-----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, ISZ8PUtViLM9MPmA6WbT6oZAvi3ECig+W+Lv7LIn78JY7MyuR0OVoUkxo5CAtD1A 8HzYgj4mPDeasgS5JTsu6Q== 0000892569-99-002150.txt : 19990812 0000892569-99-002150.hdr.sgml : 19990812 ACCESSION NUMBER: 0000892569-99-002150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990811 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: 99683950 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 QUARTERLY PERIOD ENDED 06/27/99 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 27, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 0-23298 ---------------- QLOGIC CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0537669 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3545 Harbor Boulevard Costa Mesa, California 92626 - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) (714) 438-2200 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of July 25, 1999, the registrant had 36,235,346 shares of common stock outstanding. All references to share and per-share data for all periods presented have been restated for the February 1999 and July 1999 two-for-one stock splits. ================================================================================ 2 QLOGIC CORPORATION INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 27, 1999 and March 28, 1999................. 3 Condensed Consolidated Statements of Income for the three months ended June 27, 1999 and June 28, 1998........................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 27, 1999 and June 28, 1998........................................................... 5 Notes to Condensed Consolidated Financial Statements...................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 8 PART II. OTHER INFORMATION Item 2. Changes in Securities..................................................................... 19 Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QLOGIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (Unaudited) A S S E T S
June 27, March 28, 1999 1999 -------- -------- Cash and cash equivalents ........................................................ $ 50,672 $ 43,174 Short term investments ........................................................... 62,026 57,613 Accounts and notes receivable, less allowance for doubtful accounts of $740 as of June 27, 1999 and $940 as of March 28, 1999 .................... 16,329 11,917 Inventories ...................................................................... 10,338 10,623 Deferred income taxes ............................................................ 6,536 5,649 Prepaid expenses and other current assets ........................................ 3,335 1,950 -------- -------- Total current assets .................................................... 149,236 130,926 Long term investments ............................................................ 32,286 29,760 Property and equipment, net ...................................................... 10,442 10,409 Other assets ..................................................................... 1,708 1,828 -------- -------- $193,672 $172,923 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................................................. $ 5,951 $ 6,432 Accrued compensation ............................................................. 8,918 7,378 Income taxes payable ............................................................. 4,867 1,358 Deferred revenue ................................................................. 1,224 1,074 Other accrued liabilities ........................................................ 4,416 3,997 -------- -------- Total current liabilities ............................................... 25,376 20,239 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.10 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); none issued and outstanding ............................................... -- -- Common stock, $0.05 par value; 50,000,000 shares authorized; 36,146,710 and 35,922,116 shares issued and outstanding at June 27, 1999 and March 28, 1999, respectively .............................................. 903 898 Additional paid-in capital .................................................. 112,006 107,911 Retained earnings ........................................................... 55,387 43,875 -------- -------- Total stockholders' equity ................................................ 168,296 152,684 -------- -------- $193,672 $172,923 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)
Three Months Ended -------------------- June 27, June 28, 1999 1998 ------- ------- Net revenues ................................... $43,186 $24,115 Cost of revenues ............................... 13,486 9,703 ------- ------- Gross profit .............................. 29,700 14,412 ------- ------- Operating expenses: Engineering and development ............... 7,876 4,941 Selling and marketing ..................... 3,975 2,375 General and administrative ................ 1,796 1,208 ------- ------- Total operating expenses ................ 13,647 8,524 ------- ------- Operating income ............................... 16,053 5,888 Interest income, net ........................... 1,389 1,349 ------- ------- Income before income taxes ..................... 17,442 7,237 Income tax provision ........................... 5,930 2,462 ------- ------- Net income ..................................... $11,512 $ 4,775 ======= ======= Net income per share: Basic ....................................... $ 0.32 $ 0.14 ------- ------- Diluted ..................................... $ 0.30 $ 0.13 ------- ------- Number of shares used in per share calculations: Basic ....................................... 36,010 34,660 ------- ------- Diluted ..................................... 38,150 36,672 ======= =======
See accompanying notes to condensed consolidated Financial statements. 4 5 QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
Three Months Ended ------------------------ June 27, June 28, 1999 1998 ---------- --------- Cash flows from operating activities: Net income ................................................. $ 11,512 $ 4,775 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................ 1,081 679 Decrease in allowance for doubtful accounts .............. (200) -- Loss on disposal of property and equipment ............... 4 29 Provision for (benefit from) deferred income taxes ....... (887) 136 Changes in assets and liabilities: Accounts and notes receivable ............................ (4,212) 1,967 Inventories .............................................. 285 (5,058) Prepaid expenses and other current assets ................ (1,385) (7) Other assets ............................................. 25 351 Accounts payable ......................................... (481) 538 Accrued compensation ..................................... 1,540 (991) Incomes taxes payable .................................... 6,372 2,252 Other accrued liabilities ................................ 562 122 Deferred revenue ......................................... 150 52 Other non-current liabilities ............................ -- (466) -------- -------- Net cash provided by operating activities .............. 14,366 4,379 -------- -------- Cash flows from investing activities: Additions to property and equipment ...................... (1,023) (2,676) Purchases of investments ................................. (24,122) (23,883) Maturities of investments ................................ 17,183 9,434 -------- -------- Net cash used in investing activities .................. (7,962) (17,125) -------- -------- Cash flows from financing activities: Principal payments under capital leases .................. (143) (51) Proceeds from issuance of stock under employee stock plans 1,237 257 -------- -------- Net cash provided by financing activities .............. 1,094 206 -------- -------- Net increase (decrease) in cash and cash equivalents .......... 7,498 (12,540) Cash and cash equivalents at beginning of period .............. 43,174 64,090 -------- -------- Cash and cash equivalents at end of period .................... $ 50,672 $ 51,550 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest ................................................... $ 7 $ 13 ======== ======== Income taxes ............................................... $ -- $ 191 ======== ========
Non-cash investing and financing activities: During the quarter ended June 27, 1999, the Company recorded a credit to additional paid-in-capital and a debit to accrued taxes payable of $2,863 related to the tax benefit of exercises of stock options under the Company's stock option plans. Additionally, during the quarter ended June 27, 1999, the Company recorded an accrual of $166 in accordance with the performance provisions of the Silicon Design Resources Asset Acquisition Agreement. During the quarter ended June 28, 1998, the Company recorded a credit to additional paid-in-capital and a debit to accrued taxes payable of $217 related to the tax benefit of exercises of stock options under the Company's stock options plans. See accompanying notes to condensed consolidated financial statements. 5 6 QLOGIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE (1) BASIS OF PRESENTATION In the opinion of QLogic Corporation ("QLogic" or the "Company"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are normal recurring accruals) necessary to present fairly the financial position as of June 27, 1999, the statements of income for the three months ended June 27, 1999 and June 28, 1998 and the statements of cash flows for the three months ended June 27, 1999 and June 28, 1998. The accompanying financial statements should be read in conjunction with the financial statements in the Company's Annual Report on Form 10-K for the year ended March 28, 1999. The results of operations for the three months ended June 27, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year. Certain items previously reported in specific financial statement captions have been reclassified to conform to the current presentation. NOTE (2) INVENTORIES Components of inventories are as follows: June 27, March 28, 1999 1999 ------- ------- Raw materials ....................... $ 8,823 $ 7,716 Work in process ..................... 619 833 Finished goods 896 2,074 ------- ------- $10,338 $10,623 ======= ======= NOTE (3) NET INCOME PER SHARE The Company computed basic net income per share based on the weighted average number of common shares outstanding during the period presented. Diluted income per share was computed based on the weighted average number of common and dilutive potential common shares outstanding during the periods presented. The Company has granted certain stock options which have been treated as dilutive potential common shares. The following table sets forth the computations of basic and diluted net income per share:
June 27, June 28, 1999 1998 ------- -------- Numerator: Net income ........................................... $11,512 $ 4,775 ======= ======= Denominator: Denominator for basic net income per share - weighted average shares ..................................... 36,010 34,660 Dilutive potential common shares, using treasury stock method ............................................. 2,140 2,012 ------- ------- Denominator for diluted net income per share ....... 38,150 36,672 ======= ======= Basic net income per share .............................. $ 0.32 $ 0.14 ------- ------- Diluted net income per share ............................ $ 0.30 $ 0.13 ======= =======
Options to purchase 27 and 118 shares of common stock with exercise prices that exceed the average market price of $46.43 and $10.39 during the three months ended June 27, 1999 and June 28, 1998, respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive. 6 7 QLOGIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE (4) STOCK SPLITS In July 1999, the Company's Board of Directors approved a two-for-one split of the Company's common stock effected by a stock dividend applicable to stockholders of record on July 22, 1999 and was payable on July 30, 1999. All references to share and per-share data for all periods presented have been adjusted to give effect to this split as well as the two-for-one stock split effective February 1999. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis contains forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed hereunder in "Factors That May Affect Future Results" as well as those discussed elsewhere in this report. All figures are in thousands except as otherwise noted. Results of Operations The following table sets forth, for the periods indicated, certain income and expense items expressed in absolute terms and as a percentage of the Company's net revenues.
