-----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, IAwYyfFPA6GHd0wS/7eet8kBEI5CAZIk/Y+yvNorYxiL7HrNfNefaPUszJIE6GhR A5X++U7GKy/jx64eh41Sqw== 0000892569-98-002209.txt : 19980812 0000892569-98-002209.hdr.sgml : 19980812 ACCESSION NUMBER: 0000892569-98-002209 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980811 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: 98682385 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 JUNE 28, 1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------------------ (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 28, 1998 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 (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 July 26, 1998, the registrant had 8,706,744 shares of common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 QLOGIC CORPORATION INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets -- June 28, 1998 and March 29, 1998.............................................. 3 Condensed Consolidated Statements of Income -- three months ended June 28, 1998 and June 29, 1997....................... 4 Condensed Consolidated Statements of Cash Flows -- three months ended June 28, 1998 and June 29, 1997................ 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 Item 6. Exhibits and Reports on Form 8-K............................ 17
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
JUNE 28, MARCH 29, 1998 1998 -------- --------- Cash and cash equivalents................................... $ 51,550 $ 64,090 Short term investments...................................... 34,941 27,746 Accounts and notes receivable, net.......................... 5,869 7,836 Inventories................................................. 8,893 3,835 Deferred income taxes....................................... 4,217 4,353 Prepaid expenses and other current assets................... 482 475 -------- -------- Total current assets.............................. 105,952 108,335 Long term investments....................................... 28,188 20,934 Property and equipment, net................................. 8,340 6,372 Other assets................................................ 250 601 -------- -------- $142,730 $136,242 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 4,302 $ 3,765 Accrued expenses............................................ 14,829 13,610 Current installments of capitalized lease obligations....... 212 211 -------- -------- Total current liabilities......................... 19,343 17,586 Capitalized lease obligations, excluding current installments.............................................. 89 141 Other non-current liabilities............................... -- 466 -------- -------- Total liabilities................................. 19,432 18,193 Commitments and contingencies Stockholders' equity: Preferred stock, $.10 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); none issued and outstanding................................. -- -- Common stock $.10 par value; 12,500,000 shares authorized; 8,677,043 and 8,650,826 shares issued and outstanding at June 28, 1998 and March 29, 1998 respectively....... 867 865 Additional paid-in capital................................ 99,480 99,008 Retained earnings......................................... 22,951 18,176 -------- -------- Total stockholders' equity........................ 123,298 118,049 -------- -------- $142,730 $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 ------------------- JUNE 28, JUNE 29, 1998 1997 -------- -------- Net revenues................................................ $24,115 $18,172 Cost of sales............................................... 9,703 7,840 ------- ------- Gross profit.............................................. 14,412 10,332 ------- ------- Operating expenses Engineering and development............................... 4,941 3,528 Selling and marketing..................................... 2,375 2,082 General and administrative................................ 1,208 1,355 ------- ------- Total operating expenses.......................... 8,524 6,965 ------- ------- Operating income.................................. 5,888 3,367 Interest income, net........................................ 1,349 282 ------- ------- Income before income taxes................................ 7,237 3,649 Income tax provision........................................ 2,462 1,405 ------- ------- Net income.................................................. $ 4,775 $ 2,244 ======= ======= Basic earnings per common share............................. $ 0.55 $ 0.38 ======= ======= Diluted earnings per share.................................. $ 0.52 $ 0.35 ======= ======= Common shares used in the calculations of basic earnings per share........................................ 8,665 5,864 ======= ======= Shares used in the calculations of diluted earnings per share................................................. 9,168 6,333 ======= =======
