-----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, GdoPMBDbAVqNUb5bKrU5EtDCV6MiD49SU81tXm/bf2WzURX1J6B08AneGNB3333c 4WboGKO/Lpr9RYKlI4+UtQ== /in/edgar/work/20000816/0001095811-00-002869/0001095811-00-002869.txt : 20000922 0001095811-00-002869.hdr.sgml : 20000922 ACCESSION NUMBER: 0001095811-00-002869 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000702 FILED AS OF DATE: 20000816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QLOGIC CORP CENTRAL INDEX KEY: 0000918386 STANDARD INDUSTRIAL CLASSIFICATION: [3674 ] IRS NUMBER: 330537669 STATE OF INCORPORATION: DE FISCAL YEAR END: 0328 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23298 FILM NUMBER: 704276 BUSINESS ADDRESS: STREET 1: 26650 LAGUNA HILLS DR CITY: ALLISO VIEJO STATE: CA ZIP: 92656 BUSINESS PHONE: 7144382200 MAIL ADDRESS: STREET 1: 26650 LAGUNA HILLS DR CITY: ALLISO VIEJO STATE: CA ZIP: 92656 FORMER COMPANY: FORMER CONFORMED NAME: Q LOGIC CORP DATE OF NAME CHANGE: 19940201 10-Q 1 e10-q.txt FORM 10-Q QUARTER ENDED JULY 2, 2000 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 JULY 2, 2000 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.) 26600 LAGUNA HILLS DRIVE ALISO VIEJO, CALIFORNIA 92656 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 389-6000 (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 31, 2000, the registrant had 74,769,625 shares of common stock outstanding. All references to share and per share data for all periods presented have been restated for stock splits. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 QLOGIC CORPORATION INDEX
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets at July 2, 2000 and April 2, 2000............................................... 1 Condensed Consolidated Statements of Income for the three months ended July 2, 2000 and June 27, 1999................. 2 Condensed Consolidated Statements of Cash Flows for the three months ended July 2, 2000 and June 27, 1999........... 3 Notes to Condensed Consolidated Financial Statements........ 4 Management's Discussion and Analysis of Financial Condition Item 2. and Results of Operations................................... 6 Quantitative and Qualitative Disclosures About Market Item 3. Risk........................................................ 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 18
i 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QLOGIC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS
JULY 2, APRIL 2, 2000 2000 -------- -------- Cash and cash equivalents................................... $ 60,979 $ 64,134 Short term investments...................................... 86,804 58,671 Accounts and notes receivable, less allowance for doubtful accounts of $1,013 and $950 as of July 2, 2000 and April 2, 2000, respectively..................................... 23,626 21,647 Inventories................................................. 19,846 22,330 Deferred income taxes....................................... 8,156 9,211 Prepaid expenses and other current assets................... 1,260 1,356 -------- -------- Total current assets.............................. 200,671 177,349 Long term investments....................................... 43,903 39,797 Property and equipment, net................................. 47,830 45,775 Other assets................................................ 4,702 4,235 -------- -------- $297,106 $267,156 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable............................................ $ 5,673 $ 5,743 Accrued compensation........................................ 7,320 10,224 Income taxes payable........................................ 9,067 163 Accrued warranty............................................ 2,400 2,000 Deferred revenue............................................ 2,523 3,023 Other accrued liabilities................................... 3,733 3,034 -------- -------- Total current liabilities......................... 30,716 24,187 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value; 1,000,000 shares authorized (200,000 shares designated as Series A Junior Participating Preferred, $0.001 par value); none issued and outstanding................................. -- -- Common stock, $0.001 par value; 150,000,000 shares authorized; 74,683,462 and 74,292,949 shares issued and outstanding at July 2, 2000 and April 2, 2000, respectively........................................... 75 74 Additional paid-in capital................................ 147,395 145,067 Retained earnings......................................... 118,920 97,828 -------- -------- Total stockholders' equity........................ 266,390 242,969 -------- -------- $297,106 $267,156 ======== ========
See accompanying notes to condensed consolidated financial statements. 1 4 QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED ------------------- JULY 2, JUNE 27, 2000 1999 ------- -------- Net revenues................................................ $68,275 $43,186 Cost of revenues............................................ 21,995 13,486 ------- ------- Gross profit.............................................. 46,280 29,700 ------- ------- Operating expenses: Engineering and development............................... 9,101 7,876 Selling and marketing..................................... 5,433 3,975 General and administrative................................ 2,280 1,796 ------- ------- Total operating expenses.......................... 16,814 13,647 ------- ------- Operating income............................................ 29,466 16,053 Interest income, net........................................ 2,553 1,389 ------- ------- Income before income taxes.................................. 32,019 17,442 Income tax provision........................................ 10,927 5,930 ------- ------- Net income.................................................. $21,092 $11,512 ======= ======= Net income per share: Basic..................................................... $ 0.28 $ 0.16 ------- ------- Diluted................................................... $ 0.27 $ 0.15 ------- ------- Number of shares used in per share calculations: Basic..................................................... 74,683 72,020 ------- ------- Diluted................................................... 78,161 76,300 ------- -------
