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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
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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)
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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 January 31, 2001, the registrant had 92,148,020 shares of common
stock outstanding. All references to share and per share data for all periods
presented have been restated for stock splits.
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QLOGIC CORPORATION
INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2000
and April 2, 2000........................................... 1
Condensed Consolidated Statements of Income for the three
months and nine months ended December 31, 2000 and December
26, 1999.................................................... 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended December 31, 2000 and December 26, 1999........ 3
Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QLOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
ASSETS
DECEMBER 31, APRIL 2,
2000 2000(1)
------------ --------
Cash and cash equivalents................................... $108,026 $ 86,889
Short term investments...................................... 215,809 117,762
Accounts and notes receivable, less allowance for doubtful
accounts of $1,422 and $1,015 as of December 31, 2000 and
April 2, 2000, respectively............................... 57,430 27,489
Inventories................................................. 33,675 25,092
Deferred income taxes....................................... 35,584 28,726
Prepaid expenses and other current assets................... 2,449 1,716
-------- --------
Total current assets.............................. 452,973 287,674
Long term investments....................................... -- 39,797
Property and equipment, net................................. 54,739 50,533
Other assets................................................ 21,755 18,226
-------- --------
$529,467 $396,230
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 15,127 $ 7,958
Accrued compensation........................................ 18,186 11,091
Income taxes payable........................................ -- 207
Accrued warranty............................................ 2,848 2,172
Deferred revenue............................................ 4,085 5,245
Other accrued liabilities................................... 3,037 3,874
-------- --------
Total current liabilities......................... 43,283 30,547
Long term liabilities....................................... 3,483 5,097
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; 500,000,000 shares
authorized; 91,943,118 and 89,678,789 shares issued and
outstanding at December 31, 2000 and April 2, 2000,
respectively........................................... 92 90
Additional paid-in capital................................ 371,163 293,992
Accumulated other comprehensive income (loss)............. 1,174 (242)
Retained earnings......................................... 110,272 66,746
-------- --------
Total stockholders' equity........................ 482,701 360,586
-------- --------
$529,467 $396,230
======== ========
- ---------------
(1) The condensed consolidated balance sheet as of April 2, 2000 has been
restated to give retroactive effect to the August 1, 2000 merger accounted
for using the pooling-of-interests method.
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Gross revenues................................ $97,213 $56,350 $262,235 $152,147
Sales discounts............................... 2,084 -- 4,362 --
------- ------- -------- --------
Net revenues.................................. 95,129 56,350 257,873 152,147
Cost of revenues.............................. 34,631 19,133 91,683 49,146
------- ------- -------- --------
Gross profit........................... 60,498 37,217 166,190 103,001
------- ------- -------- --------
Operating expenses:
Engineering and development................. 14,264 9,706 40,587 28,952
Selling and marketing....................... 8,879 5,117 25,923 15,790
General and administrative.................. 4,103 3,155 10,744 8,353
Merger related expenses..................... -- -- 22,947 --
------- ------- -------- --------
Total operating expenses............ 27,246 17,978 100,201 53,095
------- ------- -------- --------
Operating income.............................. 33,252 19,239 65,989 49,906
Interest income, net.......................... 4,942 2,512 13,272 5,753
------- ------- -------- --------
Income before income taxes.................... 38,194 21,751 79,261 55,659
Income tax provision.......................... 12,986 7,359 35,735 18,830
------- ------- -------- --------
Net income.................................... 25,208 14,392 43,526 36,829
Accretion on convertible preferred stock...... -- -- -- (12)
------- ------- -------- --------
Net income attributable to common
Stockholders................................ $25,208 $14,392 $ 43,526 $ 36,817
======= ======= ======== ========
Net income per share:
Basic....................................... $ 0.28 $ 0.17 $ 0.48 $ 0.43
------- ------- -------- --------
Diluted..................................... $ 0.26 $ 0.15 $ 0.46 $ 0.40
------- ------- -------- --------
Number of shares used in per share
calculations:
Basic....................................... 91,653 87,091 90,697 85,754
------- ------- -------- --------
Diluted..................................... 95,708 93,135 95,082 91,489
------- ------- -------- --------
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(1) The condensed consolidated statements of income have been restated to give
retroactive effect to the August 1, 2000 merger accounted for using the
pooling-of-interests method.