See accompanying notes to condensed consolidated financial statements. 4 5 QLOGIC CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED ------------------- JUNE 28, JUNE 29, 1998 1997 -------- -------- Cash flows from operating activities: Net income................................................ $ 4,775 $ 2,244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 679 595 Provision for doubtful accounts........................ -- 196 Loss on disposal of property and equipment............. 29 127 Provision for (benefit from) deferred income taxes..... 136 (685) Changes in assets and liabilities: Accounts and notes receivables............................ 1,967 1,122 Inventories............................................... (5,058) (1,066) Prepaid expenses and other current assets................. (7) (76) Other assets.............................................. 351 (514) Accounts payable.......................................... 538 (28) Accrued expenses.......................................... 1,435 2,515 Other non-current liabilities............................. (466) -- -------- ------- Net cash provided by operating activities......... 4,379 4,430 -------- ------- Cash flows from investing activities: Additions to property and equipment....................... (2,676) (490) Purchases of investments.................................. (23,883) -- Maturities and sales of investments....................... 9,434 -- -------- ------- Net cash used in investing activities.................. (17,125) (490) -------- ------- Cash flows from financing activities: Principal payments under capital leases................... (51) (58) Proceeds from exercise of stock options................... 257 162 -------- ------- Net cash provided by financing activities.............. 206 104 -------- ------- Net increase (decrease) in cash and cash equivalents........ (12,540) 4,044 Cash and cash equivalents at beginning of period............ 64,090 19,091 -------- ------- Cash and cash equivalents at end of period.................. $ 51,550 $23,135 ======== ======= Cash paid during the period for: Interest.................................................. $ 13 $ 25 ======== ======= Income taxes.............................................. $ 191 $ -- ======== ======= Non-cash financing activities: During the quarter ended June 28, 1998, pursuant to Statement of Financial Accounting Standards No. 109 "Accounting For Income Taxes", the Company recorded a credit to paid-in-capital and a debit to accrued taxes payable of $217 related to the tax benefit of exercises of stock options under the Company's various stock option plans.
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 June 28, 1998 the results of operations for the three months ended June 28, 1998 and June 29, 1997 and the statements of cash flows for the three months ended June 28, 1998 and June 29, 1997. The results of operations for the three month period ended June 28, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current presentation. NOTE (2) INVENTORIES Components of inventories are as follows:
JUNE 28, MARCH 29, 1998 1998 -------- --------- Raw materials............................................... $6,667 $2,720 Work in process............................................. 2,132 585 Finished goods.............................................. 94 530 ------ ------ $8,893 $3,835 ====== ======
NOTE (3) NET INCOME PER SHARE In the quarter ended December 28, 1997, 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 June 28, 1998 and June 29, 1997, were 8,665 and 5,864, 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 June 28, 1998 and June 29, 1997 were 9,168 and 6,333, respectively. The Adoption of SFAS No. 128 did not have a material impact on the Company's financial statements. Options to purchase 29,469 and 35,739 shares of common stock with exercise prices that exceed the average market price of $41.55 and $23.37 during the three months ended June 28, 1998 and June 29, 1997, respectively, were excluded from the calculation of diluted EPS because their inclusion would have been anti-dilutive. 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," 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 ------------------------------------- JUNE 28, 1998 JUNE 29, 1997 ---------------- ----------------- Net revenue....................................... $24,115 100.0% $18,172 100.0% Cost of sales..................................... 9,703 40.2 7,840 43.1 ------- ------ ------- ------- Gross profit.................................... 14,412 59.8 10,332 56.9 ------- ------ ------- ------- Operating expenses: Engineering and development..................... 4,941 20.5 3,528 19.4 Selling and marketing........................... 2,375 9.9 2,082 11.5 General and administrative...................... 1,208 5.0 1,355 7.4 ------- ------ ------- ------- Total operating expenses................ 8,524 35.4 6,965 38.3 ------- ------ ------- ------- Operating income................................ $ 5,888 24.4% $ 3,367 18.6% ======= ====== ======= =======
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 June 28, 1998 increased $5.9 million or 33% from the three months ended June 29, 1997 to $24.1 million. The increase was primarily the result of an increase in sales of the TEC, Host Board product lines, and Other revenue of $4.2 million, $3.1 million and $0.5 million, respectively. A partially offsetting decline in sales of $1.5 million, $0.3 million and $0.1 million occurred in the ISP product line, the FAS product line and in license fees, respectively. Export revenues for three months ended June 28, 1998 increased $7.6 million or 143% from the three months ended June 29, 1997. The increase was primarily the result of a $5.1 million increase in sales to Japanese customers, and a $2.3 million increase in sales to Europe. The Company's principal markets are in Japan, the United States, the United Kingdom and Malaysia. The Company's export revenue during the three months ended June 28, 1998 was $12.8 million, or 53% of net revenues. Export shipments to Japan amounted to approximately 84% of total exports. The Company's largest Japanese customers are Fujitsu Limited, Hitachi Limited and Servants International. During the three months ended June 28, 1998, sales to Japan decreased 5.2 percent from the quarter ended March 29, 1998. Fujitsu Limited and Hitachi Limited, both with headquarters in Japan, are among the Company's largest five customers. Servants International is an OEM distributor of the Company's products. 