See accompanying notes to condensed consolidated financial statements. 2 5 QLOGIC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED -------------------- JULY 2, JUNE 27, 2000 1999 -------- -------- Cash flows from operating activities: Net income................................................ $ 21,092 $ 11,512 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 1,621 1,081 Increase (decrease) in allowance for doubtful accounts.............................................. 63 (200) Loss on disposal of property and equipment.............. 83 4 Provision for (benefit from) deferred income taxes...... 1,055 (887) Changes in assets and liabilities: Accounts and notes receivable........................... (2,042) (4,212) Inventories............................................. 2,484 285 Prepaid expenses and other current assets............... 96 (1,385) Other assets............................................ (602) 25 Accounts payable........................................ (70) (481) Accrued compensation.................................... (2,904) 1,540 Incomes taxes payable................................... 9,518 6,372 Other accrued liabilities............................... 1,100 562 Deferred revenue........................................ (500) 150 -------- -------- Net cash provided by operating activities.......... 30,994 14,366 -------- -------- Cash flows from investing activities: Additions to property and equipment..................... (3,624) (1,023) Purchases of investments................................ (57,977) (24,122) Maturities of investments............................... 25,738 17,183 -------- -------- Net cash used in investing activities.............. (35,863) (7,962) -------- -------- Cash flows from financing activities: Principal payments under capital leases................. -- (143) Proceeds from issuance of stock under employee stock plans................................................. 1,714 1,237 -------- -------- Net cash provided by financing activities.......... 1,714 1,094 -------- -------- Net increase (decrease) in cash and cash equivalents........ (3,155) 7,498 Cash and cash equivalents at beginning of period............ 64,134 43,174 -------- -------- Cash and cash equivalents at end of period.................. $ 60,979 $ 50,672 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest................................................ $ 11 $ 7 ======== ======== Income taxes............................................ $ 19 $ -- ======== ======== Non-cash investing and financing activities:
During the quarter ended July 2, 2000, the Company recorded a credit to additional paid-in-capital and a debit to accrued taxes payable of $614 related to the tax benefit of exercises of stock options under the Company's stock options plans. Additionally, during the quarter ended July 2, 2000, the Company recorded an accrual of $218 in accordance with the performance provisions of the Silicon Design Resources Asset Acquisition Agreement. 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. See accompanying notes to condensed consolidated financial statements. 3 6 QLOGIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE (1) BASIS OF PRESENTATION In the opinion of management 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 Company's financial position as of July 2, 2000, the statements of income for the three months ended July 2, 2000 and June 27, 1999 and the statements of cash flows for the three months ended July 2, 2000 and June 27, 1999. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended April 2, 2000. The results of operations for the three months ended July 2, 2000 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. All references to share and per share data have been retroactively restated to give effect to the Company's stock splits. NOTE (2) INVENTORIES Components of inventories are as follows:
JULY 2, APRIL 2, 2000 2000 ------- -------- (IN THOUSANDS) Raw materials............................................ $12,538 $16,072 Work in process.......................................... 3,179 3,799 Finished goods........................................... 4,129 2,459 ------- ------- $19,846 $22,330 ======= =======
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 net income per share was computed based on the weighted average number of common and dilutive potential common shares outstanding during the periods presented. The Company has granted certain stock options which have been treated as dilutive potential common shares. The following table sets forth the computations of basic and diluted net income per share:
JULY 2, JUNE 27, 2000 1999 -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Numerator: Net income............................................. $21,092 $11,512 ======= ======= Denominator: Denominator for basic net income per share -- weighted average shares...................................... 74,683 72,020 Dilutive potential common shares, using treasury stock method.............................................. 3,478 4,280 ------- ------- Denominator for diluted net income per share............. 78,161 76,300 ======= ======= Basic net income per share............................... $ 0.28 $ 0.16 ------- ------- Diluted net income per share............................. $ 0.27 $ 0.15 ------- -------
Options to purchase 496,238 and 68,213 shares of common stock with exercise prices that exceed the average market price of $70.60 and $23.21 during the three months ended July 2, 2000 and June 27, 1999, 4 7 QLOGIC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) respectively, were excluded from the calculation of diluted net income per share as their inclusion would have been anti-dilutive. NOTE (4) BUSINESS COMBINATION On May 7, 2000, the Company entered into an agreement to merge with Ancor Communications, Inc. ("Ancor"). The merger was completed on August 1, 2000. The Company exchanged 0.5275 shares of common stock for each outstanding Ancor share. The transaction will be accounted for as a pooling-of-interests and as a tax-free exchange of shares under I.R.S. regulations. 5 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. Our 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 ------------------------------------ JULY 2, 2000 JUNE 27, 1999 ---------------- ---------------- Net revenues............................................ $68,275 100.0% $43,186 100.0% Cost of revenues........................................ 21,995 32.2 13,486 31.2 ------- ----- ------- ----- Gross profit.......................................... 46,280 67.8 29,700 68.8 ------- ----- ------- ----- Operating expenses: Engineering and development........................... 9,101 13.3 7,876 18.2 Selling and marketing................................. 5,433 8.0 3,975 9.2 General and administrative............................ 2,280 3.3 1,796 4.2 ------- ----- ------- ----- Total operating expenses...................... 16,814 24.6 13,647 31.6 ------- ----- ------- ----- Operating income.............................. $29,466 43.2% $16,053 37.2% ======= ===== ======= =====
NET REVENUES Our net revenues are derived primarily from the sale of SCSI and Fibre Channel based products. We also license certain designs and receive royalty revenues and non-recurring engineering fees. Net revenues in the three months ended July 2, 2000 increased $25.1 million or 58% from the three months ended June 27,1999 to $68.3 million. The increase was the result of a $6.2 million increase in sales of SCSI products, and a $19.0 million increase in sales of Fibre Channel products, offset by a $0.1 million decrease in IDE-based royalties. Export revenues in the three months ended July 2, 2000 increased $16.1 million or 67% from the three months ended June 27, 1999, to approximately $40.0 million, primarily due to increased sales to customers in Japan and to a lesser extent, other Pacific Rim countries. As a percentage of net revenues, export revenues accounted for 59% in the three months ended July 2, 2000, and 55% in the three months ended June 27, 1999 due to the increased sales to customers in Japan. Export revenues are denominated in U.S. dollars. We do not expect the uncertainty in selected Pacific Rim foreign currency markets to have a material adverse effect on our results of operations. A small number of customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. We believe that our 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 us. Any such reduction, delay or loss of purchases could have a material adverse effect on our business, financial condition and results of operations. GROSS PROFIT Cost of revenues consist primarily of raw materials (including wafers and completed chips from third-party manufacturers), assembly and test labor, overhead and warranty costs. The gross profit percentage for the three months ended July 2, 2000 was 67.8%, a decrease from 68.8% in the three months ended June 27, 6 9 1999. The decrease in gross profit percentage was due to an increase in costs associated with new Fibre Channel products. Our ability to maintain our 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 our ability to achieve manufacturing cost reductions. We anticipate it will be increasingly more difficult to maintain or reduce manufacturing costs. Also, royalty revenues may be irregular or unpredictable. As a result of these and other factors, we do not anticipate the gross profit percentage to remain constant or increase at a rate consistent with historic trends, and, it may decline in future quarters, as reflected in this quarter's decline. 