Three Months Ended ------------------------------------------- June 27, 1999 June 28, 1998 -------------------- -------------------- Net revenues .................... $43,186 100.0% $24,115 100.0% Cost of revenues ................ 13,486 31.2 9,703 40.2 ------- ----- ------- ----- Gross profit ............... 29,700 68.8 14,412 59.8 ------- ----- ------- ----- Operating expenses: Engineering and development 7,876 18.2 4,941 20.5 Selling and marketing ...... 3,975 9.2 2,375 9.9 General and administrative . 1,796 4.2 1,208 5.0 ------- ----- ------- ----- Total operating expenses 13,647 31.6 8,524 35.4 ------- ----- ------- ----- Operating income ....... $16,053 37.2% $ 5,888 24.4% ======= ===== ======= =====
Net Revenues The Company's net revenues are derived primarily from the sale of SCSI and Fibre Channel based products. The Company also licenses certain designs and receives royalty revenues and non-recurring engineering fees. Net revenues in the three months ended June 27, 1999 increased $19.1 million or 79% from the three months ended June 28, 1998 to $43.2 million. The increase was the result of a $8.7 million increase in sales of SCSI products, a $6.8 million increase in sales of Fibre Channel products, and a $3.5 million increase in IDE-based royalties. Export revenues in the three months ended June 27, 1999 increased $11.1 million or 86% from the three months ended June 28, 1998, to approximately $23.9 million, primarily due to increased sales to customers in Japan and to a lesser extent, Europe. Countries in the Pacific Rim continue to suffer from the influence of the Asian economic crisis. This could lead to widespread financial difficulty among the companies in this region. Export revenues (primarily to the Pacific Rim countries) of the Company's products amounted to $23.9 million in the three months ended June 27, 1999, and $12.8 million in the three months ended June 28, 1998. As a percentage of net revenues, export revenues accounted for 55% in the three months ended June 27, 1999, and 53% in the three months ended June 28, 1998. Export revenues are denominated in U.S. dollars. The Company does not expect the uncertainty in selected Pacific Rim foreign currency markets to have a material adverse effect on the results of the Company's operations. A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The Company believes that its major customers continually evaluate whether or not to purchase products from alternate or additional sources. Additionally, customers' economic and market conditions frequently change. Accordingly, there can also be no assurance that a major customer will not reduce, delay or eliminate its purchases from the Company. Any such reduction, delay or loss of purchases could have a material adverse effect on the Company's business, financial condition and results of operations. 8 9 Gross Profit Cost of revenues consist primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The gross profit percentage for the three months ended June 27, 1999 was 68.8%, an increase from 59.8% in the three months ended June 28, 1998. The increase in gross profit percentage was largely due to the impact of $3.5 million of IDE-based royalties received from a major customer. The percentage increase was also impacted by the introduction of new, higher margin products and volume-related cost reductions on mature products, combined with improved quality resulting in reduced scrap expenses. The Company's ability to maintain its current gross profit percentage can be significantly affected by factors such as supply costs and, in particular, the cost of silicon wafers, the worldwide semiconductor foundry capacity, the mix of products shipped, competitive price pressures, the timeliness of volume shipments of new products, the level of royalties received and the Company's ability to achieve manufacturing cost reductions. The Company anticipates that it will be increasingly more difficult to reduce manufacturing costs. Also, royalty revenues may be irregular or unpredictable. As a result of these and other factors, the Company does not anticipate gross profit percentage to increase at a rate consistent with historic trends, and, it may decline in future quarters. Operating Expenses Engineering and Development. Engineering and development expenses consist primarily of salaries and other personnel related expenses, development-related material, occupancy costs, and computer support. The Company believes that continued investments in engineering and development activities are critical to achieving its strategic objectives. The Company expects that the dollar amount of engineering and development expenses will continue to increase in fiscal 2000. During the three months ended June 27,1999, engineering and development expenses increased $3.0 million to $7.9 million from $4.9 million in the three months ended June 28, 1998. The increase in spending was largely due to increased levels of spending for Fibre Channel and SCSI design, as well as enclosure management product design. As a percentage of net revenues, engineering and development expenses decreased to 18.2% in the three months ended June 27, 1999 from 20.5% in the similar prior year period. The decrease as a percentage of net revenues was due to economies of scale realized from the growth in net revenues. Selling and Marketing. Selling and marketing expenses consist primarily of sales and marketing salaries, sales commissions and related expenses, promotional activities and travel for sales and marketing personnel. The Company believes continued investments of these types of expenses are critical to the success of its strategy of expanding relationships with its customers. As a result, the Company expects sales and marketing expenditures will increase in the future. During the three months ended June 27, 1999, selling and marketing expenses increased $1.6 million to $4.0 million from $2.4 million in the three months ended June 28, 1998. The increase in spending was largely due to increased sales commissions earned as a result of the increase in net revenues. As a percentage of net revenues, sales and marketing expenses decreased to 9.2% in the three months ended June 27, 1999 from 9.8% in the similar prior year period. The decrease was due to economies of scale realized from the growth in net revenues. General and Administrative. General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, human resources and information technology personnel. Non-personnel related expenses consist of recruiting fees, professional services and corporate expenses. The Company expects general and administrative expenses to increase in absolute dollars as it adds personnel and incurs additional costs relating to the growth of the business. During the three months ended June 27, 1999, general and administrative expenses increased $0.6 million to $1.8 million from $1.2 million in the three months ended June 28, 1998. The increase in spending was primarily due to the growth in administrative personnel and professional services. As a percentage of net revenues, general and administrative expenses decreased to 4.2% in the three months ended June 27, 1999 from 5.0% in the similar prior year period. The decrease as a percentage of net revenues was due to economies of scale realized from the growth in net revenues. Included in operating expenses in the three months ended June 27, 1999 was a $2.1 million payment to the former Chairman of the Board upon his retirement. 9 10 Non-Operating Income Interest and other income, net of interest expense, was $1.4 million for the three months ended June 27, 1999 and $1.3 million for the three months ended June 28, 1998. The increase was largely due to increases in interest income related to increases in cash equivalents and investment balances. Income Tax Provision The Company's effective tax rates remained relatively constant at approximately 34% for the three months ended June 27, 1999, and June 28, 1998. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. It further provides criteria for derivative instruments to be designated as fair value, cash flow and foreign currency hedges, and establishes respective accounting standards for reporting changes in the fair value of the instruments. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet determined the impact of adopting this new standard on the consolidated financial statements. Liquidity and Capital Resources The Company's combined balances of cash and cash equivalents, short-term and long-term investments have increased to $145.0 million at June 27, 1999 and were $130.5 million at March 28, 1999. The increase was primarily attributable to positive cash flow from operations, primarily net income growth, during the three months ended June 27, 1999. The Company's primary source of liquidity is derived from working capital and a $7.5 million unsecured line of credit with Silicon Valley Bank. Working capital increased $13.2 million to $123.9 million at June 27, 1999. The increase in working capital in the quarter ended June 27, 1999 was largely attributable to cash flow from operations. The $7.5 million line of credit facility with Silicon Valley Bank allows the Company to borrow at the bank's prime rate. The credit facility expires on July 5, 2000, and, although there can be no assurance, the Company currently expects to renew this line of credit. There are no borrowings under this credit facility at June 27, 1999. The Company's cash flow provided by operations was $14.4 million in the three months ended June 27, 1999, and $4.4 million in the three months ended June 28, 1998. The growth in cash provided by operations was primarily due to increases in profitability. Additionally, in the three months ended June 27, 1999, cash flow from operations was improved by increases in income taxes payable and accrued compensation and was offset by increases in accounts and notes receivable and prepaid expenses and other current assets. The Company's cash flow used in investing activities was $8.0 million in the three months ended June 27, 1999 compared to $17.1 million in the three months ended June 28, 1998. The decrease in cash used in investing activities for the three months ended June 27, 1999, was primarily due to decreases in purchases of short and long-term investments, net of maturing investments. Additionally, capital expenditures were $1.0 million in the three months ended June 27, 1999 and $2.7 million in the three months ended June 28, 1998. During fiscal year 2000, the Company anticipates spending between $2.5 million to $3.5 million for leasehold improvements and relocation related expenses associated with the corporate headquarters relocation to Aliso Viejo, California. The Company may exercise its option to purchase the Aliso Viejo facility, which could increase the Company's potential cash expenditures by approximately $30.0 to $35.0 million. 