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 7 8 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. COST OF SALES Cost of sales consists primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The cost of sales percentage for the three months ended June 28, 1998 was 40.2 percent, a decrease of 2.9 percent from the similar period in the prior fiscal year. The percentage decrease was due to a combination of increased production volumes, manufacturing efficiencies, and a shift in product mix to products with lower unit costs. 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. 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 A SMALL NUMBER OF CUSTOMERS). As a result, the Company does not anticipate the cost of sales percentage 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. OPERATING EXPENSES Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development related equipment, occupancy costs and depreciation. For the three months ended June 28, 1998, engineering and development expenditures increased by $1.4 million from the same period in fiscal 1998, primarily due to increased salary, new equipment depreciation and new product development expenses. In particular, the Company significantly expanded its engineering staff in the three months ended June 28, 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. Selling and Marketing. Selling and marketing expenses consist primarily of sales commissions, salaries and other expenses for selling and marketing personnel, travel expenses and trade shows. During the three months ended June 28, 1998, selling and marketing expenses increased by $0.3 million from the similar period in the prior fiscal year, primarily as a result of salary and advertising expenses. General and Administrative. General and administrative expenses consist primarily of salaries and other expenses for corporate management, finance, accounting and human resources. For the three months ended June 28, 1998, general and administrative expenses decreased $0.1 million from the similar period in the prior fiscal year. INTEREST INCOME (EXPENSE) Net interest income increased $1.1 million during the three months ended June 28, 1998 from the three months ended June 29, 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 June 28, 1998 and June 29, 1997, respectively. The tax rate was reduced primarily because of higher research and experimentation expenditures resulting in a higher research and experimentation credit and a portion of the Company's short term and long term investments were made in tax-exempt securities. 8 9 NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (Statement) 130, "Reporting Comprehensive Income." The new Statement is effective for both interim and annual periods for fiscal years beginning after December 15, 1997. Adoption of this new standard in fiscal 1999 will not have a significant impact 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. Adoption of this new standard in fiscal 1999 will not have a significant impact on the consolidated financial statements. 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 $4.4 million for the three months ended June 28, 1998, and for the three months ended June 29, 1997. Cash used in investing activities was $17.1 million for the three months ended June 28, 1998, reflecting expenditures for property, equipment and investments, partially offset by maturities and sales of investments. Cash provided by financing activities was $0.2 million for the three months ended June 28, 1998, which reflected proceeds from the exercise of stock options, offset in part by principal payments under capital lease liabilities. Working capital at June 28, 1998 was $86.6 million, as compared to $90.7 million at March 29, 1998. At June 28, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $51.6 million and short term investments of $34.9 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 June 28, 1998. The line of credit with Silicon Valley Bank expires July 5, 1999, and, although there can be no assurance, the Company currently 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. 