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. We believe continued investments in engineering and development activities are critical to achieving our strategic objectives. We expect the dollar amount of engineering and development expenses will continue to increase in fiscal 2001. During the three months ended July 2, 2000, engineering and development expenses increased $1.2 million to $9.1 million from $7.9 million in the three months ended June 27, 1999. 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 13.3% in the three months ended July 2, 2000 from 18.2% 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. We believe continued investments of these types of expenses are critical to the success of our strategy of expanding relationships with our customers. As a result, we expect sales and marketing expenditures will increase in the future. During the three months ended July 2, 2000, selling and marketing expenses increased $1.4 million to $5.4 million from $4.0 million in the three months ended June 27, 1999. The increase in spending was largely due to increased sales commissions earned as a result of the increase in net revenues. As a percentage of net revenues, sales and marketing expenses decreased to 8.0% in the three months ended July 2, 2000 from 9.2% 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. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs relating to the growth of the business. During the three months ended July 2, 2000, general and administrative expenses increased $0.5 million to $2.3 million from $1.8 million in the three months ended June 27, 1999. 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 3.3% in the three months ended July 2, 2000 from 4.2% 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. 7 10 NON-OPERATING INCOME Interest and other income, net of interest expense, was $2.6 million for the three months ended July 2, 2000 and $1.4 million for the three months ended June 27, 1999. 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 July 2, 2000, and June 27, 1999. 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 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. In June 1999, the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which defers the effective date of SFAS 133 to all fiscal quarters for fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 138"). Although we continue to review the effect of the implementation of SFAS 133 and SFAS 138, we do not currently believe their adoption will have a material adverse impact on our consolidated financial position or overall trends in results of operations, and do not believe adoption will result in significant changes to our financial risk management practices. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements". The objective of this SAB is to provide further guidance on revenue recognition issues in the absence of authoritative literature addressing a specific arrangement or a specific industry. We are required to follow the guidance in the SAB, as amended, no later than fiscal year 2001, including the retroactive restatement of any affected quarters in 2001. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB 101. Until such time as this additional guidance is issued, we are unable to assess the impact, if any, SAB 101 may have on our consolidated financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation -- an interpretation of APB Opinion No. 25" ("FIN 44"). This Interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. We believe that the impact of FIN 44 will not have a adverse material effect on our consolidated financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Our combined balances of cash and cash equivalents, short-term and long-term investments have increased to $191.7 million at July 2, 2000 and were $162.6 million at April 2, 2000. The increase was primarily attributable to positive cash flow from operations, primarily net income growth, during the three months ended July 2, 2000. 8 11 Our 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 $16.8 million to $170.0 million at July 2, 2000. The increase in working capital in the quarter ended July 2, 2000 was largely attributable to cash flow from operations. The $7.5 million line of credit facility with Silicon Valley Bank allows us to borrow at the bank's prime rate. The credit facility expires on July 6, 2001, and, although there can be no assurance, we currently expect to renew this line of credit. There are no borrowings under this credit facility at July 2, 2000. Our cash flow provided by operations was $31.0 million in the three months ended July 2, 2000, and $14.4 million in the three months ended June 27, 1999. The growth in cash provided by operations was primarily due to increases in profitability. Additionally, in the three months ended July 2, 2000, cash flow from operations was improved by increases in income taxes payable and a reduction in inventories and was partially offset by increases in accounts and notes receivable and other assets, and a decrease in accrued compensation. Our cash flow used in investing activities was $35.9 million in the three months ended July 2, 2000 compared to $8.0 million in the three months ended June 27, 1999. The increase in cash used in investing activities for the three months ended July 2, 2000, was primarily due to increases in purchases of short and long-term investments, net of maturing investments. Additionally, capital expenditures were $3.6 million in the three months ended July 2, 2000 and $1.0 million in the three months ended June 27, 1999. The increase was due to additional building improvements associated with our corporate facility relocation. Our cash flow provided by financing activities was $1.7 million in the three months ended July 2, 2000 compared to $1.1 million in the three months ended June 27, 1999. The increase in cash provided by financing activities in the three months ended July 2, 2000 was primarily due to increases in proceeds from issuance of stock under employee stock plans. We believe that existing cash and cash equivalent balances, short term investments, facilities and equipment leases, and cash flows from operating activities will provide us with sufficient funds to finance our 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," "anticipates" "expects," and