See accompanying notes to condensed consolidated financial statements.
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QLOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(1)
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
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Cash flows from operating activities:
Net income................................................ $ 43,526 $ 36,829
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 7,819 4,746
Write-off of acquired in process technology............ -- 871
Non-cash sales discount................................ 4,362 --
Increase in allowance for doubtful accounts............ 409 9
Loss on disposal of property and equipment............. 183 219
Benefit from deferred income taxes..................... (10,065) (3,929)
Tax benefit from issuance of stock under employee stock
plans................................................. 45,571 12,545
Changes in assets and liabilities:
Accounts and notes receivable.......................... (30,350) (13,331)
Inventories............................................ (8,583) (11,024)
Prepaid expenses and other current assets.............. (733) (2,148)
Other assets........................................... (4) (116)
Accounts payable....................................... 7,169 1,870
Accrued compensation................................... 7,095 1,534
Incomes taxes payable.................................. (1,951) 5,152
Other accrued liabilities.............................. 2,439 1,250
Deferred revenue....................................... (2,765) 3,391
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Net cash provided by operating activities......... 64,122 37,868
--------- ---------
Cash flows from investing activities:
Additions to property and equipment....................... (11,526) (8,580)
Purchases of investments.................................. (163,218) (594,546)
Acquisition of businesses, net of cash acquired........... (841) (1,321)
Maturities of investments................................. 105,383 508,675
Other, net................................................ -- (128)
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Net cash used in investing activities............. (70,202) (95,900)
--------- ---------
Cash flows from financing activities:
Principal payments under short-term debt.................. (17) (143)
Proceeds from issuance of stock under employee stock
plans.................................................. 27,242 4,400
Proceeds from sales of common and preferred stock......... -- 64,898
Proceeds from issuance of warrants........................ -- 6,502
Principal payments on long-term debt...................... (8) (116)
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Net cash provided by financing activities......... 27,217 75,541
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Net increase in cash and cash equivalents................... 21,137 17,509
Cash and cash equivalents at beginning of period............ 86,889 49,632
--------- ---------
Cash and cash equivalents at end of period.................. $ 108,026 $ 67,141
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest.................................................. $ 49 $ 17
========= =========
Income taxes.............................................. $ 2,524 $ 3,856
========= =========
Non-cash investing and financing activities:
During the nine months ended December 31, 2000 and December 26, 1999, the Company
recorded an accrual of $924 and $673, respectively, in accordance with the performance
provisions of the Silicon Design Resources Asset Acquisition Agreement.
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(1) The condensed consolidated statements of cash flows have been restated to
give retroactive effect to the August 1, 2000 merger accounted for using the
pooling-of-interests method.
See accompanying notes to condensed consolidated financial statements.
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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 fairly present the Company's financial position as of December 31,
2000, the statements of income for the three months and the nine months ended
December 31, 2000 and December 26, 1999 and the statements of cash flows for the
nine months ended December 31, 2000 and December 26, 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 and nine months ended December 31, 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.
The unaudited condensed consolidated financial statements have also been
retroactively restated to give effect to the Ancor Communications, Incorporated
merger consummated on August 1, 2000. This merger was accounted for using the
pooling-of-interests method.
NOTE (2) INVENTORIES
Components of inventories are as follows:
DECEMBER 31, APRIL 2,
2000 2000
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(IN THOUSANDS)
Raw materials......................................... $27,197 $17,797
Work in process....................................... 316 4,796
Finished goods........................................ 6,162 2,499
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$33,675 $25,092
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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.
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the computations of basic and diluted net
income per share:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 1, DECEMBER 26, DECEMBER 1, DECEMBER 26,
2000 1999 2000 1999
----------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income attributable to common
stockholders......................... $25,208 $14,392 $43,526 $36,817
======= ======= ======= =======
Denominator:
Denominator for basic net income per
share -- weighted average shares..... 91,653 87,091 90,697 85,754
Dilutive potential common shares, using
treasury stock method................ 4,055 6,044 4,385 5,735
------- ------- ------- -------
Denominator for diluted net income per
share................................... 95,708 93,135 95,082 91,489
======= ======= ======= =======
Basic net income per share attributable to
common stockholders..................... $ 0.28 $ 0.17 $ 0.48 $ 0.43
------- ------- ------- -------
Diluted net income per share attributable
to common stockholders.................. $ 0.26 $ 0.15 $ 0.46 $ 0.40
------- ------- ------- -------
Options to purchase 138,551 and 43,161 shares of common stock with exercise
prices that exceed the average market price of $92.65 and $54.50 during the
three months ended December 31, 2000 and December 26, 1999, respectively, were
excluded from the calculation of diluted net income per share as their inclusion
would have been anti-dilutive.