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 is in the process of upgrading its software to address the year 2000 issue. Because a large portion of the Company's software is obtained from its vendors on a non-custom basis, the Company believes that upgrades for its commercial programs are currently available. The Company currently estimates that the costs associated with the year 2000 issue, and the consequences of incomplete or untimely resolution of 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. The Company also relies, directly and indirectly, on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governmental entities, both domestic and international, for accurate exchange of data. Even if the internal systems of the Company are not materially affected by the year 2000 issue, the Company could be affected through disruptions in the operation of the enterprises with which the Company interacts. Despite the Company's efforts to address the year 2000 impact on its internal systems and business operations, there can be no assurance that such impact will not result in material disruption of its business or have a material adverse effect on the Company's business, financial condition or results of operations. The Company is in the process of establishing a year 2000 contingency plan to be completed by March 28, 1999. 9 10 RISK FACTORS Except for the historical information contained herein, the information in this report constitutes forward-looking statements. When used in this report the words "shall," "should," "forecast," "all of," "projected," "believes," "expects," and similar expressions are intended to identify forward looking statements. In addition, the Company may from time to time make oral forward-looking statements. The Company wishes to caution readers that a number of important factors could cause results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above 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 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 effected. 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 effecting the timing of customer orders and capital spending. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and its competitors' products. Although the Company does not maintain its own wafer manufacturing facility, a large portion of the Company's expenses 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 effected the Company's quarterly results of operations. Due to all of the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's common stock would likely be materially and adversely effected. 10 11 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 effect the Company's business, financial condition and results of operations. As the Company's OEM customers are pressured to reduce prices as a result of competitive factors, the Company may be required to 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, it would have material adverse effect on future operating results. The Company currently competes primarily with Adaptec, Inc. and Symbios Logic, Inc. in the SCSI sector of the I/O market. In the Fibre Channel sector of the I/O market, the Company expects to compete primarily with Adaptec, Inc., Symbios Logic, Inc., Emulex Corporation and Hewlett-Packard Company. LSI Logic, Corporation recently made a bid to acquire Symbios. 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 11 12 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. 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 recently made a bid to acquire Symbios. In the event that LSI Logic is unable or unwilling to satisfy the Company's requirements for this technology, the Company's marketing efforts related to Fibre Channel products would be delayed and, as such, its results of operations could be materially and adversely effected. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely effect 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 effect 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 12 13 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 effected. 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 Symbios Logic, Inc., have extensive development efforts related to 13 14 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 effected. 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 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 effected. The Company could experience delays in product development that are common in the computer and semiconductor industry. Significant delays in product development and release would adversely effect the Company's business, financial condition and results of operations. There can be no assurance that the Company will respond effectively to technological changes 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, all of which could materially adversely effect 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") is considering making 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 effected. 14 15 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, have led to widespread financial difficulty among the companies in this region. The Company's export sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of the Company's foreign customers should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors 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 15 16 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. 