10 11 The Company's cash flow provided by financing activities was $1.1 million in the three months ended June 27, 1999 compared to $0.2 million in the three months ended June 28, 1998. The increase in cash provided by financing activities in the three months ended June 27, 1999 was primarily due to increases in proceeds from issuance of stock under employee stock plans. The Company believes that existing cash and cash equivalent balances, short term investments, facilities and equipment leases, and cash flows from operating activities will provide the Company with sufficient funds to finance its operations for at least the next 12 months. FACTORS THAT MAY AFFECT FUTURE RESULTS Except for the historical information contained herein, the information in this report constitutes forward-looking statements. When used in this report the words "shall," "should," "forecast," "all of," "projected," "believes," "expects," and similar expressions are intended to identify forward looking statements. In addition, the Company may from time to time make oral forward-looking statements. The Company wishes to caution readers that a number of important factors could cause results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above in "Business" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this report. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced, and expects to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful, and that such comparisons cannot be relied upon as indicators of future performance. In addition, there can be no assurance that the Company will maintain its current profitability in the future. A significant portion of the Company's net revenues in each fiscal quarter result from orders booked in that quarter. In the past, a significant percentage of the Company's quarterly bookings and sales to major customers occurred during the last month of the quarter, and there can be no assurance that this trend will not return in the future. Orders placed by major customers are typically based on their forecasted sales and inventory levels for the Company's products. Changes in purchasing patterns by one or more of the Company's major customers, customer order changes or rescheduling, gain or loss of significant customers, customer policies pertaining to desired inventory levels of the Company's products, negotiations of rebates and extended payment terms, as well as changes in the ability of the Company to anticipate in advance the mix of customer orders, could result in material fluctuations in quarterly operating results. Certain large OEM customers may require the Company to maintain higher levels of inventory, or field warehouses in an attempt to minimize their own inventories. In addition, the Company must order its products and build inventory substantially in advance of product shipments, and because the markets for the Company's products are subject to rapid technological and price changes, there is a risk the Company will forecast incorrectly and produce excess or insufficient inventory of particular products. To the extent the Company produces excess or insufficient inventory or is required to hold excess inventory, the Company's operating results could be adversely affected. Other factors that could cause the Company's sales and operating results to vary significantly from period to period include: the time, availability and sale of new products; seasonal OEM customer demand, such as the decline experienced in the fiscal quarter ended June 30, 1996; changes in the mix of products having differing gross margins; variations in manufacturing capacities, efficiencies and costs; the availability and cost of components, including silicon wafers; warranty expenses; variations in product development and other operating expenses; adoption of new accounting pronouncements and/or changes in Company policies and general economic and other conditions effecting the timing of customer orders and capital spending. The Company's quarterly results of operations are also influenced by competitive factors, including pricing and availability of the Company's and its competitors' products. Although the Company does not maintain its own wafer manufacturing facility, a large portion of the Company's expenses is fixed and difficult to reduce in a short period of time. If net revenues do not meet the Company's expectations, the Company's fixed expenses would exacerbate the effect on net income of such shortfall in net revenues. Furthermore, announcements by the Company, its competitors or others regarding new products and technologies could cause customers to defer or cancel purchases of the Company's products. Order deferrals by the Company's customers, delays in the Company's introduction of new products and longer than 11 12 anticipated design-in cycles for the Company's products have in the past adversely effected the Company's quarterly results of operations. Due to all of the foregoing factors, as well as other unanticipated factors, it is likely that in some future quarter or quarters the Company's operating results will be below the expectations of public market analysts or investors. In such event, the price of the Company's common stock would likely be materially and adversely affected. DEPENDENCE ON SMALL NUMBER OF CUSTOMERS A small number of customers account for a substantial portion of the Company's net revenues, and the Company expects that a limited number of customers will continue to represent a substantial portion of the Company's net revenues for the foreseeable future. The loss of any of the Company's major customers would have a material adverse effect on its business, financial condition and results of operations. Some of these customers are based in the Pacific Rim, which is subject to economic and political uncertainties. In addition, a majority of the Company's customers order the Company's products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase products from the Company for any extended period. Major customers also have significant leverage over the Company and may attempt to change the terms, including pricing, upon which the Company and such customers do business, which could materially adversely affect the Company's business, financial condition and results of operations. This risk is increased due to the potential for some of these customers merging or acquiring other customers of the Company. As the Company's OEM customers are pressured to reduce prices as a result of competitive factors, the Company may be required to contractually commit to price reductions for its products before it knows how, or if, cost reductions can be obtained. If the Company is unable to achieve such cost reductions, the Company's gross margins could decline and such decline could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company provides certain customers with price protection in the event that the Company reduces the prices of its products. While the Company maintains reserves for such price protection, there can be no assurance that the impact of future price reductions by the Company will not exceed the Company's reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The markets for both peripheral and host computer products are highly competitive and are characterized by short product life cycles, price erosion, rapidly changing technology, frequent product performance improvements and evolving industry standards. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of shortened product life cycles and even shorter design-in cycles, the Company's competitors have increasingly frequent opportunities to achieve design wins in next generation systems. A design win usually ensures a customer will purchase the product until a higher performance standard is available or a competitor can demonstrate a significant price/performance advantage. Most of the Company's products compete with products available from several companies, many of which have substantially greater research and development, long term guaranteed supply capacity, marketing and financial resources, manufacturing capability and customer support organizations than those of the Company. The Company believes that its future operating results will depend, in part, upon its ability to continue to improve product and process technologies and develop new technologies in order to achieve or maintain the performance advantages of products and processes relative to competitors, to adapt products and processes to technological changes, and to identify and adopt emerging industry standards. Because of the complexity of its products, the Company has experienced delays from time to time in completing products on a timely basis. If the Company is unable to design, develop and introduce competitive new products on a timely basis, its future operating results would be materially and adversely affected. The Company currently competes primarily with Texas Instruments, Adaptec, Inc. and LSI Logic in the SCSI sector of the I/O market. In the Fibre Channel sector of the I/O market, the Company competes primarily with Texas Instruments, LSI Logic, Hewlett-Packard Company and Emulex Corporation. In the IDE sector, the Company competes with STMicroelectronics and Cirrus Logic, Inc. In the enclosure management sector, the Company competes primarily with the Symbios division of LSI Logic and the Serano division of Vitesse Semiconductor Corporation. The Company may compete with some of its larger disk drive and computer systems customers, some of which have the capability to develop I/O controller integrated circuits for use in their own products. At least one large OEM customer in the past has decided to vertically integrate and has therefore ceased purchases from the Company. 12 13 The Company will need to continue to develop products appropriate to its markets to remain competitive as its competitors continue to introduce products with improved performance characteristics. While the Company continues to devote significant resources to research and development, there can be no assurance that such efforts will be successful or that the Company will develop and introduce new technology and products in a timely manner. Further, several of the Company's competitors have greater resources devoted to securing semiconductor foundry capacity (e.g. long-term agreements regarding supply flow, equity or financing agreements or direct ownership of a foundry). In addition, while relatively few competitors offer a full range of SCSI and other I/O products, additional domestic and foreign manufacturers may increase their presence in, and resources devoted to, these markets. There can be no assurance that the Company will compete successfully in the future. DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS The Company currently relies on several independent foundries to manufacture its semiconductor products either in finished form or wafer form. Generally, the Company conducts business with some of its foundries through written purchase orders as opposed to long-term supply contracts and, therefore, such foundries are generally not obligated to supply products to the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order as may be accepted by a foundry. To the extent a foundry terminates its relationship with the Company or should the Company's supply from a foundry be interrupted or terminated for any other reason, the Company may not have a sufficient amount of time to replace the supply of products manufactured by that foundry. Historically, there have been periods when there has been a worldwide shortage of advanced process technology foundry capacity. The manufacture of semiconductor devices is subject to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. The Company is continuously evaluating potential new sources of supply. However, the qualification process and the production ramp-up for additional foundries has in the past taken, and could in the future take, longer than anticipated. There can be no assurance that new supply sources will be able or willing to satisfy the Company's wafer requirements on a timely basis or at acceptable quality or unit prices. While the quality, yield and timeliness of wafer deliveries to date have been acceptable, there can be no assurance that manufacturing yield problems will not occur in the future. The Company is using multiple sources of supply for certain of its products, which may require the Company's customers to perform separate product qualifications. The Company has not, however, developed alternate sources of supply for certain other products and its newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. In particular, the Company's integrated single chip Fibre Channel controller is manufactured by LSI Logic and integrates LSI Logic's transceiver technology. In the event that LSI Logic is unable or unwilling to satisfy the Company's requirements for this technology, the Company's marketing efforts related to Fibre Channel products would be delayed and, as such, its results of operations could be materially and adversely effected. The requirement that a customer perform separate product qualifications or a customer's inability to obtain a sufficient supply of products from the Company may cause that customer to satisfy its product requirements from the Company's competitors, which would adversely affect the Company's results of operations. The Company's ability to obtain satisfactory wafer and other supplies is subject to a number of other risks. These risks include that the Company's suppliers may be subject to injunctions arising from alleged violations of third party intellectual property rights. The enforcement of such an injunction could impede a supplier's ability to provide wafers, components or packaging services to the Company. In addition, the Company's flexibility to move production of any particular product from one foundry to another can be limited in that such a move can require significant re-engineering, which may take several quarters. These efforts also divert engineering resources which otherwise could be dedicated to new product development, which would adversely affect new product development schedules. Accordingly, production may be constrained even though capacity is available at one or more foundries. In addition, the Company could encounter supply shortages if sales grow substantially. The Company uses domestic and offshore subcontractors for die assembly of its semiconductor products purchased in wafer form, and for assembly of its host adapter board products. The Company's reliance on independent subcontractors to provide these services involves a number of risks, including the absence of guaranteed capacity and reduced control over delivery schedules, quality assurance and costs. The Company is also subject to the risks of shortages and increases 13 14 in the cost of raw materials used in the manufacture or assembly of the Company's products. In addition, the Company may receive orders for large volumes of products to be shipped within short periods, and the Company may not have sufficient testing capacity to fill such orders. Constraints or delays in the supply of the Company's products, whether because of capacity constraints, unexpected disruptions at the Company's foundries or subcontractors, delays in obtaining additional production at the existing foundries or in obtaining production from new foundries, shortages of raw materials or other reasons, could result in the loss of customers and other material adverse effects on the Company's operating results, including those that may result should the Company be forced to purchase products from higher cost foundries or pay expediting charges to obtain additional supply. TRANSACTIONS TO OBTAIN MANUFACTURING CAPACITY; FUTURE CAPITAL NEEDS The Company is not currently experiencing any difficulties in obtaining sufficient foundry capacity due to the current availability of worldwide semiconductor fabrication capacity. However, the Company and the semiconductor industry have, in the past, experienced shortages of available foundry capacity. Accordingly, in order to secure an adequate supply of wafers, especially wafers manufactured using advanced process technologies, the Company may consider various possible transactions, including the use of "take or pay" contracts that commit the Company to purchase specified quantities of wafers over extended periods or equity investments in, or advances to, wafer manufacturing companies in exchange for guaranteed production capacity, or the formation of joint ventures to own and operate or construct foundries or to develop certain products. Any of these transactions would involve financial risk to the Company and could require the Company to commit substantial capital or provide technology licenses in return for guaranteed production capacity. The need to commit substantial capital may require the Company to seek additional equity or debt financing. The sale or issuance of additional equity or convertible debt securities could result in dilution to the Company's stockholders. There can be no assurance that such additional financing, if required, will be available on terms acceptable to the Company. RELIANCE ON HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKET A significant portion of the Company's host adapter board products and hard disk drive controller products are ultimately used in high-performance file servers, workstations and other office automation products. The Company's growth has been supported by increasing demand for sophisticated I/O solutions which support database systems, servers, workstations, Internet/Intranet applications, multimedia and telecommunications. Should there be a slowing in the growth of demand for such systems, the Company's business, financial condition and results of operations could be