Options to purchase 366,473 and 139,781 shares of common stock with
exercise prices that exceed the average market price of $84.04 and $39.08 during
the nine months ended December 31, 2000 and December 26, 1999, respectively,
were excluded from the calculation of diluted net income per share as their
inclusion would have been anti-dilutive.
NOTE (4) OTHER COMPREHENSIVE INCOME
In the second fiscal quarter ended October 1, 2000, the Company changed its
classification of certain investment securities from "held to maturity" to
"available for sale" according to the definitions of Financial Accounting
Standards No. 115 (SFAS No. 115). According to Financial Accounting Standards
No. 130 (SFAS No. 130), unrealized gains and losses from available for sale
securities require disclosure as a component of other comprehensive income. SFAS
No. 130 separates comprehensive income into two components: net income and other
comprehensive income. Other comprehensive income refers to revenue, expenses,
gains and losses that are recorded as an element of stockholders' equity, but
are excluded from net income. While SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income, SFAS No. 130 has no impact on the
Company's net income or total stockholders' equity. The Company's other
comprehensive income is comprised solely of unrealized gains and losses on
marketable securities categorized as "available for sale" under SFAS No. 115.
For the three and nine months ended December 26, 1999, there were no components
of other comprehensive income, therefore, net income is equal to total
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
comprehensive income. The components of total comprehensive income for the three
and nine-month periods ended December 31, 2000 were as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
2000 2000
------------ ------------
(IN THOUSANDS)
Net income......................................... $25,208 $43,526
Other comprehensive income, net of tax:
Unrealized gain on available for sale
investments, net.............................. 894 1,416
------- -------
Total comprehensive income............... $26,102 $44,942
======= =======
NOTE (5) BUSINESS COMBINATION
On August 1, 2000, the Company completed the merger with Ancor
Communications, Incorporated ("Ancor"). Ancor was a leading provider of Fibre
Channel switches. In connection with the merger, the Company issued 15,535,835
shares of its common stock in exchange for all shares of Ancor's common stock
and reserved 1,724,036 shares of its common stock for issuance upon exercise of
outstanding Ancor employee stock options and other rights assumed by the
Company. The merger was accounted for as a pooling of interests. Accordingly,
the Company's consolidated financial statements have been restated to include
the pooled operations of Ancor as if it had combined with the Company since
Ancor's inception. Included in net revenues for the three and nine months ended
December 26, 1999 were net revenues from Ancor of $4.0 and $9.1 million,
respectively. Included in restated net income for the three and nine months
ended December 26, 1999 were net losses from Ancor of approximately $1.8 million
and $5.6 million, respectively. Restated diluted net income per share for the
three and nine months ended December 26, 1999 included losses of $0.02 and $0.06
per share, respectively, from Ancor. Included in net revenues for the nine
months ended December 31, 2000, was $9.4 million from Ancor, incurred prior to
the closing of the merger on August 1, 2000. Included in net income for the nine
months ended December 31, 2000, were losses totaling $3.8 million from Ancor,
incurred prior to August 1, 2000. There were no transactions between the Company
and Ancor prior to the consummation of the merger.
In connection with the merger with Ancor, the Company recorded
approximately $22.9 million in charges in the nine months ended December 31,
2000 for direct and other merger-related costs including fees of investment
bankers, attorneys, accountants and other direct and incremental charges.
Substantially all of the merger-related costs and fees have been paid at
December 31, 2000.
NOTE (6) SALES DISCOUNTS
As part of the agreement with Sun Microsystems, Incorporated ("Sun"), the
Company granted a warrant to Sun to purchase up to 791,250 shares of the
Company's common stock at an exercise price of $13.84 per share. The warrant
shares are earned at the rate of one share for each $127.00 of switch product
revenue the Company receives from Sun through September 30, 2002. In each period
in which the warrant shares are earned, a non-cash sales discount is recorded.