similar expressions are intended to identify forward-looking statements. In addition, we may from time to time make oral forward-looking statements. We wish to caution readers that a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed above in "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this report. ALTHOUGH WE EXPECT OUR MERGER WITH ANCOR WILL RESULT IN BENEFITS, THOSE BENEFITS MAY NOT BE REALIZED AND OUR STOCK PRICE MAY DECLINE AS A RESULT. On August 1, 2000 we completed a merger with Ancor Communications, Inc. Achieving the benefits of the merger will depend in part on our ability to integrate the technology, operations and personnel of the two companies in a timely and efficient manner so as to minimize the risk that the merger will result in the loss of customers or key employees. Integrating QLogic and Ancor will be a complex, time consuming and expensive process and may disrupt QLogic's and Ancor's business if not completed in a timely and efficient manner. Integrating two companies like QLogic and Ancor involves a number of risks, including: - diverting management's attention from ongoing operations; - difficulties and expenses in combining the operations, technology and systems of the two companies; - difficulties and expenses in assimilating and retaining employees, including integrating teams that have not previously worked together; 9 12 - difficulties in creating and maintaining uniform standards, controls, procedures and policies; - different geographic locations of the principal operations of QLogic and Ancor; - challenges in attracting new customers; - difficulties in demonstrating to existing customers that the merger will not result in adverse changes to product quality, lead time for product deliveries or customer service standards; and - potential adverse short-term effects on operating results, primarily as a result of increased costs resulting from the integration of the two businesses. We may not be able to successfully integrate the businesses of Ancor or realize any of the anticipated benefits of the merger. A failure to do so could have a material adverse effect on our business, financial conditions and operating results. COMPETITORS OF QLOGIC AND ANCOR MAY INCREASE THEIR COMPETITIVE PRESSURES ON THE INTEGRATED BUSINESSES, OR MAKE ANNOUNCEMENTS CHALLENGING THE EXPECTED BENEFITS OF THE MERGER, CAUSING OUR STOCK PRICE TO DECLINE. As integrated businesses, QLogic and Ancor will face the combined competitive pressure from existing competitors of both companies. Some of these competitors may see the integrated businesses as a new threat and exert greater competitive pressures than either company currently faces. Some competitors may join together, through agreements or acquisitions, to face the challenge or perceived challenge that the merger presents. If we are not able to adequately respond to this increased competition, the companies' integrated businesses, financial conditions and operating results would be adversely affected. In addition, competitors may make public announcements that challenge or question our expectation that the merger will result in benefits. Such announcements could cause our stock price to decline. In addition, if such announcements require a response from us, such announcements could disrupt and delay our attempts to integrate the two companies, which could have a material adverse effect on our business, financial condition and operating results. EVENTS COULD OCCUR THAT COULD CAUSE THE MERGER WITH ANCOR TO FAIL TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT, WHICH COULD HARM OUR FUTURE OPERATING RESULTS. We intend to account for our merger with Ancor as a pooling-of-interests business combination. It was a condition to completion of the merger that we be advised by our independent accountants that they concur with our conclusion that the transaction contemplated by the merger agreement can properly be accounted for as a pooling-of-interests business combination. Under the pooling-of-interests method of accounting, each of QLogic's and Ancor's historical recorded assets and liabilities will be carried forward to QLogic at their recorded amounts. In addition, the operating results of QLogic will include QLogic's and Ancor's operating results for the entire fiscal year in which the merger is completed and QLogic's and Ancor's historical reported operating results for prior periods will be combined and restated as the operating results of QLogic. However, events could occur that could cause the merger to no longer qualify for pooling-of-interests accounting treatment, in which case the purchase method of accounting would apply. Under that method, we would record the estimated fair value of QLogic common stock, stock options and warrants issued in the merger as the cost of acquiring the business of Ancor. That cost would be allocated to the net assets acquired, with the excess of the estimated fair value of QLogic common stock, stock options and warrants over the fair value of net assets acquired recorded as goodwill or other intangible assets. To the extent goodwill and other intangibles are recorded on our financial statements, we would be required to take a noncash charge to earnings for a number of years until the full values of the goodwill and other intangibles have been fully amortized. The estimated fair value of QLogic common stock, stock options and warrants issued in the merger was much greater than the historical net book value at which Ancor carries its assets in its accounts. Therefore, purchase accounting treatment would reduce the reported income and earnings per share of the combined company for several years into the future as compared to pooling-of-interests accounting treatment. 10 13 OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE IF OUR RESULTS FAIL TO MEET INVESTORS' AND ANALYSTS' EXPECTATIONS. We have experienced, and expect to continue to experience, fluctuations in sales and operating results from quarter to quarter. As a result, we believe that period-to-period comparisons of our 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 we will maintain our current profitability in the future. A significant portion of our net revenues in each fiscal quarter result from orders booked in that quarter. In the past, a significant percentage of our 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 our products. Material fluctuations in our quarterly operating results may be the result of: - changes in purchasing patterns by one or more of our major customers; - customer order changes or rescheduling; - gain or loss of significant customers; - customer policies pertaining to desired inventory levels of our products; - negotiations of rebates and extended payment terms; or - changes in our ability to anticipate in advance the mix of customer orders. Some large original equipment manufacturer customers may require us to maintain higher levels of inventory or field warehouses in an attempt to minimize their own inventories. In addition, we must order our products and build inventory substantially in advance of product shipments, and because the markets for our products are subject to rapid technological and price changes, there is a risk we will forecast incorrectly and produce excess or insufficient inventory of particular products. If we produce excess or insufficient inventory or