materially and adversely affected. As a supplier of controller products to manufacturers of computer peripherals such as disk drives and other data storage devices, a portion of the Company's business is dependent on the overall market for computer peripherals. This market, which itself is dependent on the market for computers, has historically been characterized by periods of rapid growth followed by periods of oversupply and contraction. As a result, suppliers to the computer peripherals industry from time to time experience large and sudden fluctuations in demand for their products as their customers adjust to changing conditions in their markets. If these fluctuations are not accurately anticipated, such suppliers, including the Company, could produce excessive or insufficient inventories of various components, which could have a material adverse effect on the Company's business, financial condition, and results of operations. RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS; INDUSTRY STANDARDS The markets in which the Company and its competitors compete are characterized by rapidly changing technology, evolving industry standards and continuing improvements in products and services. The Company's future success depends on its ability to enhance its current products and to develop and introduce in a timely manner new products that keep pace with technological developments and industry standards, compete effectively on the basis of price and performance, adequately address OEM customer and end-user customer requirements and achieve market acceptance. The Company believes that to remain competitive in the future it will need to continue to develop new products, which will require the investment of significant financial resources in new product development. In anticipation of the implementation of Fibre Channel data transfer interface technologies, the Company has invested, and will continue to invest, significant resources in developing its integrated circuit single chip PCI to Fibre Channel controllers. There can be no assurance that Fibre Channel will be adopted as a predominant industry standard. The Company is aware of products for alternative I/O standards and enabling 14 15 technologies being developed by its competitors. The Company believes that certain competitors, including Adaptec, Inc., have extensive development efforts related to products based on new parallel SCSI I/O technology. There can be no assurance that such technology will not be adopted as an industry standard and if an alternative standard is adopted, there can be no assurance the Company will timely develop products for such standard. Further, even if Fibre Channel is adopted, there can be no assurance that the Company's integrated PCI to Fibre Channel controller will be fully developed in time to be accepted for use in Fibre Channel technology or that, if developed, will achieve market acceptance, or be capable of being manufactured at competitive prices in sufficient volumes. In the event that Fibre Channel is not adopted as an industry standard, or that the Company's integrated circuit PCI to Fibre Channel controllers are not timely developed or do not gain market acceptance, the Company's business, financial condition and results of operations could be materially and adversely affected. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as IDE, SCSI, Ultra SCSI, Ultra2 SCSI, Ultra3 SCSI and PCI. In addition, the Company's Fibre Channel products have been designed to conform to a standard that has yet to be uniformly adopted. The Company's products must be designed to operate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, operating system software and peripherals. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading microprocessor, systems and peripheral suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability. If industry acceptance of these standards was to decline or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business, financial condition and results of operations could be materially and adversely affected. The Company could experience delays in product development that are common in the computer and semiconductor industry. Significant delays in product development and release would adversely effect the Company's business, financial condition and results of operations. There can be no assurance that the Company will respond effectively to technological changes, new product announcements by other companies or that the Company's research and development efforts will be successful. Furthermore, introduction of new products and moving production of existing products to different suppliers involves substantial business risks because of the possibility of product "bugs" or performance problems, in which event the Company could experience significant product returns, warranty expenses and expedite charges, in addition to lower sales and lower profits. IDENTIFICATION AND INTEGRATION OF ACQUISITIONS The Company anticipates that its future growth may depend in part on its ability to identify and acquire complementary businesses, technologies or product lines that are compatible with those of the Company. Acquisitions involve numerous risks, including uncertainties in identifying and pursuing acquisitions, difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks associated with entering markets or conducting operations with which the Company has no or limited direct prior experience, the potential loss of current customers and/or retention of the acquired Company's customers and the potential loss of key employees of the acquired company. Moreover, there can be no assurance that the anticipated benefits of an acquisition will be realized. There can be no assurance that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. Future acquisitions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, all of which could materially adversely affect the Company's business, financial condition, results of operations or stock price. With respect to recording future business combinations the FASB has announced it may abolish the pooling-of-interests accounting treatment as well as the accounting treatment of acquired in-process research and development. The proposal would affect transactions after January 1, 2001. If the FASB does eliminate pooling-of-interests accounting treatment, the Company's ability to consummate a business combination without incurring goodwill would be adversely affected. 15 16 DEPENDENCE ON KEY PERSONNEL The Company's future success is highly dependent on the continued services of its key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers, and its ability to identify and hire additional personnel. The loss of the services of key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that the market for key personnel in the industries in which it competes is highly competitive. In particular, periodically the Company has experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipates that competition for such personnel will increase in the future. There can be no assurance that the Company will be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future, or to manage the Company's business, both in the United States and abroad. RISKS OF DOING BUSINESS IN INTERNATIONAL MARKETS The Company expects that export revenues will continue to account for a significant percentage of the Company's net revenues for the foreseeable future. As a result, the Company is subject to several risks, which include: a greater difficulty of administering its business globally; compliance with multiple and potentially conflicting regulatory requirements, such as export requirements, tariffs and other barriers; differences in intellectual property protections; difficulties in staffing and managing foreign operations; potentially longer accounts receivable cycles; currency fluctuations; export control restrictions; overlapping or differing tax structures; political and economic instability; and general trade restrictions. A significant amount of the Company's customers and suppliers are located in Japan. Recently, the Asian markets have suffered property price deflation. This asset deflation has taken place especially in countries that have had a collapse in both their currency and stock markets. These deflationary pressures have reduced liquidity in the banking systems of the affected countries and, when coupled with spare industrial production capacity, could lead to widespread financial difficulty among the companies in this region. The Company's export sales are invoiced in U.S. dollars and, accordingly, if the relative value of the U.S. dollar in comparison to the currency of the Company's foreign customers should increase, the resulting effective price increase of the Company's products to such foreign customers could result in decreased sales. There can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's business, financial condition and results of operations. LACK OF SIGNIFICANT PATENT PROTECTION; INFRINGEMENT RISKS Although the Company has patent protection on certain aspects of its technology in certain jurisdictions, it relies primarily on trade secrets, copyrights and contractual provisions to protect its proprietary rights. There can be no assurance that these protections will be adequate to protect its proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that the Company can maintain such technology as trade secrets. There also can be no assurance that any patents the Company possesses will not be invalidated, circumvented or challenged. In addition, the laws of certain countries in which the Company's products are or may be developed, manufactured or sold, including various countries in Asia, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States or at all. The failure of the Company to protect its intellectual property rights could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has experienced intellectual property claims being made against it in the past. There can be no assurance that patent or other intellectual property infringement claims will not be asserted against the Company or its suppliers in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and there can be no assurance that necessary licenses or similar arrangements would be available to the Company on satisfactory terms or at all. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent the Company from manufacturing and selling certain of its products, which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, should the Company decide to, or be forced to, litigate such claims, such litigation could be expensive and time consuming, could divert management's attention from other matters or could otherwise have a material adverse effect on the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. The Company's supply of wafers and other components can also be interrupted by intellectual property infringement claims against its suppliers. 16 17 YEAR 2000 The information provided below constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure Act. Many existing computer systems and applications, and other control devices, use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can process data related to the year 2000 and beyond. The Company relies on its systems, applications and devices in operating and monitoring all major aspects of its business, including financial systems, customer services, infrastructure, embedded computer chips, networks and telecommunications equipment and products. The Company has initially assessed how it may be impacted by Year 2000 and has formulated and commenced implementation of a comprehensive plan to address certain aspects of the Year 2000 problem. The potential impacts to the Company identified by the plan include internal information technology ("IT") systems, internal non-IT systems, including embedded technology, the Company's products, and the readiness of significant third parties with whom the Company has material relationships. Internal IT Systems. The Company has formed a Year 2000 committee that oversees the Company's Year 2000 readiness activities. The Year 2000 committee has executive sponsorship and periodically reports status to the Audit Committee of the Board of Directors. The Year 2000 committee is charged with raising awareness throughout the company, developing tools and methodologies for internally addressing the Year 2000 issue, developing and monitoring plans to bring non-compliant applications and infrastructure into compliance and identifying and resolving high-risk Year 2000 issues. The Company is addressing Year 2000 issues in a phased approach consisting of the following phases: (1) assessment, (2) planning, (3) preparation and (4) implementation. The assessment phase consists of taking an inventory of the Company's internal IT and non-IT systems and assessing risk, identifying potential solutions and estimating repair or remediation costs. The planning phase consists of identifying tasks to ensure Year 2000 readiness, identifying mission-critical applications and infrastructure, and coordinating testing dates and remediation timing. The third phase, preparation, includes coordinating the remediation process; and the implementation phase involves testing, repair and/or replacement of non-compliant application and infrastructure. The implementation phase will be concluded with establishing contingency plans for the Company's mission-critical systems and infrastructure. The Company has completed testing and remediation efforts for its critical and non-critical information systems and will continue to monitor them to ensure they are Year 2000 compliant. Internal Non-IT Systems. The Company's non-IT systems include, but are not limited to, those systems that are not commonly thought of as IT systems, such as telephone and voice mail systems, building access and security systems, facility environmental systems and other equipment with embedded technology. The Company has completed remediation efforts for its critical internal non-IT systems and will continue to monitor them to ensure they are Year 2000 compliant. The remaining non-critical non-IT systems are in the implementation phase and remediation is expected to be completed by September 30, 1999. Products. The Company's products include I/O and enclosure management semiconductors as well as I/O host bus adapter products. The Company has completed an assessment of its products and has determined they do not contain specific date functions that would be impacted by the change in the century. Material Third-Party Relationships. The Company's material third-party suppliers include key suppliers, contract manufacturers, vendors and business partners. The process for evaluating third-party risk includes the following steps: (1) distribution of an initial readiness assessment, (2) if necessary, a comprehensive risk assessment combined with telephone or on site interviews, and (3) preparing contingency plans based on the assessed risk for each third party relationship. The Company has received responses from its initial readiness assessment and is collecting secondary assessments and conducting necessary interviews. The assessment and interview phase is expected to be completed by August 31, 1999, and contingency plans finalized by September 30, 1999. 17 18 The Company currently estimates that the costs associated with the Year 2000 should not have a material adverse effect on the results of operations or financial position of the Company in any given year. Historical amounts spent on assessment, planning, preparation and implementation have not been material to the results of operations. The Company believes its greatest risks related to the Year 2000 issue involve its relationships with its critical third party suppliers and service providers. Potential impacts to the Company include an interrupted product flow from critical suppliers due to their Year 2000 interruptions, supplier allocation or limiting products and/or sub-assemblies due to unforeseen product shortages, a decline in customer orders after December 31, 1999 due to customers building up inventory levels prior to that date, potential infrastructure collapse such as interruptions in public utilities, electricity or telecommunications. Any of the foregoing risks, as well as the fruition of a combination of lesser risks, could adversely impact the Company's financial condition and results of operations. Contingency plans to mitigate or reduce these risks are being formulated to address each area of the Company's Year 2000 compliance plan, and are expected to be completed by September 30, 1999. However, as many of the third party service providers such as the public utilities are outside of the Company's control, and the Company does not have the ability to independently verify the Year 2000 readiness statements of third parties, there can be no assurance that a material adverse impact to the Company's financial condition or results of operations would not occur. VOLATILITY OF STOCK PRICE The market price of the common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. Future announcements concerning the Company or its competitors or customers, quarterly variations in operating results, the introduction of new products or changes in product pricing policies by the Company or its competitors, conditions in the semiconductor industry, changes in earnings estimates by analysts, market conditions for high technology stocks in general, and the potential for a shareholder lawsuit, or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially. In addition, stock markets have experienced extreme price and volume volatility in recent years and stock prices of technology companies have been especially volatile. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations could adversely affect the market price of the Company's common stock. POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS Pursuant to the Company's Restated Certificate of Incorporation, as amended, the Board of Directors is authorized to approve the issuance of shares of currently undesignated preferred stock, to determine the price, powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed on any unissued series of the preferred stock, and to fix the number of shares constituting any such series and the designation of such series, without any vote or future action by the stockholders. Pursuant to this authority, the Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one preferred stock purchase right for each outstanding share of the Company's common stock. Concurrently with the February 1999 two-for-one stock split, each "post-split" share was adjusted to carry one-half-right per share of common stock. Concurrently with the July 1999 two-for-one stock split, each "post-split" share was adjusted to carry one-quarter-right per share of common stock. The Shareholder Rights Plan, the undesignated preferred stock and certain provisions of the Delaware law may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Company's common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock. FACILITIES The Company currently occupies an 97,000 square foot facility in Costa Mesa, California containing its corporate, principle product development, and sales personnel, as well as its operational facilities. QLogic has entered into a ten-year lease agreement to expand and relocate its Costa Mesa operations to a 165,000 square foot facility in Aliso Viejo, California. The lease commences upon completion of the construction of the facility, expected in November 1999 to February 2000. There can be no assurance the Company will continue to grow and fully utilize its expanded facility. As a result, the Company may incur additional costs associated with carrying facility expansion capabilities, which could adversely impact future earnings. Additionally, the Company will experience additional costs associated with the relocation, which may adversely impact future earnings. The Company may experience an adverse impact to future earnings due to loss of management focus or business interruption related to issues surrounding the relocation of operations. The Company's current headquarters in Costa Mesa, California and the future site in Aliso Viejo, California are located near major earthquake faults. The Company is not specifically insured for earthquakes, or other such natural disasters. Any personal injury or damage to the facilities as a result of such occurrences could have a material adverse effect on the Company's business, results of operations and financial condition. 18 19 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES (a) Effective July 30, 1999, the Registrant's Common Stock was split in a 2-for-1 stock split effected by a stock dividend with a record date of July 22, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Item Caption - ----------- ------------ 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, A Delaware Corporation, Emulex Corporation, a California Corporation and Qlogic Corporation.(1) 3.1 Certificate of Incorporation of Emulex Micro Devices Corporation, dated November 13, 1992.(1) 3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1) 3.3 Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993.(1) 3.4 By-Laws of QLogic Corporation.(1) 3.5 Amendments to By-Laws of Qlogic Corporation.(4) 3.6 Certificate of Amendment of Certification of Incorporation, dated February 15, 1999.(9) 10.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan.*(1) 10.1.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan, as amended.*(9) 10.2 Form of QLogic Corporation Stocks Awards Plan.*(1) 10.2.1 Form of QLogic Corporation Stocks Awards Plan, as amended.*(9) 10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and QLogic Corporation.(1) 10.4 Administrative Services Agreement, dated as of February 21, 1993, among Emulex Corporation, a California corporation, Emulex Corporation, a Delaware corporation and QLogic Corporation.(1) 10.5 Employee Benefits Allocation Agreement, dated as of January 24, 1994, among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and QLogic Corporation.(1) 10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex Corporation, a California corporation, QLogic Corporation and C.J. Segerstrom & Sons, a general partnership.(1) 10.7 Intellectual Property Assignment and Licensing Agreement, dated as of January 24, 1994, between Emulex Corporation, a California Corporation, and QLogic Corporation.(1) 10.8 Form of QLogic Corporation Savings Plan.*(1) 10.9 Form of QLogic Corporation Savings Plan Trust.*(1) 10.10 Loan and Security Agreement with Silicon Valley Bank.(7) 10.11 Form of Indemnification Agreement between QLogic Corporation and Directors.(3) 10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between QLogic Corporation and Emulex Corporation.(3) 10.13 Industrial Lease Agreement between the Registrant, as lessee, and AEW/Parker South, LLC, as lessor.(8) 10.14 Press release related to February 15, 1999 stock split.(8) 10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(9) 10.16 Loan and Security Agreement with Silicon Valley Bank.(10) 10.17 Press release related to July 30, 1999 stock split.(10) 21.1 Subsidiaries of the registrant.(10) 27 Financial Data Schedule.(10) 19 20 (b) Reports on Form 8-K The Registrant filed Form 8-K on May 23, 1999, with respect to the retirement of the Company's Chairman of the Board, Gary E. Liebl, reported under Item 5. (1) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 filed January 28, 1994 and incorporated herein by reference. (2) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April3, 1994 and incorporated herein by reference. (3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April 2, 1995 and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 31, 1996 and incorporated herein by reference. (5) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A filed June 19, 1996, and incorporated herein by reference. (6) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A/A filed November 25, 1997, and incorporated herein by reference. (7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the quarter ended June 28, 1998, and incorporated herein by reference. (8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the quarter ended December 27,1998, and incorporated herein by reference. (9) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999 an incorporated herein by reference. (10) New exhibit filed with this report. * Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QLOGIC CORPORATION Date: August 11, 1999 By: /s/ H. K. DESAI --------------------------------- H.K. Desai Chairman, Chief Executive Officer and President By: /s/ THOMAS R. ANDERSON --------------------------------- Thomas R. Anderson Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 21 22 EXHIBIT INDEX Exhibit No. Item Caption - ----------- ------------ 2.1 Distribution Agreement dated as of January 24, 1994 among Emulex Corporation, A Delaware Corporation, Emulex Corporation, a California Corporation and Qlogic Corporation.(1) 3.1 Certificate of Incorporation of Emulex Micro Devices Corporation, dated November 13, 1992.(1) 3.2 EMD Incorporation Agreement, dated as of January 1, 1993.(1) 3.3 Certificate of Amendment of Certificate of Incorporation, dated May 26, 1993.(1) 3.4 By-Laws of QLogic Corporation.(1) 3.5 Amendments to By-Laws of QLogic Corporation.(4) 3.6 Certificate of Amendment of Certification of Incorporation, dated February 15, 1999.(9) 10.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan.*(1) 10.1.1 Form of QLogic Corporation Non-Employee Director Stock Option Plan, as amended.*(9) 10.2 Form of QLogic Corporation Stocks Awards Plan.*(1) 10.2.1 Form of QLogic Corporation Stocks Awards Plan, as amended.*(9) 10.3 Form of Tax Sharing Agreement among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and Qlogic Corporation.(1) 10.4 Administrative Services Agreement, dated as of February 21, 1993, among Emulex Corporation, a California corporation, Emulex Corporation, a Delaware corporation and QLogic Corporation.(1) 10.5 Employee Benefits Allocation Agreement, dated as of January 24, 1994, among Emulex Corporation, a Delaware corporation, Emulex Corporation, a California corporation, and QLogic Corporation.(1) 10.6 Form of Assignment, Assumption and Consent Re: Lease among Emulex Corporation, a California corporation, QLogic Corporation and C.J. Segerstrom & Sons, a general partnership.(1) 10.7 Intellectual Property Assignment and Licensing Agreement, dated as of January 24, 1994, between Emulex Corporation, a California Corporation, and QLogic Corporation.(1) 10.8 Form of QLogic Corporation Savings Plan.*(1) 10.9 Form of QLogic Corporation Savings Plan Trust.*(1) 10.10 Loan and Security Agreement with Silicon Valley Bank.(7) 10.11 Form of Indemnification Agreement between QLogic Corporation and Directors.(3) 10.12 Supplement to Tax Sharing Agreement, dated June 2, 1995, between QLogic Corporation and Emulex Corporation.(3) 10.13 Industrial Lease Agreement between the Registrant, as lessee, and AEW/Parker South, LLC, as lessor.(8) 10.14 Press release related to February 15, 1999 stock split.(8) 10.15 Form QLogic Corporation 1998 Employee Stock Purchase Plan.(9) 10.16 Loan and Security Agreement with Silicon Valley Bank.(10) 10.17 Press release related to July 30, 1999 stock split.(10) 21.1 Subsidiaries of the registrant.(10) 27 Financial Data Schedule.(10) 23 EXHIBIT INDEX (Continued) (1) Previously filed as an exhibit to Registrant's Registration Statement on Form 10 filed January 28, 1994 and incorporated herein by reference. (2) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April 3, 1994 and incorporated herein by reference. (3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April 2, 1995 and incorporated herein by reference. (4) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 31, 1996 and incorporated herein by reference. (5) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A filed June 19, 1996, and incorporated herein by reference. (6) Previously filed as an exhibit to Registrant's Registration Statement on Form 8-A/A filed November 25, 1997, and incorporated herein by reference. (7) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the quarter ended June 28, 1998, and incorporated herein by reference. (8) Previously filed as an exhibit to Registrant's Report on Form 10-Q for the quarter ended December 27,1998, and incorporated herein by reference. (9) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999 an incorporated herein by reference. (10) New exhibit filed with this report. * Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. (b) Reports on Form 8-K The Registrant filed Form 8-K on May 23, 1999, with respect to the retirement of the Company's Chairman of the Board, Gary E. Liebl, reported under Item 5. EX-10.16 2 LOAN AND SECURITY AGREEMENT 1 EXHIBIT 10.16 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT Borrower: QLogic Corporation Address: 3545 Harbor Boulevard, P.O. Box 5001 Costa Mesa, California 92628 Dated as of: July 6, 1999 THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK ("Silicon") and the borrower named above (the "Borrower"). The parties agree to amend the Loan and Security Agreement between them, dated March 31, 1994, as amended by that Amendment to Loan and Security Agreement dated July 10, 1995, as amended by that Amendment to Loan and Security Agreement dated July 5, 1996 and as amended by that Amendment to Loan Agreement dated as of July 6, 1998 (as so amended and as otherwise amended from time to time, the "Loan Agreement"), as follows, effective as of the date hereof. (Capitalized terms used but not defined in this Amendment, shall have the meanings set forth in the Loan Agreement.) 