The amount of non-cash sales discount is the fair value of the warrant shares
which are earned in the period. Fair value of the warrant shares is calculated
by using the Black-Scholes option pricing model. None of the warrant shares vest
until the Company has received a total of $10 million in switch product revenue
from Sun.
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QLOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE (7) SUBSEQUENT EVENTS
On January 22, 2001, the Company acquired the outstanding common stock of
Little Mountain Group, Inc. ("LMG"), for cash and stock which could amount to
$30 million over a four-year period. The Company will account for this
transaction using the purchase method of accounting in its fourth fiscal quarter
ending April 1, 2001. The structure of the acquisition includes payments of
stock based on performance milestones to be achieved over the next four fiscal
years.
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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 our net
revenues. We have retroactively restated the historical information presented
below to give effect to the Ancor Communications, Incorporated merger accounted
for as a pooling-of-interests.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ --------------------------------------
DECEMBER 31, DECEMBER 26, DECEMBER 31, DECEMBER 26,
2000 1999 2000 1999
---------------- ---------------- ----------------- -----------------
(IN THOUSANDS)
Net revenues.......................... $95,129 100.0% $56,350 100.0% $257,873 100.0% $152,147 100.0%
Cost of revenues...................... 34,631 36.4 19,133 34.0 91,683 35.6 49,146 32.3
------- ----- ------- ----- -------- ----- -------- -----
Gross profit........................ 60,498 63.6 37,217 66.0 166,190 64.4 103,001 67.7
------- ----- ------- ----- -------- ----- -------- -----
Operating expenses:
Engineering and development......... 14,264 15.0 9,706 17.2 40,587 15.8 28,952 19.0
Selling and marketing............... 8,879 9.3 5,117 9.1 25,923 10.1 15,790 10.4
General and administrative.......... 4,103 4.3 3,155 5.6 10,744 4.2 8,353 5.5
Merger related expenses............. -- -- -- -- 22,947 8.9 -- --
------- ----- ------- ----- -------- ----- -------- -----
Total operating expenses...... 27,246 28.6 17,978 31.9 100,201 38.9 53,095 34.9
------- ----- ------- ----- -------- ----- -------- -----
Operating income................ $33,252 35.0% $19,239 34.1% $ 65,989 25.6% 49,906 32.8%
======= ===== ======= ===== ======== ===== ======== =====
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 December 31, 2000 increased $38.8 million or 68.8% from the three months
ended December 26, 1999 to $95.1 million. The increase was the result of a $30.9
million increase in sales of Fibre Channel products and a $9.1 million increase
in sales of SCSI products, offset by a $1.2 million decrease in IDE-based
royalties.
Net revenues for the nine months ended December 31, 2000 increased $105.7
million or 69.5% from the nine months ended December 26, 1999 to $257.9 million.
The increase was the result of a $84.3 million increase in sales of Fibre
Channel products and a $24.9 million increase in sales of SCSI products, offset
by a $3.5 million decrease in IDE-based royalties.
Export revenues (primarily to the Pacific Rim countries) in the three
months ended December 31, 2000 increased $23.0 million or 70.6% from the three
months ended December 26, 1999, to approximately $55.6 million, primarily due to
increased sales to customers in Japan and to a lesser extent, Europe. As a
percentage of net revenues, export revenues accounted for 58.4% in the three
months ended December 31, 2000, and 57.8% in the three months ended December 26,
1999. 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 the results of the Company's operations.
Export revenues in the nine months ended December 31, 2000 increased $58.9
million or 72.1% from the nine months ended December 26, 1999, to approximately
$140.6 million, primarily due to increased sales to customers in Japan and to a
lesser extent, Europe. As a percentage of net revenues, export revenues
accounted for 54.4% in the nine months ended December 31, 2000, and 53.7% in the
nine months ended December 26, 1999.
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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 in the three months
ended December 31, 2000 was 63.6%, a decrease from 66.0% in the three months
ended December 26, 1999. The decrease in gross profit percentage was due
primarily to a reduction in IDE-based royalties, as well as increased sales of
our lower margin switch products.