are required to hold excess inventory, our operating results could be adversely affected. Other factors that could cause our sales and operating results to vary significantly from period to period include: - the time, availability and sale of new products; - seasonal original equipment manufacturer customer demand; - changes in the mix of products having differing gross margins; - variations in manufacturing capacities, efficiencies and costs; - the availability and cost of components, including silicon wafers; - warranty expenses; - variations in product development and other operating expenses; - revenue adjustments related to product returns; or - adoption of new accounting pronouncements and/or changes in our policies and general economic and other conditions effecting the timing of customer orders and capital spending. Our quarterly results of operations are also influenced by competitive factors, including the pricing and availability of our products and our competitors' products. Although we do not maintain our own wafer manufacturing facility, large portions of our expenses are fixed and difficult to reduce in a short period of time. If net revenues do not meet our expectations, our fixed expenses would exacerbate the effect on net income of such shortfall in net revenues. Furthermore, announcements regarding new products and technologies could cause our customers to defer or cancel purchases of our products. Order deferrals by our customers, delays in our introduction of new products, and longer than anticipated design-in cycles for our products have in the past adversely effected our quarterly results of operations. Due to these factors, as well as other unanticipated 11 14 factors, it is likely that in some future quarter or quarters our operating results will be below the expectations of public market analysts or investors, and as a result, the price of our common stock could significantly decrease. WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ANY DECREASE IN REVENUE FROM ANY ONE OF OUR CUSTOMERS COULD CAUSE OUR STOCK PRICE TO DECLINE. A small number of customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion of our net revenues for the foreseeable future. The loss of any of our major customers would have a material adverse effect on our 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 our customers order products through written purchase orders as opposed to long-term supply contracts and, therefore, such customers are generally not obligated to purchase products from us for any extended period. Major customers also have significant leverage over us and may attempt to change the terms, including pricing, which could materially adversely effect our business, financial condition and results of operations. This risk is increased due to the potential for some of these customers merging or acquiring another of our customers. As our original equipment manufacturer customers are pressured to reduce prices as a result of competitive factors, we may be required to contractually commit to price reductions for our products before we know how, or if, cost reductions can be obtained. If we are unable to achieve such cost reductions, our gross margins could decline and such decline could have a material adverse effect on our business, financial condition and results of operations. In addition, we provide some customers with price protection in the event that we reduce the price of our products. While we maintain reserves for this price protection, the impact of any future price reductions could exceed our reserves in any specific fiscal period. Any price protection in excess of recorded reserves could have a negative impact on our business, financial condition and results of operations. COMPETITION WITHIN OUR PRODUCT MARKETS IS INTENSE AND INCLUDES NUMEROUS ESTABLISHED COMPETITORS. 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. We currently compete primarily with Adaptec, LSI Logic, and Cirrus Logic in the SCSI sector of the I/O market. In the Fibre Channel sector of the I/O market, we compete primarily with Agilent Technologies, LSI Logic, Emulex Corporation, JNI and Adaptec. In the integrated drive electronics, or IDE sector, we compete with STMicroelectronics and Cirrus Logic. In the enclosure management sector, we compete primarily with LSI Logic and Vitesse Semiconductor. We may compete with some of our 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 original equipment manufacturer customer in the past has decided to vertically integrate and has therefore stopped purchasing from us. We will need to continue to develop products appropriate to our markets to remain competitive as our competitors continue to introduce products with improved performance characteristics. While we continue to devote significant resources to research and development, these efforts may not be successful or may not be developed and introduced in a timely manner. Further, several of our competitors have greater resources devoted to securing semiconductor foundry capacity because of 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 these markets. We may not be able to compete successfully against these competitors. Competition typically occurs at the design stage, where the customer evaluates alternative design approaches. Because of short product life cycles and even shorter design cycles, our 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 our products compete with products 12 15 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 ours. Because of the complexity of our products, we have experienced delays from time to time in completing products on a timely basis. If we are unable to design, develop and introduce competitive new products on a timely basis, our future operating results will be materially and adversely affected. WE DEPEND ON OUR RELATIONSHIPS WITH WAFER SUPPLIERS AND OTHER SUBCONTRACTORS AND A LOSS OF THESE RELATIONSHIPS MAY LEAD TO UNPREDICTABLE CONSEQUENCES WHICH MAY HARM OUR RESULTS OF OPERATIONS IF ALTERNATIVE SUPPLY SOURCES ARE NOT AVAILABLE. We currently rely on several independent foundries to manufacture our semiconductor products either in finished form or wafer form. Generally, we conduct business with some of our foundries through written purchase orders as opposed to long-term supply contracts. Therefore, these foundries are generally not obligated to supply products to us for any specific period, in any specific quantity or at any specified price. If a foundry terminates its relationship with us or if our supply from a foundry is otherwise interrupted, we may not have a sufficient amount of time to replace the supply of products manufactured by that foundry. As a result, we may not be able to meet customer demands which could harm our business. 