1. AMENDED CREDIT LIMIT. The section of the Schedule to the Loan Agreement entitled "Credit Limit (Section 1.1)" is amended effective on the date hereof, to read as follows: "CREDIT LIMIT (Section 1.1): An amount not to exceed $5,000,000; Provided, however, that the minimum amount of a Loan shall be $100,000; Letters of Credit Silicon, in its reasonable discretion, will from time to time during the term of this Agreement issue letters of credit for the account of the Borrower ("Letters of Credit"), in an aggregate amount at any one time outstanding not to exceed $3,000,000, upon the request of the Borrower, provided that, on the date the Letters of Credit are to be issued, Borrower has available to it Loans in an amount equal to or greater than the face amount of the Letters of Credit to be issued. Prior to the issuance of any Letters of Credit, Borrower shall execute and deliver to Silicon Applications for Letters of Credit and such other documentation as Silicon shall specify (the "Letter of Credit Documentation"). Fees for the Letters of Credit shall be as provided in the Letter of Credit Documentation. The Loans available under this Agreement at any time shall be reduced by the face amount of Letters of Credit from time to time outstanding." -1- 2 2. AMENDED MATURITY DATE. The section of the Schedule to the Loan Agreement entitled "Maturity Date (Section 5.1)" is amended effective on the date hereof, to read as follows: "MATURITY DATE (Section 5.1): JULY 5, 2000. 3. AMENDED FINANCIAL COVENANTS. The section of the Schedule to the Loan Agreement entitled "Financial Covenants (Section 4.1)" is amended effective on the date hereof, to read as follows: "FINANCIAL COVENANTS (Section 4.1): Borrower shall comply with all of the following covenants. Compliance shall be determined as of the end of each quarter, except as otherwise specifically provided below: QUICK ASSET RATIO: Borrower shall maintain a ratio of "Quick Assets" to current liabilities of not less than 2.50 to 1. TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not less than $100,000,000. DEBT TO TANGIBLE NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to tangible net worth of not more than 1.00 to 1. PROFITABILITY Borrower shall not incur a loss (after taxes) for any fiscal quarter during the term hereof, other than for a loss (after taxes) in a single fiscal quarter; notwithstanding the foregoing permitted loss, Borrower shall not incur a loss (after taxes) for any fiscal year. DEFINITIONS: "Current assets," and "current liabilities" shall have the meanings ascribed to them in accordance with generally accepted accounting principles. "Tangible net worth" means the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, excluding however all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights, capitalized software and organizational costs, licenses and franchises. "Quick Assets" means cash on hand or on deposit in banks, readily marketable securities issued by the United States, readily marketable commercial paper rated "A-1" by Standard & Poor's Corporation (or a similar rating by a similar rating organization), certificates of deposit and banker's acceptances, and accounts receivable (net of allowance for doubtful accounts). DEFERRED REVENUES: For purposes of the above quick asset ratio deferred revenues shall not be counted as current liabilities. For purposes of the above debt to tangible net worth ratio, deferred revenues shall not be counted in determining total liabilities but shall be counted in determining tangible net worth for purposes of such ratio. For all other purposes deferred revenues shall be counted as liabilities in accordance with generally accepted accounting principles. -2- 3 SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants do not include indebtedness which is subordinated to the indebtedness to Silicon under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon." 4. FACILITY FEE. Borrower shall pay to Silicon concurrently herewith a facility fee of $25,000, which shall be in addition to all interest and all other fees payable to Silicon and shall be non-refundable. 5. REPRESENTATIONS TRUE. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. 6. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and the Borrower, and the other written documents and agreements between Silicon and the Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and the Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. BORROWER: SILICON: QLOGIC CORPORATION SILICON VALLEY BANK BY BY ----------------------------------- ------------------------------ PRESIDENT OR VICE PRESIDENT TITLE ---------------------------- BY ----------------------------------- SECRETARY OR ASS'T SECRETARY -3- EX-10.17 3 PRESS RELEASE RELATED TO JULY 30, 1999 STOCK SPLIT 1 EXHIBIT 10.17 FOR IMMEDIATE RELEASE EDITOR'S CONTACT: Thomas R. Anderson Michael R. Manning Vice President, CFO Secretary & Treasurer QLogic Corporation QLogic Corporation Phone: 714/668-5092 Phone: 714/668-5344 Fax: 714/668-5090 Fax: 714/668-5090 QLOGIC CORPORATION ANNOUNCES 2-FOR-1 STOCK SPLIT Costa Mesa, Calif., July 14, 1999 - QLogic Corporation (Nasdaq:QLGC), a leader in the I/O industry, announced today that its Board of Directors approved a two-for-one stock split of the Company's issued and outstanding common stock to be effected by way of a stock dividend. On the ex-dividend date of July 30, 1999, stockholders will be entitled to receive one additional share for every share they own on the record date of July 22, 1999. Following the effective date of the split, QLogic will have approximately 36 million shares outstanding. QLogic Corporation is a leading designer and supplier of semiconductor and board-level I/O (input/output) and enclosure management products. The Company's products provide high-performance interface connections between computer systems and their attached data storage peripherals, such as hard disk drives, tape drives and RAID subsystems. In addition, QLogic provides enclosure management products that monitor and communicate management information related to components that are critical to computer system and storage subsystem reliability and availability. QLogic's highly integrated, fully featured solutions are targeted at the computer system, storage device and storage subsystem marketplaces. The Company believes that its I/O and enclosure management solutions encompass one of the industry's broadest ranges of Fibre Channel and SCSI technologies, and offer OEM customers a simple, low risk migration path between technologies. With the exception of historical information, the statements set forth above constitute forward-looking statements that involve risks and uncertainties. The Company wishes to advise readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include new and changing technologies and customer acceptance of those technologies; a change in semiconductor foundry capacity or conditions; fluctuations in the growth of I/O markets; fluctuations or cancellations in orders from OEM customers; factors relating to Year 2000 problems or compliance programs; the Company's ability to compete effectively with other companies; cancellation of OEM products associated with design wins; and increased costs of operations due to facility relocation. Historic royalty revenues are not indicative of royalty revenues to be received in the future. Furthermore, royalty revenue streams may fluctuate significantly over time and are subject to sudden reduction when alternative designs are implemented. The Company undertakes no obligation to update the information herein. These or other factors which could cause results to differ materially from those in the forward looking statements are mentioned in the Company's Form 10-K or Form 10-Q filings with the Securities and Exchange Commission. More information on QLogic is available from the Company's SEC filings. Contact QLogic Corporation, 3545 Harbor Blvd., Costa Mesa, CA 92626. Sales 800/662-4471. Corporate 714/438-2200. World Wide Web http://www.qlc.com. (1) EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 QLOGIC CORPORATION Subsidiaries of Registrant QLogic Foreign Sales Corporation, A U.S. Virgin Islands Corporation QLogic Enclosure Management Products, Inc. EX-27 5 FINANCIAL DATA SCHEDULE
5 3-MOS APR-02-2000 MAR-29-1999 JUN-27-1999 50,672 94,312 16,979 740 10,338 149,236 26,197 15,755 193,672 25,376 0 0 0 903 167,393 193,672 43,186 43,186 13,486 13,647 0 0 (1,389) 17,442 5,930 11,512 0 0 0 11,512 0.32 0.30
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