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 is in the process of upgrading its software to address the year 2000 issue. Because a large portion of the Company's software is obtained from its vendors on a non-custom basis, the Company believes that upgrades for its commercial programs are currently available. The Company currently estimates that the costs associated with the year 2000 issue, and the consequences of incomplete or untimely resolution of 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. The Company also relies, directly and indirectly, on external systems of business enterprises such as customers, suppliers, creditors, financial organizations, and of governmental entities, both domestic and international, for accurate exchange of data. Even if the internal systems of the Company are not materially affected by the year 2000 issue, the Company could be affected through disruptions in the operation of the enterprises with which the Company interacts. Despite the Company's efforts to address the year 2000 impact on its internal systems and business operations, there can be no assurance that such impact will not result in a material disruption of its business or have a material adverse effect on the Company's business, financial condition or results of operations. The Company is in the process of establishing a year 2000 contingency plan to be completed by March 28, 1999. 16 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.10 Loan and Security Agreement with Silicon Valley Bank 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. 17 18 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: August 10, 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) 18 19 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.10 Loan and Security Agreement with Silicon Valley Bank 27 Financial Data Schedule
EX-10.10 2 LOAN & SECURITY AGREEMENT WITH SILICON VALLEY BANK 1 EXHIBIT 10.10 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT BORROWER: QLOGIC CORPORATION ADDRESS: 3545 HARBOR BOULEVARD, P.O. BOX 5001 COSTA MESA, CALIFORNIA 92628 DATED AS OF: JULY 6, 1998 CREDIT LIMIT (Section 1.1): An amount not to exceed $7,500,000; Provided, however, that the minimum amount of a Loan shall be $100,000; LETTER OF CREDIT SUBLIMIT Silicon, in its reasonable discretion, will from time to time during the term of this Agreement issue letters of credit for the account of the Borrower ("Letters of Credit"), in an aggregate amount at any one time outstanding not to exceed $3,000,000, upon the request of the Borrower, provided that, on the date the Letters of Credit are to be issued, Borrower has available to it Loans in an amount equal to or greater than the face amount of the Letters of Credit to be issued. Prior to the issuance of any Letters of Credit, Borrower shall execute and deliver to Silicon Applications for Letters of Credit and such other documentation as Silicon shall specify (the "Letter of Credit Documentation"). Fees for the Letters of Credit shall be as provided in the Letter of Credit Documentation. The Credit Limit set forth above and the Loans available under this Agreement at any time shall be reduced by the face amount of Letters of Credit from time to time outstanding. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from time to time. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. LOAN FEE (Section 1.3): See Amendment to Loan Agreement of even date herewith. MATURITY DATE (Section 5.1): JULY 5, 1999. PRIOR NAMES OF BORROWER (Section 3.2): EMULEX MICRO DEVICES (EMD) A DIVISION OF EMULEX CORPORATION TRADE NAMES OF BORROWER (Section 3.2): NONE
-1- 2 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT - ------------------------------------------------------------------------------- OTHER LOCATIONS AND ADDRESSES (Section 3.3): 150 INDUSTRIAL AVE. EAST, SUITE 39, LOWELL, MA 01852 MATERIAL ADVERSE LITIGATION (Section 3.10): NONE NEGATIVE COVENANTS-EXCEPTIONS (Section 4.6): Without Silicon's prior written consent, Borrower may do the following, provided that, after giving effect thereto, no Event of Default has occurred and no event has occurred which, with notice or passage of time or both, would constitute an Event of Default, and provided that the following are done in compliance with all applicable laws, rules and regulations: (i) repurchase shares of Borrower's stock pursuant to any employee stock purchase or benefit plan, provided that the total amount paid by Borrower for such stock does not exceed $1,000,000 in any fiscal year and (ii) make employee loans in an aggregate amount outstanding at any time not to exceed $50,000. FINANCIAL COVENANTS (Section 4.1): Borrower shall comply with all of the following covenants.Compliance shall be determined as of the end of each quarter, except as otherwise specifically provided below: QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to current liabilities of not less than 1.50 to 1. TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less than $75,000,000. DEBT TO TANGIBLE NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to tangible net worth of not more than 1.00 to 1. PROFITABILITY: Borrower shall not incur a loss (after taxes) for any fiscal quarter during the term hereof, other than for a loss (after taxes) in a single fiscal quarter; notwithstanding the foregoing permitted loss, Borrower shall not incur a loss (after taxes) for any fiscal year. DEFINITIONS: "Current assets," and "current liabilities" shall have the meanings ascribed to them in accordance with generally accepted accounting principles. "Tangible net worth" means the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, excluding however all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises. "Quick Assets" means cash on hand or on deposit in banks, readily marketable securities issued by the United States, readily marketable commercial paper rated "A-1" by Standard & Poor's Corporation (or a similar rating by a similar rating organization), certificates of deposit and banker's acceptances, and accounts receivable (net of allowance for doubtful accounts).