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. We are 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. New supply sources may not be able or willing to satisfy our wafer requirements on a timely basis or at acceptable quality or unit prices. We use multiple sources of supply for some of our products which may require customers to perform separate product qualifications. We have not developed alternate sources of supply for all of our products and our newly introduced products are typically produced initially by a single foundry until alternate sources can be qualified. In particular, our 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 our requirements for this technology, our marketing efforts related to Fibre Channel products would be delayed and, as such, our 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 us, may cause that customer to satisfy its product requirements from our competitors. Our ability to obtain satisfactory wafer and other supplies is subject to a number of other risks. These risks include the possibility that our suppliers may be subject to injunctions arising from alleged violations of third party intellectual property rights. The enforcement of this kind of injunction could impede a supplier's ability to provide wafers, components or packaging services to us. In addition, our flexibility to move production of any particular product from one foundry to another is limited because such a move can require significant re-engineering, which may take several quarters. These efforts also divert engineering resources that could otherwise be dedicated to new product development, which would adversely affect new product development schedules. Therefore, our production could be constrained even though capacity is available at one or more foundries. In addition, we could encounter supply shortages if sales grow substantially. We use domestic and offshore subcontractors for die assembly of our semiconductor products purchased in wafer form, and for assembly of our host adapter board products. Our 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. We are also subject to the risks of shortages and increases in the cost of raw materials used in the manufacture or assembly of our products. In addition, we may receive orders for large volumes of products to be shipped within short periods, and we may not have sufficient testing capacity to fill these orders. Constraints or delays in the supply of our products, whether because of capacity constraints, unexpected disruptions at our foundries or with our subcontractors, delays in 13 16 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. WE MAY NEED TO ENGAGE IN FINANCIALLY RISKY TRANSACTIONS TO GUARANTEE WE HAVE PRODUCTION CAPACITY WHICH MAY REQUIRE US TO SEEK ADDITIONAL FINANCING AND RESULT IN DILUTION TO OUR STOCKHOLDERS. The semiconductor industry and we 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, we may consider various possible transactions, including the use of "take or pay" contracts that commit us to purchase specified quantities of wafers over extended periods or the 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 us and could require us to commit a substantial amount of our funds or provide technology licenses in return for guaranteed production capacity. The need to commit our own funds may require us to seek additional equity or debt financing. The sale or issuance of additional equity or convertible debt securities could result in dilution to our stockholders. This kind of additional financing, if necessary, may not be available on terms acceptable to us. WE RELY ON THE HIGH PERFORMANCE COMPUTER AND COMPUTER PERIPHERAL MARKETS AND ANY UNPREDICTABLE FLUCTUATIONS OR REDUCTIONS IN DEMAND FOR PRODUCTS IN THESE MARKETS MAY ADVERSELY EFFECT OUR RESULTS OF OPERATIONS. A significant portion of our host adapter board products and hard disk drive controller products are ultimately used in high-performance file servers, workstations and other office automation products. Our growth has been supported by increasing demand for sophisticated I/O solutions which support database systems, servers, workstations, Internet/ Intranet applications, multimedia and telecommunications. If the demand for these systems slows, our business could be 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 our business is dependent on the overall market for computer peripherals. This market is itself dependent on the market for computers, and 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 us, could produce excessive or insufficient inventories of various components, which could have a negative impact on our business. OUR FINANCIAL CONDITION WILL BE MATERIALLY HARMED IF WE DO NOT MAINTAIN AND GAIN MARKET OR INDUSTRY ACCEPTANCE OF OUR PRODUCTS. The markets in which our competitors and we compete involve rapidly changing technology, evolving industry standards and continuing improvements in products and services. Our future success depends on our ability to do the following: - enhance our 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; and - adequately address original equipment manufacturer customer and end-user customer requirements and achieve market acceptance. We believe that to remain competitive in the future we will need to continue to develop new products, which will require a significant investment in new product development. In anticipation of the implementation of Fibre Channel data transfer interface technologies, we have invested, and will continue to invest, significant resources in developing our integrated circuit single chip peripheral computer interface, or PCI to Fibre Channel controllers. However, Fibre Channel may not be adopted as a predominant industry standard. We are 14 17 aware of products for alternative I/O standards and enabling technologies being developed by our competitors. We believe that some competitors, including Adaptec, have extensive development efforts related to products based on new parallel SCSI I/O technology. If this kind of alternative standard is adopted by the industry, we may not be able to develop products for the new standard in a timely manner. Further, even if Fibre Channel is adopted, our integrated PCI to Fibre Channel controller may not be fully developed in time to be accepted for use in Fibre Channel technology. If it is developed on time, we may not be able to manufacture it at competitive prices in sufficient volumes. In the event that Fibre Channel is not adopted as an industry standard, or our integrated circuit PCI to Fibre Channel controllers are not timely developed or do not gain market acceptance, our business could be materially and adversely affected. Our Fibre Channel products have been designed to conform to a standard that has yet to be uniformly adopted. Our 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. We depend on significant cooperation with these manufacturers in order to achieve our design objectives and produce products that interoperate successfully. While we believe that we generally have good relationships with leading microprocessor, systems and peripheral suppliers, there can be no assurance that these suppliers will not make it more difficult for us to design our products for successful interoperability. If industry acceptance of these standards was to decline or if they were replaced with new standards, and if we did not anticipate these changes and develop new products, our business could be adversely affected. WE ANTICIPATE ENGAGING IN ACQUISITIONS, HOWEVER THESE ACQUISITIONS MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND STOCK PRICE IF THEY DO NOT COMPLEMENT OUR BUSINESS. We anticipate that our future growth may depend in part on our ability to identify and acquire complementary businesses, technologies or product lines that are compatible with ours. 