and sales to major customers occurred during the last month of the quarter, and there can be no assurance that this trend will not return in the future. Orders placed by major customers are typically based on their forecasted sales and inventory levels for the Company's products. Changes in purchasing patterns by one or more of the Company's major customers, customer order changes or rescheduling, gain or loss of significant customers, customer policies pertaining to desired inventory levels of the Company's products, negotiations of rebates and extended payment terms, as well as changes in the ability of the Company to anticipate in advance the mix of customer orders, could result in material fluctuations in quarterly operating results. Certain large OEM customers may require the Company to maintain higher levels of inventory as such customers attempt to minimize their own inventories. In addition, the Company must order its products and build inventory substantially in advance of product shipments, and because the markets for the Company's products are subject to rapid technological and price changes, there is a risk the Company will forecast incorrectly and produce excess or insufficient inventory of particular products. To the extent the Company produces excess or insufficient inventory or is required to hold excess inventory, the Company's operating results could be adversely affected. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: the time, availability and sale of new products; seasonal OEM customer demand, such as the decline experienced in the fiscal quarter ended June 30, 1996; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components, including silicon wafers; warranty expenses; variations in product development and other operating expenses; and general economic and other conditions affecting the timing of customer orders and capital spending. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and its competitors' products. Although the Company does not maintain its own wafer manufacturing facility, a large portion of the Company's expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect on net income of such shortfall in net revenues. Furthermore, announcements by the Company, its competitors or others regarding new products and technologies could cause customers to defer 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 specified period. Major customers also have significant leverage over the Company and may attempt to change the terms, including pricing, upon which the Company and such customers do business, which could materially adversely affect the 10 11 Company's business, financial condition and results of operations. As the Company's OEM customers are pressured to reduce prices as a result of competitive factors, the Company may be required to contractually commit to price reductions for its products before it knows how, or if, cost reductions can be obtained. If the Company is unable to achieve such cost reductions, the Company's gross margins could decline and such decline could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company provides its major distributors and certain volume purchasers with price protection in the event that the Company reduces the prices of its products. While the Company maintains reserves for such price protection, there can be no assurance that the impact of future price reductions by the Company will not exceed the Company's reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for both peripheral and host computer products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of shortened product life cycles and even shorter design-in cycles, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. A design win usually ensures a customer will purchase the product until a higher performance standard is available or a competitor can demonstrate a significant price/performance advantage. All of the Company's products compete with products available from several companies, many of which have substantially greater research and development, long term guaranteed supply capacity, marketing and financial resources, manufacturing capability and customer support organizations than those of the Company. The Company believes that its future operating results will depend, in part, upon its ability to continue to improve product and process technologies and develop new technologies in order to 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 Adaptec, Inc. and Symbios Logic, Inc. In the Fibre Channel sector of the I/O market, the Company expects to compete primarily with Adaptec, Inc., Symbios Logic, Inc. and Hewlett-Packard Company. In the IDE sector, the Company expects to compete with Adaptec, Inc. and Cirrus Logic, Inc. The Company may compete with some of its larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their products. At least one large OEM customer in the past decided to vertically integrate and therefore ceased purchases from the Company. The Company will 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 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. 11 12 The Company is using multiple sources of supply for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. In particular, the Company's integrated single chip Fibre Channel controller is manufactured by LSI Logic and integrates LSI Logic's transceiver technology. In the event that LSI Logic is unable or unwilling to satisfy the Company's requirements for this technology, the Company's attempt to market Fibre Channel products would be delayed and, as such, its results of operations could be materially and adversely affected. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. The Company's ability to obtain satisfactory wafer and other supplies is subject to a number of other risks. These risks include, without limit, 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. 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 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. 12 13 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 Symbios Logic, Inc., have extensive development efforts related to products based on the Low Voltage Differential ("LVD") technology. There can be no assurance that such technology will not be adopted as an industry standard and if an alternative standard is adopted, there can be no assurance the Company will timely develop products for such standard. Further, even if Fibre Channel is adopted, there can be no assurance that the Company's integrated PCI to Fibre Channel controller will be fully developed in time to be accepted for use in Fibre Channel technology or that, if developed, will achieve market acceptance, or be capable of being manufactured at competitive prices in sufficient volumes. In the event that Fibre Channel is not adopted as an industry standard, or that the Company's integrated circuit PCI to Fibre Channel controllers are not timely developed or do not gain market acceptance, the Company's business, financial condition and results of operations could be materially and adversely affected. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as IDE, SCSI, Ultra SCSI and PCI. In addition, the Company's Fibre Channel products have been designed to conform with a standard that has yet to be uniformly adopted. The Company's products must be designed to operate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, operating system software and peripherals. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading microprocessor, systems and peripheral suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability. If industry acceptance of these standards was to decline or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business, financial condition and results of operations could be materially and adversely affected. The Company could experience delays in product development that are common in the computer and semiconductor industry. Significant delays in product development and release would adversely affect the Company's business, financial condition and results of operations. There can be no assurance that the Company will respond effectively to technological changes or new product announcements by other companies or that the Company's research and development efforts will be successful. Furthermore, introduction of new products and moving production of existing products to different suppliers involves substantial business risks because of the possibility of product "bugs" or performance problems, in which event the Company could experience significant product returns, warranty expenses and expedite charges, in addition to lower sales and lower profits. IDENTIFICATION AND INTEGRATION OF ACQUISITIONS The Company anticipates that its future growth may depend in part on its ability to identify and acquire complementary businesses, technologies or product lines that are compatible to those of the Company. Acquisitions involve numerous risks, including identifying and pursuing acquisitions, difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that the anticipated benefits of an acquisition will be realized. There can be no assurance that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. Future acquisitions by the Company could result in potentially dilutive issuance's of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could materially adversely affect the Company's business, financial condition, results of operations or stock price. With respect to the possible amortization of goodwill, the Financial Accounting Standards Board ("FASB") may make pooling of interests accounting treatment for merger transactions more difficult to attain, or may abolish such treatment altogether. If the FASB does limit or eliminate pooling of interests accounting treatment, the Company's ability to consummate merger transactions without incurring goodwill would be materially and adversely affected. 13 14 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. 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. 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. 14 15 PART II. OTHER INFORMATION On September 23, 1997, the Board of Directors adopted an amendment to the Rights Agreement dated June 4, 1996 under the Company's Shareholder Rights Plan to increase the Purchase Price for each one one-one hundredth of a share of preferred stock pursuant to the exercise of a Right from $45.00 to $225.00. The Board of Directors had determined that, due to increases in the trading prices of the Company's Common Stock and other factors that it deemed relevant, the $45.00 Purchase Price would no longer serve as an adequate deterrent to the abusive takeover practices the Shareholder Rights Plan is intended to deter. In addition, the Board further amended the Rights Agreement to provide that any future amendment would only be effective if approved by continuing members of the Company's Board of Directors, or their designees. This provision is intended to prevent an unfriendly acquiror of the Company from seizing control of the Board of Directors and them amending the Rights Agreement for its own benefit. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K The registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 10, 1997 QLOGIC CORPORATION BY: /s/ H.K. DESAI --------------------------------------- H.K. Desai President and Chief Executive Officer BY: /s/ THOMAS R. ANDERSON --------------------------------------- Thomas R. Anderson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS MAR-29-1997 SEP-28-1997 70,010 34,416 6,357 797 4,616 117,383 16,019 10,701 123,809 14,816 0 0 0 857 106,964 123,809 19,625 19,625 8,450 8,450 6,950 0 (720) 4,945 1,904 3,041 0 0 0 3,041 0.39 0.39
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