-2- 3 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT - -------------------------------------------------------------------------------- DEFERRED REVENUES: For purposes of the above quick asset ratio deferred revenues shall not be counted as current liabilities. For purposes of the above debt to tangible net worth ratio, deferred revenues shall not be counted in determining total liabilities but shall be counted in determining tangible net worth for purposes of such ratio. For all other purposes deferred revenues shall be counted as liabilities in accordance with generally accepted accounting principles. SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not include indebtedness which is subordinated to the indebtedness to Silicon under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon. OTHER COVENANTS (Section 4.1): Borrower shall at all times comply with all of the following additional covenants: 1. BANKING RELATIONSHIP. Borrower shall at all times maintain its primary banking relationship with Silicon, provided that the foregoing shall not restrict the Borrower's establishment of investment accounts at other institutions. 2. INDEBTEDNESS. Without limiting any of the foregoing terms or provisions of this Agreement, Borrower shall not in the future incur indebtedness for borrowed money, except for (i) indebtedness to Silicon, (ii) indebtedness incurred in the future for the purchase price of or lease of equipment in an aggregate amount not exceeding $3,500,000 on an annual basis, and (iii) the creation of trade payable obligations in the ordinary course of business. 3. SEC FILINGS AND COMMUNICATIONS. Without limitation of the provisions of Section 3.7 hereof, Borrower agrees to provide to Silicon all filings made with the Securities and Exchange Commission (the "SEC"), and copies of all notices or other communication from the SEC, within 5 days of such filing or receipt of such notice or other communication. 4. NEGATIVE PLEDGE. Except as otherwise permitted hereunder (including without limitation the incurrence of Permitted Liens as set forth in Section 3.4 of this Agreement), Borrower shall not hereafter grant a security interest in any of its present or future Collateral, other than for liens on capital equipment relating to obligations incurred pursuant to paragraph 3 above.
QLOGIC CORPORATION By /s/ THOMAS R. ANDERSON ------------------------------- President or Vice President By /s/ MICHAEL MANNING -------------------------------- Michael Manning Secretary or Ass't Secretary SILICON VALLEY BANK By: /s/ MARLA W. JOHNSON -------------------------------- Marla W. Johnson Title: Vice President -3- 4 SILICON VALLEY BANK CERTIFIED RESOLUTION BORROWER: QLOGIC CORPORATION, A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE ADDRESS: 3545 HARBOR BOULEVARD, P.O. BOX 5001 COSTA MESA, CALIFORNIA 92628 DATED AS OF: JULY 6, 1998 I, the undersigned, Secretary or Assistant Secretary of the above-named borrower, a corporation organized under the laws of the state set forth above, do hereby certify that the following is a full, true and correct copy of resolutions duly and regularly adopted by the Board of Directors of said corporation as required by law, and by the by-laws of said corporation, and that said resolutions are still in full force and effect and have not been in any way modified, repealed, rescinded, amended or revoked. RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"), from time to time, such sum or sums of money as, in the judgment of the officer or officers hereinafter authorized hereby, this corporation may require. RESOLVED FURTHER, that any officer of this corporation be, and he or she is hereby authorized, directed and empowered, in the name of this corporation, to execute and deliver to Silicon, and Silicon is requested to accept, the loan agreements, security agreements, notes, financing statements, and other documents and instruments providing for such loans and evidencing and/or securing such loans, with interest thereon, and said authorized officers are authorized from time to time to execute renewals, extensions and/or amendments of said loan agreements, security agreements, and other documents and instruments. RESOLVED FURTHER, that said authorized officers be and they are hereby authorized, directed and empowered, as security for any and all indebtedness of this corporation to Silicon, whether arising pursuant to this resolution or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or deed in trust for its benefit, any property of any and every kind, belonging to this corporation, including, but not limited to, any and all real property, accounts, inventory, equipment, general intangibles, instruments, documents, chattel paper, notes, money, deposit accounts, furniture, fixtures, goods, and other property of every kind, and to execute and deliver to Silicon any and all grants, transfers, trust receipts, loan or credit agreements, pledge agreements, mortgages, deeds of trust, financing statements, security