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 we have 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. Further, we may never enjoy the perceived benefits of an acquisition. We may not be effective in identifying and completing attractive acquisitions or managing future growth. Future acquisitions by us could dilute stockholders, and cause us to incur debt and contingent liabilities and amortization expense related to goodwill and other intangible assets, all of which could materially adversely affect our business. With respect to accounting for future business combinations, the Financial Accounting Standards Board, or FASB, has announced it may abolish pooling-of-interests accounting treatment. The standard, as currently proposed, would affect transactions after January 1, 2001. If the FASB does eliminate pooling-of-interests accounting treatment, we may not be able to complete a business combination without incurring goodwill or other intangible assets, which would reduce our future reported earnings. IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS. Our future success largely depends on our key engineering, sales, marketing and executive personnel, including highly skilled semiconductor design personnel and software developers. We also must identify and hire additional personnel. If we lose the services of key personnel, our business would be adversely affected. We believe that the market for key personnel in the industries in which we compete is highly competitive. In particular, periodically we have experienced difficulty in attracting and retaining qualified engineers and other technical personnel and anticipate that competition for such personnel will increase in the future. We may not 15 18 be able to attract and retain key personnel with the skills and expertise necessary to develop new products in the future, or to manage our business, both in the United States and abroad. BECAUSE WE DEPEND ON FOREIGN CUSTOMERS AND SUPPLIERS, WE ARE SUBJECT TO INTERNATIONAL ECONOMIC, REGULATORY AND POLITICAL RISKS WHICH COULD HARM OUR FINANCIAL CONDITION. We expect that export revenues will continue to account for a significant percentage of our net revenues for the foreseeable future. As a result, we are subject to several risks, which include: - a greater difficulty of administering our 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 number of our customers and suppliers are located in Japan. Historically, 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. Our 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 our foreign customers should increase, the resulting effective price increase of our 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 our business, financial condition and results of operations. OUR PROPRIETARY RIGHTS MAY BE INADEQUATELY PROTECTED AND INFRINGEMENT CLAIMS OR ADVERSE JUDGMENTS COULD HARM OUR COMPETITIVE POSITION. Although we have patent protection on some aspects of our technology in some jurisdictions, we rely primarily on trade secrets, copyrights and contractual provisions to protect our proprietary rights. There can be no assurance that these protections will be adequate to protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain such technology as trade secrets. There also can be no assurance that any patents we possess will not be invalidated, circumvented or challenged. In addition, the laws of certain countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products and intellectual property rights to the same extent as the laws of the United States or at all. If we fail to protect our intellectual property rights, our business would be negatively impacted. Intellectual property claims have been made against us in the past, and patent or other intellectual property infringement claims could be made against us in the future. Although patent and intellectual property disputes may be settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and the necessary licenses or similar arrangements may not be available to us on satisfactory terms or at all. As a result, we could be prevented from manufacturing and selling some of our products. In addition, if we litigate these kinds of claims, the litigation could be expensive and time consuming and could divert management's attention from other matters. Our business could suffer regardless of the 16 19 outcome of the litigation. Our supply of wafers and other components can also be interrupted by intellectual property infringement claims against our suppliers. OUR STOCK PRICE MAY BE VOLATILE WHICH COULD AFFECT THE VALUE OF YOUR INVESTMENT. The market price of our common stock has fluctuated substantially, and there can be no assurance that such volatility will not continue. From January 1, 2000 through May 26, 2000, the market price has ranged from a low of $39.69 per share to a high of $203.25 per share. Future announcements concerning us or our competitors or customers, quarterly variations in operating results, the introduction of new products or changes in product pricing policies by us or our 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 our common stock. OUR CHARTER DOCUMENT AND SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE COMPANIES FROM ACQUIRING US AND OFFERING OUR STOCKHOLDERS A PREMIUM FOR THEIR STOCK. Pursuant to our certificate of incorporation, our board of directors is authorized to approve the issuance of shares of currently undesignated preferred stock, to determine the price, powers, preferences, rights, 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, in June 1996 the board of directors adopted a shareholder rights plan and declared a dividend of a right to purchase one one-hundredths of a share of preferred stock for each outstanding share of our common stock. After adjustment for each of the three two-for-one stock splits effected by us to date, our common stock now carries one-eighth of the preferred stock purchase right per share. 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 us, may discourage bids for our common stock at a premium over the market price of the common stock and may adversely affect the market price of the common stock. OUR CORPORATE HEADQUARTERS AND PRINCIPAL DESIGN FACILITIES ARE LOCATED IN A REGION THAT IS SUBJECT TO EARTHQUAKES AND OTHER NATURAL DISASTERS. Our California facilities, including our principal executive offices, our principal design facilities, and our critical business operations 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE SENSITIVITY At July 2, 2000, our investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, of $191.7 million. The carrying amount of these securities approximates fair market value. These securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of July 2, 2000, the decline in the fair value of the portfolio would not be material to our financial position, results of operations and cash flows. 17 20 PART II. OTHER INFORMATION 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 Corpo- ration.(1) 2.2 Agreement and Plan of Merger dated as of May 8, 2000 by and among QLogic Corporation, Amino Acquisition Corp. and Ancor Communications, Incorporated.(14) 2.3 Stock Option Agreement dated as of May 8, 2000 by and among QLogic Corporation and Ancor Communications, Incorporated.(14) 2.4 Form of Voting Agreement dated as of May 8, 2000 by and among QLogic Corporation and various Ancor Communications, Incorporated directors and executive officers.(12) 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 Certificate of Incorporation, dated May 26, 1993. (Incorporated by reference to an exhibit to QLogic Corporation's Registration Statement on Form 10 filed January 28, 1994.) 3.7 Certificate of Amendment of Certificate of Incorporation, dated February 15, 1999.(9) 3.8 Certificate of Amendment of Certificate of Incorporation, dated January 5, 2000.(11) 4.1 Rights Agreement, dated as of June 4, 1996 between QLogic Corporation and Harris Trust Company of California, which includes as Exhibit B thereto the form of Rights Certifi- cate.(5) 4.2 Amendment to Rights Agreement, dated as of November 19, 1997 between QLogic Corporation and Harris Trust Company of California.(6) 4.3 Amendment to Rights Agreement, dated as of January 24, 2000 between QLogic Corporation's and Harris Trust Company of California.(13) 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)