The gross profit percentage in the nine months ended December 31, 2000 was
64.4%, a decrease from 67.7% in the nine months ended December 26, 1999. The
percentage decrease resulted primarily from a reduction in IDE-based royalties,
as well as increased sales of our lower margin switch 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 Company's
ability to achieve manufacturing cost reductions. We anticipate 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, we do not anticipate the gross profit percentage to remain constant or
increase at a rate consistent with historic trends and may decline in future
quarters, as reflected in the current 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 December 31, 2000, engineering and
development expenses increased $4.6 million to $14.3 million from $9.7 million
in the three months ended December 26, 1999. The increase in spending was
largely due to increased levels of spending for Fibre Channel and SCSI design.
As a percentage of net revenues, engineering and development expenses decreased
to 15.0% in the three months ended December 31, 2000 from 17.2% in the similar
prior year period. The decrease as a percentage of net revenues were due to
economies of scale realized from the growth in net revenues.
During the nine months ended December 31, 2000 engineering and development
expenses increased $11.6 million to $40.6 million from $29.0 million in the nine
months ended December 26, 1999. As a percentage of net revenues this amounted to
15.8% in the nine months ended December 31, 2000 and 19.0% in the nine months
ended December 26, 1999. The decrease as a percentage of net revenues were 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.
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During the three months ended December 31, 2000, selling and marketing
expenses increased $3.8 million to $8.9 million from $5.1 million in the three
months ended December 26, 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 increased to 9.3%
in the three months ended December 31, 2000 from 9.1% in the similar prior year
period. The increase was due primarily to the growth in personnel and personnel
related expenses.
During the nine months ended December 31, 2000 sales and marketing expenses
increased $10.1 million from the similar period in the prior fiscal year. As a
percentage of net revenues this amounted to 10.1% in the nine months ended
December 31, 2000 compared to 10.4% in the similar prior year period. The
decrease in sales and marketing expenses as a percentage of net revenue relates
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 December 31, 2000, general and administrative
expenses increased $0.9 million to $4.1 million from $3.2 million in the three
months ended December 26, 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
4.3% in the three months ended December 31, 2000 from 5.6% in the similar prior
year period. The decrease as a percentage of net revenues were due to economies
of scale realized from the growth in net revenues.
During the nine months ended December 31, 2000 general and administrative
expenses increased $2.3 million to $10.7 million from $8.4 million in the nine
months ended December 26, 1999. As a percentage of net revenues this amounted to
4.2% in the nine months ended December 31, 2000, and 5.5% in the nine months
ended December 26, 1999. In the nine months ended December 31, 2000, general and
administrative expenses increased in dollars due to an increase in general and
administrative personnel.
Merger Related Expenses. Merger related expenses consist primarily of
investment banking, legal and accounting fees and other direct and incremental
related charges relating to the merger with Ancor Communications, Incorporated.
In the nine months ended December 31, 2000 merger related expenses were $22.9
million.
Non-Operating Income
Interest and other income, net of interest expense, was $4.9 million for
the three months ended December 31, 2000, and $2.5 million for the three months
ended December 26, 1999. The increase was largely due to increases in interest
income related to increases in cash equivalent and investment balances.
In the nine months ended December 31, 2000, interest and other income, net
of interest expense, was $13.3 million and $5.8 million in the nine months ended
December 26, 1999. The increase in interest and other income in the nine months
ended December 31, 2000 is largely due to increases in cash equivalent and
investment balances.
Income Tax Provision
Our effective tax rate was 34% in the three months ended December 31, 2000
and December 26, 1999, respectively.
Our effective tax rate was 45% in the nine months ended December 31, 2000
and 34% in the nine months ended December 26, 1999. The increase in the
effective tax rate in the nine months ended December 31, 2000 related to certain
non-deductible merger expenses associated with the Ancor Communications,
Incorporated merger consummated on August 1, 2000.
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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 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 the fourth quarter of fiscal year
2001. The SEC has recently issued further guidance with respect to adoption of
specific issues addressed by SAB 101. We are currently assessing 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 was 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 material effect on our consolidated financial position
or results of operations.
Liquidity and Capital Resources
Our combined balances of cash and cash equivalents and short-term and
long-term investments have increased to $323.8 million as of December 31, 2000
compared to $244.4 million at April 2, 2000. The increase was primarily
attributable to positive cash flow from operations and proceeds from issuance of
stock under employee stock plans during the nine months ended December 31, 2000.