agreements and other hypothecation agreements, which said instruments and the note or notes and other instruments referred to in the preceding paragraph may contain such provisions, covenants, recitals and agreements as Silicon may require and said authorized officers may approve, and the execution thereof by said authorized officers shall be conclusive evidence of such approval. RESOLVED FURTHER, that Silicon may conclusively rely upon a certified copy of these resolutions and a certificate of the Secretary or Ass't Secretary of this corporation as to the officers of this corporation and their offices and signatures, and continue to conclusively rely on such certified copy of these resolutions and said certificate for all past, present and future transactions until written notice of any change hereto or thereto is given to Silicon by this corporation by certified mail, return receipt requested. 5 SILICON VALLEY BANK CERTIFIED RESOLUTION - ------------------------------------------------------------------------------- The undersigned further hereby certifies that the following persons are the duly elected and acting officers of the corporation named above as borrower and that the following are their actual signatures:
NAMES OFFICE(S) ACTUAL SIGNATURES - ----- --------- ----------------- H.K. DESAI President & C.E.O. X /s/ H.K. DESAI THOMAS R. ANDERSON Vice President & C.F.O. X /s/ THOMAS R. ANDERSON MICHAEL MANNING Secretary & Treasurer X /s/ MICHAEL MANNING __________________________ _________________________ X_________________________
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or Assistant Secretary on the date set forth above. /s/ MICHAEL MANNING ------------------------------------ Michael Manning Secretary or Assistant Secretary -2- 6 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT BORROWER: QLOGIC CORPORATION ADDRESS: 3545 HARBOR BOULEVARD, P.O. BOX 5001 COSTA MESA, CALIFORNIA 92628 DATED AS OF: JULY 6, 1998 THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK ("Silicon") and the borrower named above (the "Borrower"). The parties agree to amend the Loan and Security Agreement between them, dated March 31, 1994, as amended by that Amendment to Loan and Security Agreement dated July 10, 1995 and as amended by that Amendment to Loan and Security Agreement dated July 5, 1996 (as so amended and as otherwise amended from time to time, the "Loan Agreement"), as follows, effective as of the date hereof. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. AMENDED SCHEDULE. The Schedule to the Loan Agreement is amended effective on the date hereof, to read as set forth on the Amended Schedule to Loan Agreement attached hereto. 2. DELETED REFERENCES. Section 2.2A of the Loan Agreement is deemed deleted, and all references in the Loan Agreement to the Section 2.2A Condition shall be deemed of no force and effect. 3. SECURITY INTEREST REFERENCES IN LOAN AGREEMENT; ETC. All references to the security interest or lien of Silicon in the Collateral and related provisions are hereby deleted. Further, it is understood that Silicon shall not be required to be named as loss payee on the Borrower's insurance policies, nor are insurance payments relating to the Collateral required to be forwarded to Silicon for payment of the Obligations. Further, references in the Loan Agreement to remedies of Silicon on and after an Event of Default that depend upon the existence of a security interest in the Collateral in favor of Silicon at or prior to the occurrence of an Event of Default are considered deleted, provided, however, nothing herein affects or diminishes the rights of Silicon otherwise available as set forth in the Loan Agreement or as available under law. 4. FACILITY FEE. Borrower shall pay to Silicon concurrently herewith a facility fee of $37,500, which shall be in addition to all interest and all other fees payable to Silicon and shall be non-refundable. 5. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 6. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and the Borrower, and the other written -1- 7 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT - ------------------------------------------------------------------------------- documents and agreements between Silicon and the Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and the Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: SILICON: QLOGIC CORPORATION SILICON VALLEY BANK By: /s/ THOMAS R. ANDERSON By: /s/ MARLA W. JOHNSON -------------------------------- ----------------------- Thomas R. Anderson Marla W. Johnson President or Vice President Vice President By: /s/ MICHAEL MANNING -------------------------------- Michael Manning Secretary or Ass't Secretary -2- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-28-1999 MAR-30-1998 JUN-28-1998 51,550 63,129 6,615 746 8,893 105,952 18,288 11,916 142,730 19,343 0 0 0 867 122,431 142,730 24,115 24,115 9,703 8,524 0 0 (1,349) 7,237 2,462 4,775 0 0 0 4,775 0.55 0.52
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