18 21
EXHIBIT NO. ITEM CAPTION ----------- ------------ 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 22, 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. 10.17 Press release related to July 30, 1999 stock split.(10) 10.18 Press release related to February 7, 2000 stock split.(15) 21.1 Subsidiaries of the Registrant.(10) 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K (1) The Registrant filed Form 8-K on May 11, 2000, with respect to the merger with Ancor Communications, Inc. 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 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 Quarterly 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 Quarterly Report on Form 10-Q for the quarter ended December 27, 1998, and incorporated herein by reference. (9) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999 and incorporated herein by reference. (10) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 1999, and incorporated herein by reference. incorporated herein by reference 19 22 (11) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 26, 1999, and incorporated herein by reference. (12) Previously filed as an exhibit to Registrant's Current Report on Form 8-K dated May 11, 2000. (13) Previously filed as and exhibit to Registrant's Registration Statement on Form 8-A/A dated June 1, 2000, and incorporated herein by reference. (14) Previously filed as an exhibit to Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed June 22, 2000, and incorporated herein by reference. (15) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April 2, 2000, and incorporated herein by reference. * Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. 20 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. QLOGIC CORPORATION Date: August 16, 2000 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 24 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) 2.2 Agreement and Plan of Merger dated as of May 8, 2000 by and among QLogic Corporation, Amino Acquisition Corp. and Ancor Communications, Incorporated.(14) 2.3 Stock Option Agreement dated as of May 8, 2000 by and among QLogic Corporation and Ancor Communications, Incorporated.(14) 2.4 Form of Voting Agreement dated as of May 8, 2000 by and among QLogic Corporation and various Ancor Communications, Incorporated directors and executive officers.(12) 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 Certificate of Incorporation, dated May 26, 1993. (Incorporated by reference to an exhibit to QLogic Corporation's Registration Statement on Form 10 filed January 28, 1994.) 3.7 Certificate of Amendment of Certificate of Incorporation, dated February 15, 1999.(9) 3.8 Certificate of Amendment of Certificate of Incorporation, dated January 5, 2000.(11) 4.1 Rights Agreement, dated as of June 4, 1996 between QLogic Corporation and Harris Trust Company of California, which includes as Exhibit B thereto the form of Rights Certificate.(5) 4.2 Amendment to Rights Agreement, dated as of November 19, 1997 between QLogic Corporation and Harris Trust Company of California.(6) 4.3 Amendment to Rights Agreement, dated as of January 24, 2000 between QLogic Corporation's and Harris Trust Company of California.(13) 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 partner- ship.(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)
25
EXHIBIT NO. ITEM CAPTION - ----------- ------------ 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 22, 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. 10.17 Press release related to July 30, 1999 stock split.(10) 10.18 Press release related to February 7, 2000 stock split.(15) 21.1 Subsidiaries of the Registrant.(10) 27 Financial Data Schedule
- --------------- (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 Quarterly 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 Quarterly Report on Form 10-Q for the quarter ended December 27, 1998, and incorporated herein by reference. (9) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended March 28, 1999 and incorporated herein by reference. (10) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 27, 1999, and incorporated herein by reference. incorporated herein by reference (11) Previously filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 26, 1999, and incorporated herein by reference. (12) Previously filed as an exhibit to Registrant's Current Report on Form 8-K dated May 11, 2000. (13) Previously filed as and exhibit to Registrant's Registration Statement on Form 8-A/A dated June 1, 2000, and incorporated herein by reference. (14) Previously filed as an exhibit to Registrant's Amendment No. 1 to Registration Statement on Form S-4 filed June 22, 2000, and incorporated herein by reference. 26 (15) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended April 2, 2000, and incorporated herein by reference. * Compensation plan, contract or arrangement required to be filed as an exhibit pursuant to applicable rules of the Securities and Exchange Commission. EX-10.16 2 ex10-16.txt EXHIBIT 10.16 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 92682 Dated as of: July 6, 2000 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, and as amended by that Amendment to Loan Agreement dated as of July 6, 1999, (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 Maturity Date. The section of the Schedule to the Loan Agreement entitled "Maturity Date (Section 5.1)" is amended to read as follows: "Maturity Date (Section 5.1): JULY 5, 2001 2. 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. 3. General Provisions. Borrower represents and warrants to Silicon that all representations and warranties set forth in the Loan Agreement, as amended hereby, are true and correct. This Amendment, the Loan Agreement, any prior written amendments to the Loan 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 term 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. QLogic CORPORATION SILICON VALLEY BANK By /s/ THOMAS R. ANDERSON By /s/ MARLA JOHNSON -------------------------------------------------- ----------------------------------------------------- President or Vice President By /s/ MICHAEL MANNING Title Sr. Vice President -------------------------------------------------- ----------------------------------------------------- Secretary or Ass't Secretary
EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 3-MOS APR-01-2001 MAR-03-2000 JUL-02-2000 60,979 130,707 23,626 1,013 19,846 200,671 65,351 17,521 297,106 30,716 0 0 0 75 266,390 297,106 68,275 68,275 21,995 16,814 0 0 (2,553) 32,019 10,927 21,092 0 0 0 21,092 0.28 0.27
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