Our primary source of liquidity is derived from working capital, cash from
operations, and a $5.0 million unsecured line of credit with Silicon Valley
Bank. Working capital increased $152.6 million to $409.7 million from April 2,
2000 to December 31, 2000. The increase in working capital in the nine months
ended December 31, 2000 was largely attributable to cash flow from operations
and an increase in short-term investments. The increase in the short-term
investment balance was largely attributable to a change in classification of
investment securities from held-to-maturity to available-for-sale, which
resulted in a reclassification of investments from long-term to short-term. The
$5.0 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 as of December 31,
2000.
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Our cash flow provided by operations was $64.1 million in the nine months
ended December 31, 2000, and $37.9 million in the nine months ended December 26,
1999. The growth in cash provided by operations was primarily due to tax
benefits from issuance of stock under employee stock plan. Additionally, in the
nine months ended December 31, 2000, cash flow from operations was improved by
increases in profitability, accounts payable and accrued compensation and was
offset by increases in accounts and notes receivable and deferred income taxes.
Our cash flow used in investing activities was $70.2 million in the nine
months ended December 31, 2000 compared to $95.9 million in the nine months
ended December 26, 1999. The decrease in cash used in investing activities for
the nine months ended December 31, 2000 was primarily due to reduced purchases
of short-term investments, net of investment maturities. Additionally, capital
expenditures were $11.5 million in the nine months ended December 31, 2000 and
$8.6 million in the nine months ended December 26, 1999. The increase in capital
expenditures was due to the acquisition of required testing and engineering
equipment.
Our cash flow provided by financing activities was $27.2 million in the
nine months ended December 31, 2000, compared to $75.5 million in the nine
months ended December 26, 1999. The decrease in cash provided by financing
activities in the nine months ended December 31, 2000 was primarily due to no
sales of common and preferred stock in the current fiscal year. During the nine
months ended December 31, 1999, Ancor Communications, Incorporated completed a
secondary offering with net proceeds of $64.9 million.
We believe 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 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,
Incorporated. 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 has been, and will be, a complex, time consuming and expensive process
and may disrupt our 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;
- difficulties in creating and maintaining uniform standards, controls,
procedures and policies;
- different geographic locations of the principal operations of QLogic and
Ancor;
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- 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 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 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 have accounted 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 could 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 were carried forward to QLogic at
their recorded amounts. In addition, the operating results of QLogic included
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 were 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 could 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 under current purchase accounting rules. The FASB has
recently proposed amending the purchase accounting rules to eliminate the
pooling-of-interests method of accounting, and to also eliminate the
amortization of goodwill acquired in a purchase business combination. While that
proposal would reduce the quarterly and yearly recurring charge for the
amortization of goodwill, a significant charge to earnings may be recorded if it
can be determined that the goodwill is impaired. Such a charge could have a
material impact on the Company's results of operations since 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 carried its
assets in its accounts.
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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
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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
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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 have 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
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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
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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 were 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. While the new proposal would reduce the quarterly and yearly recurring
charge for the amortization of goodwill, a significant charge to earnings may be
recorded if it can be determined that the goodwill is impaired. Such a charge
could have a material impact on the Company's results of operations if the
estimated fair value of QLogic common stock, stock options and warrants issued
in a purchase business combination was much greater than the historical net book
value at which the acquired company carried its assets in its accounts.
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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 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.
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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 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 February 14, 2001, 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
As of December 31, 2000, our investment portfolio consisted of fixed income
securities, excluding those classified as cash equivalents, of $215.8 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 December 31, 2000, the decline in the
fair value of the portfolio would not be material to our financial position,
results of operations and cash flows.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER 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 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
partnership.(1)
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EXHIBIT
NUMBER ITEM CAPTION
- ------- ------------
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 dated
July 6, 1998(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 dated
July 6,2000.(16)
10.17 Press release related to July 30, 1999 stock split.(10)
10.18 Press release related to February 7, 2000 stock split.(15)
- ---------------
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10 on 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 on June 19, 1996, and incorporated herein by reference.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 8-A/A on 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, and incorporated herein by reference.
(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 on June 22, 2000, and incorporated
herein by reference.
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(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.
(16) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended July 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.
(b) Reports on Form 8-K
(1) None.
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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: February 14, 2001 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)
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